ISLAMABAD: Pakistan has to bring and strictly implement broad-based structural reforms in the energy sector to get rid of the vicious cycle of circular debt, unaccounted for gas (UFG), lines/distribution losses, and capacity payments-related issues.
This was the crux of a seminar titled, “The Pakistan Energy Conundrum” organised by the Pakistan Institute of Development Economics (PIDE), here on Friday.
Moreover, wrong policy choices have resulted in high dependency on imported energy making up subject to external price shocks, poor state of energy infrastructure such that we cannot deliver what we can produce and low utilisation of investment made when we are a capital-starved country.
The energy system operates in Pakistan with significant flaws, particularly in the power sector. Despite the introduction of private sector involvement, it often remains under the control of state monopolies.
Policy formation for energy addition is deeply flawed, with political pressures often overriding rational decision-making. Governments failed to enforce cost recovery for power and gas, burdening consumers with higher costs.
Addressing the seminar as the only speaker, former Special Assistant to Prime Minister (SPAM) on Petroleum Nadeem Babar said that Pakistan’s energy sector was facing a series of issues and the government needs to address these issues once and for all as these problems are hampering the economic development of the country.
He said that one of the key problems of the energy sector wasthe power sector capacity payments which according to the National Electric Power Regulatory Authroity (Nepra) as of July 14, 2023, stands at Rs 1,954 billion, of which, Rs 692 billion coal-based power plants, Rs 443 billion nuclear power plants, Rs 282 hydel power plants, Rs 185 billion RNLG-based power plants, Rs 175 billion wind power plants, Rs 65 billion furnace oil power plants and Rs 112 billion solar/gas power plants.
The circular debt issue has made the energy sector business model sector unsustainable and necessitated the introduction of much-delayed reforms, as the International Monetary Fund (IMF) has also been calling to solve the issue. According to the Nepra, the figures for the current fiscal year 2023-24 for power price and capacity payments are Rs 1,048 billion and Rs 2,112, which translate into 33 percent and 67 percent respectively.
However, the total price stood at Rs 1,251 billion against the capacity payments of Rs 1,321 billion in fiscal year 2023. In fiscal year 2022, the price and the capacity payments were Rs 1,430 billion and Rs 971 billion respectively, while the figures for 2021 remained at Rs678 billion and Rs 856 billion. When it comes to 2020, the price of power generation remained at Rs 621 billion against the capacity payments of Rs856 billion. As far as the solution is concerned, Nepra has recommended that measures should be taken to increase power use and shut down obsolete power plants.
The energy revenue collected falls short of covering the cost of delivery, leading to a cycle of circular debt. This debt is periodically retired through bank borrowing, further increasing the cost of delivering services. To compensate, consumer tariffs for power and gas are raised, exacerbating issues like demand reduction and increased leakages in the system.
In many cases, state entities monopolise the energy sector, lacking competitive pressures and allowing inefficiencies malpractices to drive up costs. When costs are not fully recovered, subsidies required, leading to circular debt as state-owned enterprises borrow against government guarantees.
Poor policy choices have resulted in heavy dependence on imports, vulnerability to external price shocks, inadequate infrastructure, and underutilization of investments in a capital-starved country. Government actions and regulations often treat symptoms rather than address root causes, and overregulation alienates potential capital providers.
With no enforcement of government writ, non-payment of bills has become an entitlement in many parts of the country. The modus operandi of government and regulators has been a treatment of symptoms rather than causes.
Interest groups, mafias, and elites extract subsidies from the government, further raising costs for consumers. Despite these challenges, the true reasons behind the high cost of providing energy are often obscured by populist rhetoric. When the cost is not fully recovered, the subsidy has to be funded in the budget. Rather than funding it, the issue a guarantee and SOEs borrow under it, thereby creating Circular Debt distributed across multiple balance sheets.
The State entities are monopolies in most cases (DISCOs), NTDC, Sui Companies, LNG; with no competitive pressure, the burden of inefficiencies, losses, and malpractices become part of the approved “Cost”. The country was spending $20 billion on the imports of petroleum products, liquefied natural gas (LNG), liquefied petroleum gas (LPG), and coal-like products.
He said in 2020 when global crude oil prices touched the lowest level of $ 20 per barrel, he repeatedly requested the authorities to allow the hedging of crude oil for three years, had the cabinet okayed the move, Pakistan would have saved billions of dollars in import bills.
He said that the LNG import deal Pakistan signed with Qatar is even today the cheapest in the world but those who signed it were punished in Pakistan for benefiting the country. He said that the power sector circular debt stands at around Rs 2.6 trillion and in the books of different entities, total receivables are Rs 1.8 trillion while in reality hardly Rs 300 billion are recoverable and the rest of the amount the government has to write off as it is impossible to recover.
During another seminar, the participants were informed that Pakistan faces unprecedented stresses on its water resources from inequitable distribution, population growth, urbanisation, and shifts in production and consumption patterns, and these water problems exacerbate local tensions.
Pakistan is facing a serious water crisis. The country is rapidly moving from being classified as water “stressed” to water “scarce”—and with its annual water availability falling below 1,000 cubic metres per person, it may in fact have already crossed this threshold. With water availability per person declining year by year, and demand for food production continuously increasing, Pakistan faces not only a water crisis but also serious concerns regarding its future food security.
This situation also has clear implications for the government's efforts to become an upper middle income country by 2025 and achieve long-term peace and security. When climate change and its implications for Pakistan’s water resources are discussed, the conversation normally revolves around the expected decline in water flow in the Indus River basin as the glaciers of the Hindu Kush-Karakorum-Himalaya mountains retreat and are lost.
This concern is understandable given that snow and ice melt runoff currently generates between 50 and 80 per cent of average water flows in the Indus River basin. And there is in fact some evidence that the amount of water flowing into the Indus River basin has declined in recent years.
Pakistan, a semi-arid region and primarily agricultural economy is facing declining water availability and quality, growing water pollution and overall environmental insecurity. This situation, coupled with institutional, operational, and governance failures, is fostering domestic discord.
Copyright Business Recorder, 2024
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