The Prime Minister has underscored the need for reducing energy/electricity prices. This was also a part of PML(N) manifesto. Although, his claim of reducing electricity cost by 26% is correct, the reduction has not come about due to government action or policy but it is due mainly to the phenomenal reduction in international oil prices. It is not easy to reduce energy costs unless subsidy is provided. Subsidies have in fact been withdrawn. Although there are not much opportunities for reducing energy costs which are largely dependent on international factors, whatever little opportunities are available should be utilised to achieve this end. In this article, we will discuss some measures for reducing energy costs. It is by reducing the relending rates of the energy sector projects of the public sector, as would be explained in the following:
Interest costs these days represent a significant proportion of energy prices due to a reduction in fuel cost. In pre-oil price collapse period, oil based electricity used to cost around 16 cents per unit: fixed cost being around 4 cents, was around 25 % of the total cost or even lower. This ratio has today increased to around 50%. Fixed cost essentially is the financial costs including interest and return on equity, indicating the higher role of interest rates these days on the final energy costs and tariff.
Readers would be amazed, and certainly not amused, that the effective interest rates for public sector projects in energy sector is around 15-17% as opposed to international market rates of 4-5% and local currency rates of around 6%. The relending rates are the same even when local currency interest rates have come down from 14 % to 6%. The government borrows at the rate of 2-3% and relends to the energy projects at 15-17%. In return, it does provide some services like guarantees and foreign exchange rate cover. The energy project pays in PKR at the foreign exchange rate prevalent at the time of borrowing. Foreign currency in Pakistan in the long run has depreciated at about 5% per year. Thus government can charge this differential and guarantee charges (say 1-2%). Thus a legitimate relending rate hovers around 8-10% as opposed to 15-17% being charged by the government. This has a direct bearing on the energy production costs and tariff.
Based on these high relending rates, gas transmission and distribution companies (SNGPL and SSGC) are paid 17% as return on assets (RoA) in their Annual Revenue Requirement, resulting in a higher gas tariff. Neelum Jehlum Hydro power plant (NJHPP) capital cost increases are partly due to high relending rates. NJHPP costs have increased due to delays; inflation and interest during construction, wherein interest rates charged are at the rate of 17%. Diamer-Basha dam and other public sector projects would also suffer from this irritant. RLNG projects and pipelines in the public sector would also suffer from the same malady. In fact, the situation has become so acute that public sector prefers to borrow these days from local banks wherever feasible and some international loans have not been utilised because of this high cost intermediation.
The Planning Commission has spearheaded the demand for change in relending policy which has been also supported by all the relevant public sector agencies and line ministries; - perhaps the only issue on which there is harmony or solidarity. If the case is so obvious as I have explained, why the EAD and Ministry of Finance do not agree? Apart from ego (why it did not occur to me first, which I do not think may have come in between), it is the cost-centre accounting approach that may be blocking change and reform. Under such an approach individual departments may have positive economics and earning, while the economy as a whole loses. Earlier, perhaps there was some rationale, if one has to be found, that subsidies were balancing the higher relending charges. Many argue that it is even more untenable, if not outright stupidity. Charging on one account and giving it away in other forms, while earning the criticism from the international financial institutions, including the IMF. And finally, it creates a differential or cleavage in the competitiveness of the public sector versus private sector, as the latter borrows internationally at 4-5%.
The issue is simple. I have taken all this space on elaboration for the sake of my readers who may not have access to data or may not be aware of this anomaly. It is hoped that the relevant bureaucracy and policymakers would pay attention to it and bring down the relending rates.
(The writer has until recently been a member of the Planning Commission)
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ITEMS Unit/Base 2013 2016
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Feb March April Nov Feb March April Nov
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Exports (BOP) Million US $ 1,929 2,179 2,203 1,849 1,864 1,992 1,818 1,841
Imports (BOP) -do- 3,079 3,395 3,445 3,205 2,995 3,212 3,074 3,773
Foreign Direct Investment (Net) -do- (13.8) 117.5 231.6 47.1 103 162 59 144
Foreign Portfolio Investment (Net) -do- 30.4 28.8 20.7 (73.0) (34) (502) (11) (56)
Foreign Exchange Reserves -do- 13,674 12,957.0 12,416 7,989 20,345 20,922 20,802 23,383
Workers' Remittances -do- 1,028.33 1,119.2 1,215.9 1,131.1 1,521.54 1,711.17 1,656.85 1,616.43
Real Effective Exchange Rate (REER)-Month Average (2010 = 100) 100.0390 101.5174 102.3034 - 121.4621 120.0639 120.0781 125.9848
Nominal Effective Exchange Rate (NEER)-Month Average -do- 56.2525 56.8615 56.6948 - 92.5413 91.6575 90.4011 93.4795
Exchange Rate (end month) Rs./US $ 98.0940 98.3428 98.3943 108.3849 104.5977 104.6719 104.7487 104.7213
Exchange Rate (month average) -do- 97.9687 98.0605 98.3119 107.5054 104.6232 104.6470 104.6738 104.6935
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