The withering energy sector

Problems of the energy sector in Pakistan are becoming more and more complicated and the scenario now unfolding seems to be serious enough to give sleepless nights to the policy makers of the country. According to a report in this newspaper on 19th March, the cash-strapped Pakistan State Oil (PSO) was again in great trouble as the power sector had failed to pay its dues on a regular basis, pushing up PSO's receivables to Rs 151.3 billion on 18th March, 2011.
Clients against which receivables were outstanding on this date included Wapda (Rs 39.9 billion), Hubco (Rs 68.8 billion), Kapco (Rs 27.26 billion), KESC (Rs 2.05 billion) and PIA (Rs 1.28 billion). The oil importing companies including PSO are thus facing a default-like situation due to mounting receivables and, are therefore, not in a position to pay LC to international suppliers. Such an unsustainable situation could break the entire fuel oil supply chain and lead to a severe energy crisis in the country.
There are reports that the borrowing limit of PSO from banks has already exhausted and banks are now refusing its request for further financing. Local refineries have also curtailed their supplies to PSO due to non-payment of their dues that have increased to Rs 88.7 billion. It is also understood that PSO has to pay Rs 57.8 billion LC payments to international fuel suppliers and needs urgently at least Rs 20 billion for LC payments to these suppliers to continue with its fuel oil imports.
This is not the first time that the problems in the energy sector have come to a boil. For instance, when the critical situation was brought to the notice of the Prime Minister last month with the warning that the economy of the country could be severely hit by the non-availability of oil products in the next few weeks, he instructed the Finance Minister to resolve the problem of circular debt immediately.
The Finance Minister held a meeting with all the stakeholders in which a decision was made to release Rs 30 billion immediately, out of which Rs 24 billion was to be provided to PSO and Rs 6 billion to IPPs to enable them to maintain their day-to-day operations. It was also decided to make at source diversion of Rs 10 billion every month from the electricity bills of power companies to the PSO to ensure uninterrupted supplies of furnace oil for power generation.
As a result of the release of funds promised by the Ministry of Finance, PSO receivables had declined to Rs 144.3 billion but have again soared above Rs 151 billion, suggesting very clearly that ad hoc or temporary arrangements are not the solution of this endemic problem, which needs to be addressed on a permanent basis by digging deep into the reasons behind this situation and finding the right solutions.
It is, however, important to note that there is no disagreement about the origin of the problem that has stemmed primarily from the "viability gap" or a huge disparity between cost of production and energy tariff. The inability of the government to increase the energy tariff in line with the rising cost, particularly prior to 2007-08, gave rise to substantial cost-tariff differential.
As the government was not able to afford to pay the huge amount of subsidy to compensate for this differential, large amounts of circular debt were created because power-producing companies were unable to receive payments from the distribution companies, forcing the power producers to defer payments to fuel suppliers.
Even after a substantial increase in tariff in the subsequent years, the present gap between average generation cost and recovery is estimated to be quite substantial that has to be covered either by a huge subsidy from the budget or a steep rise in energy tariffs.
While there is no room for such a huge amount of subsidy from the budget, it would also be very difficult for the present government, or for that matter any future government, to raise the energy tariff to a level that could cover the entire cost to avoid the problem of circular debt.
Even if the government is prepared to pay the political price for such an action, the problem of settling the outstanding amount of circular debt accumulated in the past through budgetary provisions would be very hard to tackle due to lack of fiscal space. At best, a few billion rupees could be spared at times to temporarily avoid a complete shutdown.
Recognised that the present government does not have a magic wand to rectify the situation entirely in the energy sector, but, at the same time, the truth cannot be avoided that if the position is allowed to linger or deteriorate further, it could devastate the economy and have serious social repercussions.
The kind of mass agitation and chaos sometimes seen in various cities due to load shedding could, with the passage of time, turn uglier and destabilise the whole system. The scarcity of gas and acute shortage of electricity have exacerbated the problem to an extent that not only domestic consumers are suffering but factories are closing, the transportation system including the railways is no more reliable, investors are deserting and if there is no improvement in the situation in the near future, the whole country could come to a standstill.
The most unfortunate aspect is that there is no long-term planning to overcome the problem of energy shortages. We have been listening about the prospects of Thar coal, alternative sources of energy, import of gas from the Central Asian states and new hydel power projects for such a long time that nobody believes in the sincerity of the government anymore to resolve the problem.
The gas pipeline from Iran is probably the only project which holds some promise, but it is put on hold by various governments on one pretext or the other. As a short-term measure, the country could import LNG to meet the growing shortfall.
However, adequate arrangements for this are still not in place. Seen closely, both the Musharraf and the present governments are especially guilty of non-seriousness on an issue which is a matter of life and death for the country. Needless to add, the authorities at the helm must act fast to save the economy from the impending catastrophe. The latest reports indicate that the Prime Minister is likely to convene an Energy Summit in the first week of April to sort out issues relating mainly to electricity load management in the country.
We fail to understand why the government continues to emphasise on the distribution side rather than concentrate its efforts on production/supply side which is the source of the problem. The need of the hour is to design an integrated energy plan to raise the supply of energy to a level that is sufficient to meet the requirements in the country and implement it with all the resources at our disposal at the earliest.