Archive for June 4th, 2013

Priority in Pakistan: Turn On Lights

By Saeed Shah for The Wall Street Journal

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When Nawaz Sharif starts his new term as Pakistan’s prime minister on Wednesday, 14 years after he was ousted in a military coup, he will focus on turning on the lights in a nuclear-armed nation that has been increasingly starved of electricity.

Power outages of 12 to 20 hours a day have crippled industry and made life miserable for households, a problem that worsened under the previous government of the Pakistan Peoples Party. Electricity shortages cost Pakistan some $13.5 billion a year, equivalent to knocking 1.5 percentage points off the economic-growth rate, Lahore’s Beaconhouse National University said in a report this year.

After Mr. Sharif is sworn in, he will deliver a speech outlining his strategy for solving the electricity emergency through wide-ranging intervention, bond sales and privatizations, aides said. The financing of the electricity rescue plan would be laid out in the budget to be announced next week by incoming Finance Minister Ishaq Dar, they said.

The new administration plans to pay off what it says is $5 billion in debt that has paralyzed the industry, build new power plants and privatize the sector in a multibillion-dollar overhaul that could attract foreign investor interest, the aides said.

The challenges are great. The previous government poured billions into the sector without eliminating the debt or significantly increasing the supply of electricity. The industry is riddled with corruption and depends on expensive oil for power generation, instead of cheaper gas or coal.

The most pressing issue is the chain of so-called circular debt that runs through the sector: The government keeps the price of electricity to the consumer below the cost of production, but can’t afford to make up the shortfall. It means that oil importers are owed money by power plants, which are owed money by distribution companies, which in turn are owed money by consumers.

“First, we need to write a check,” said Miftah Ismail, an energy adviser to Mr. Sharif, who drew up the energy policy in the party’s election manifesto. “We will pay off the stock of circular debt. It is choking the system. No fresh investment will come into Pakistan unless you get rid of circular debt.”

Although the incoming government has given the level of this debt at $5 billion, a government think tank, the Planning Commission, issued a report in March this year placing it at $9 billion at the end of 2012.

The new administration would borrow the money from banks and also take on the debts owed to the banks by various energy companies and government-owned entities, Mr. Ismail said. Then the government would plan to tap domestic and international bond markets.

A domestic bond issue picked up by local banks would be the most likely scenario, said Ashraf Bava, chief executive of Nael Capital, a brokerage in Karachi. Pakistan would need to improve its credit rating and balance of payments before approaching international capital markets, he said.

“The local banks will have no choice. They’ll have to do it,” said Mr. Bava. “Obviously they’ll be offered a decent return.”

Pakistan, a country of 180 million people, is currently producing some 11,000 megawatts of power, though that dropped last month to less than 9,000 megawatts, compared with demand of at least 17,000 megawatts.

By comparison, installed generation capacity in Indonesia, a country of 240 million people, is 41,000 megawatts, according to a 2012 report from PricewaterhouseCoopers.

Pakistan’s supply shortfall results in power being switched off to households and industry for part of each day on a rotating basis across the country—outages known as “load shedding.”

After paying off the debt, the new government plans to pursue a three-pronged strategy, the aides say. The government would aim to cut line losses and electricity theft, shift power plants from oil to coal, and eliminate subsidies to consumers. Pakistan currently charges consumers around 9 cents per kilowatt-hour for electricity that costs 12 to 14 cents to produce.

Those who use minimal amounts of electricity would continue to get power cheaply, a cost that would be borne by the full fare paid by heavier users—including the middle classes, who form Mr. Sharif’s core constituency, as well as Pakistan’s elite. But if the plan works, Mr. Sharif’s aides said, the cost of power production and prices would come down again.

“There’s no reason why we should be subsidizing those who can afford to run air conditioners,” said Mr. Ismail.

Mr. Sharif’s plan envisages converting three or four of the biggest power plants, which currently burn oil, to coal. Experts estimate such a plan would cost about $2 billion but would pay for itself in savings in about a year.

New coal-burning power stations would also be commissioned, which the incoming government says would take around three years to come onstream. Government-owned generation plants and the grid companies would be put under new management and privatized.

“We will nibble at this problem from many angles as we go along,” said Sartaj Aziz, an adviser to Mr. Sharif on finance and a former finance minister.

Foreign companies rushed into Pakistan’s electricity sector in the 1990s, when new private generation plants were allowed, on lucrative terms. Oil prices were low at the time, so oil-burning plants were built.

However, frequent changes in governments and policies that followed, together with the circular debt issue, chased away most of the foreign interest. The last major American investor, AES Corp.,sold out in 2009.

GDF Suez of France and Malaysia’s Tenaga Nasional Berhad are the remaining foreign firms active in Pakistan’s energy sector.

Naveed Ismail, an independent energy-sector expert who previously worked with the government, said that 48% of Pakistan’s thermal generation came from burning furnace oil, the highest such proportion among any major countries, while contribution from much cheaper coal, the main source of generation in India or China, was close to zero.

“Pakistan just has to learn from the rest of the world. It doesn’t have to reinvent the wheel,” he said. “The issue is producing affordable electricity. No new capacity should be added unless it brings down the average cost of power.”

Helping Pakistan with its electricity crisis has been a major focus of American aid in recent years. Since October 2009, the U.S. has spent $225 million on energy projects in Pakistan, according to the U.S. Embassy in Islamabad, adding more than 900 megawatts to the country’s generation, with schemes for upgrading power plants and dams.

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