The energy sector mess

Seven months into the new fiscal year, the State Bank of Pakistan finally came out with its Annual Report 2011-12. Of the major issues faced by the country, the energy situation which has rightly been termed as a crisis, leads the way. A lot has been written and said about the structure, illness and the plausible solution to get out of this crisis, however unfortunately little if any progress can be reported beyond dialogue and debate.
What is disturbing is the fact that the problems in the energy sector are not new, they have only exacerbated in the past five years. Even more worrisome is the fact that the solutions are well-known and energy experts had formulated an Integrated Energy Plan three years back, which has only gathered dust somewhere in Islamabad.
The SBP in its Annual Report has pointed out that the "energy crisis reflects the lack of a coherent policy". In our view, it was not the lack of policy, but the lack of its implementation that has augmented the crisis.
On the electricity front, the SBP has highlighted challenges of rising demand, constraint of supply, circular debt and power sector inefficiencies. While all of it is rather well-documented, it is not the capacity constraint in the power generation that is causing the major headache, it is the inefficiency in the system.
The power generation capacity in Pakistan is still satisfactory, but the power plants have not been able to operate at full efficiency. The reasons are manifold, of which the inter-corporate circular debt is of primary concern. The peak load-management has gone from 16.7 percent in FY07 to a massive 44.3 percent in FY12, highlighting the magnitude of the problem.
The government had promised power sector reforms, but unfortunately, the reforms have not gone beyond some chopping and changing in the board committees of distribution committees and issuing of TFCs to deal with the pressing circular debt situation. Power sector subsidies have run wild, costing the country nearly 2.2 percent of GDP (nearly Rs460 billion) in FY12.
Even after changing three ministers and several secretaries in the Ministry of Water and Power, the electricity production and billed collection gap has not narrowed because of the poor implementation of energy policy as well as gross failure to restructure this vital sector.
Forcing the SBP to print money and Ministry of Finance to dole it out to the Ministry of Petroleum and Natural Resources to procure the fuel and give to Ministry of Petroleum and Natural Resources to burn it, with no accountability of its theft and wastage has become the norm.
Political will to undertake painful reforms is needed. This requires acceptance of an underlying theme, i.e. ensuring commercial viability in all government managed and operated entities. This involves giving the Board of Directors autonomy and a professional management of these PSEs to hire and fire as needed without interference from political bigwigs in the government and in the assemblies. The IFIs will help via the budget to fund the right-sizing of these PSEs provided we guarantee to privatize them.
The fuel mix for power generation has worsened over the years, which reflects in the heightened cost of electricity generation, which is now touching Rs8 per unit, from a little over Rs5 per unit in FY10. The expensive fuel mix, inefficient generation and distribution system and irrational power pricing all combine to inflate the circular debt stock, which in return results in massive power outages and more subsidies to the inefficient power sector.
The BSP hits the nail on the head discussing the natural gas crisis in the country. The extent to which the precious natural resource is abused in Pakistan is balking. The government has been unable to rationalise the price of natural gas in the past five years, incentive enough for consumers to not use it justly. SBP has suggested the unpopular, yet rational measure of increasing gas tariffs for domestic consumers as a short-term fix.
To put things in perspective, natural gas is nearly eight times cheaper than electricity, hence the gross misuse. What also needs to be done besides rationalizing gas price, is setting the priorities right, as the transportation sectors share of natural gas consumption has gone to 10 percent, which could instead be used for cheaper power generation.
Moreover, with LNG and LPG imports in the future energy mix, there is no way the idea can be executed without narrowing the gap with alternate fuels.
To say it is about time to act might sound a bit too late, but it is never too late, as the SBP points out that the current state of energy sector is unsustainable. It is unfortunate that whoever comes to power for the next term would inherit a mess deeper than the one inherited by the current regime. But that should not act as an excuse and rational steps must be taken at all costs, whether the country is under an IMF Programme or not.