Beyond the billionaires bash: Pakistan’s real crisis

In a recent op-ed published in a national daily, a noted author has made several claims to misrepresent fundamental issues at the heart of Pakistan’s energy sector and overall economic crisis.

One of these is that “the core problem here is not capacity charges. The core problem is devaluation, because the dollar value of your electricity bills has not risen by much more than 30 percent in the past decade. Check and find out.” Well, we checked:

Notes: Effective power tariffs including base variable and fixed charges, financing cost surcharge, fuel price adjustment, quarterly tariff adjustment, and electricity duty, excluding additional taxes billed; Source: Nepra.

Over just the last five years, never mind the entire decade, power tariffs for B-3 industrial consumers—in dollar terms—have increased by 60-70%, and this is the non-RCET power tariff. For other consumers, they have similarly increased by much more than 30%, in dollar terms:

Notes: Effective power tariffs including base variable and fixed charges, financing cost surcharge, fuel price adjustment, quarterly tariff adjustment, and electricity duty, excluding additional taxes billed; Source: NEPRA.

These very high power tariffs are a direct result of increasing capacity charges and unutilized capacity, and a shrinking pool of consumption over which these are spread. However, it’s not even the absolute number or the increase that is plaguing the industry. It is that Pakistan’s industrial power tariff is over twice that of competing economies like Bangladesh, India, and Vietnam, and this disparity in energy costs is a critical factor undermining the economy’s industrial competitiveness.

It is widely understood that Pakistan’s most fundamental economic problem is a shortage of productive capacity, that is neither sufficient to meet domestic demand nor to generate exportable surplusesto meet import requirements. This shortfall creates a chronic shortage of foreign exchange and repeatedly lands the economy into balance of payments crises.

The only sustainable solution is rapid industrialization, and a most basic input that any industrial setup requires is energy. But when that energy is twice as expensive as what competitors in other countries are getting, its cost—comprising 10-35% of input costs across the textile and apparel value chain—gets passed into the product and makes its significantly more expensive than those of your competitors, rendering it uncompetitive in the international market.

Expensive energy is one of the main reasons Pakistan’s industry struggles on the international stage and a major factor deterring efficiency-seeking foreign direct investment into the country. Imagine an investor looking to establish a garment factory in South Asia.

A comparison of the business environment in India, Bangladesh, and Pakistan would reveal that while labour costs may be comparable, everything else, including energy, taxes, and borrowing costs, is two to three times as much in Pakistan. Naturally, Pakistan would be the first to be dropped from consideration.

The economy faces an annual foreign exchange shortfall of over $25 billion for the next five years. Without further debt—an entirely untenable option—the only way to bridge this gap is through a drastic increase in the industrial base and exports. However, this increase is impossible if something as basic as energy costs over twice as much in Pakistan as in the rest of the world.

Pakistan’s textile sector is a crucial component of the country’s economic fabric, contributing 8-9%of GDP, employing 40% of the industrial labour force, and bringing in over half of the country’s export earnings. In fact, the textile sector is one of the very few industries in Pakistan that does not receive protection, and that is why it has innovated and increased the share of value-added goods in textile exports from around 50% in 2013 to 80% in 2023.

It has produced companies like Interloop, one of the largest of its kind in the world, and Gul Ahmed, IKEA’s single largest supplier, that is now also venturing into foreign markets with its branded goods. But the problem is that we have not been able to build enough companies like these because of the continuously prohibitive business environment faced by the private sector.

Where removing the cross-subsidy was sufficient to achieve a competitive energy tariff a year ago, failure to do so exacerbated the predicament. Inflated power tariffs, including the cross-subsidy, drove manufacturers out of business, causing a sizable reduction in demand for grid electricity and increasing the burden of growing capacity costs on the remaining consumers, further reinforcing the cycle.

Today, despite a reduction in the cross-subsidy, power tariffs remain over twice the regional levels due to unutilized capacity costs, driving more firms out of business and affecting the livelihood of countless workers and their families.

The capacity payments issue is not about reverting to a subsidized energy regime. It is about addressing the fundamental imbalance in the power sector’s cost structure. In Pakistan, capacity constitutes around 70% of the total cost, with fuel making up the remaining 30%.

Globally, this ratio is reversed, with 30% capacity cost and 70% fuel cost. This structural anomaly means that a significant portion of the power sector’s revenue goes to fixed payments to power producers, regardless of the actual electricity produced or consumed. This results in exorbitant costs for all consumers, including industrial, commercial and residential.

The campaign for fair energy tariffs is about the entire country, not just the textile sector. Both Fitch and Moody’s have predicted dangerous levels of sociopolitical instability due to rising inflation, taxes, and most importantly the unbearable cost of energy. The textile industry is not merely seeking relief for itself but advocating for a restructuring of the power regime to benefit the entire nation, including the common man so he no longer must pay 22 cents for a kWh whose cost should be in single digits.

We are calling for IPP contracts to be renegotiated in the same line as those calling for the country’s domestic and foreign debt to be restructured. Not out of self-interest, but to ensure that the power sector and the economy can be made sustainable. The opacity and inefficiency currently plaguing the power sector are detrimental to all Pakistanis, not just the textile sector.

There is a consistent theme across all such baseless criticism. And that is there’s always a lot of “billionaire bashing”, but never any realistic solutions to the problems faced by this country. It’s easy to sit back and criticize without understanding the complexities of the issues or offering viable solutions. Constructive dialogue requires an acknowledgment of the facts and a willingness to engage with the realities of the situation.

A comprehensive review and restructuring of capacity payments and the broader energy tariff regime is not just necessary but existential. The goal should be to align our energy costs with those of economies at a similar stage of development.

This is critical to attracting investment, boosting industrial output, and increasing exports to address this dangerously unsustainable economic situation. Sustainable growth requires a stable, predictable, and competitive energy supply. This, in turn, fosters an environment conducive to investment, innovation, and growth.

Our stance is grounded in a vision for a prosperous, competitive, and economically stable Pakistan. We call for an open, fact-based dialogue involving all stakeholders to address these critical issues. The textile industry stands ready to work collaboratively towards a more efficient and equitable energy sector that serves the best interests of the entire nation.

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Select Consumer Power Tariffs, cents/kWh
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                                          Jul-19   Jul-24   Change
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Residential (Unprotected) 0-100 Units     4.85     8.89        83%
Residential (Unprotected) 201-300 Units   7.63     15.27      100%
Residential ToU                           11.25    18.49       64%
Commercial ToU                            11.98    17.77       48%
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Notes: Effective power tariffs including base variable and fixed
charges, financing cost surcharge, fuel price adjustment, quarterly
tariff adjustment, and electricity duty, excluding 
additional taxes billed; Source: NEPRA.
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Copyright Business Recorder, 2024