Reformed energy sector key for sustainable economic growth

Pakistan’s economy cannot be put on a sustainable growth trajectory unless the energy sector is revamped and reformed with a hallmark of massive gains through efficiency coupled with changing the mode of the import-led economy to the export-led economy.

For the export-led economy, Pakistanis need to turn themselves into a manufacturing nation.

The country badly needs to reform the energy sector which has now virtually become unsustainable and unviable with annual theft of electricity of Rs589 billion, 87% of recovery of electricity bills, circular debt of Rs2.6 billion and, the increasing inability to pay the dues to the IPPs and CPEC IPPs as well.

This has virtually kept foreign investors away from investing more in the power sector.

The government owes Chinese IPPs $1.68 billion which is why the Chinese SINOSURE is not allowing more investment in the $10 billion Green Refinery and 300MW Gwadar power project in the country.

The monster of the capacity payments will be more frightening as it will increase from Rs1.9 trillion to Rs2.278 trillion in next fiscal and this is how the contribution of capacity payment in the tariff would escalate to Rs17.42 from Rs14.09 per unit.

The base tariff for the financial year 2024-25 may surge to Rs36.28 per unit at the maximum from the existing base tariff of Rs29.78 which was at Rs24.82 per unit in 2022-23 in case distribution margin and prior year adjustments are added and the end consumer tariff during peak hours for domestic consumers will go up to Rs48.51 per unit from over Rs42 per unit if the admissible losses of 11% of DISCOs, surcharges, taxes and duties are added up in the bills.

If we look at the circular debt in the gas sector that now peaked at Rs2.9 trillion which is more alarming than that of the power sector. The exploration and production companies — OGDCL, PPL, GHPL, MOL and, Mari Gas are braving the severe liquidity crisis as Sui gas companies — Sui Southern and Sui Northern are needed to pay them Rs1500 billion.

In the head of RLNG, the volume of the circled debt has also swelled to an unimaginable level. Pakistan State Oil (PSO) owes Sui Northern over Rs550 billion and Pakistan LNG Limited (PLL) is also required to be paid Rs90-100 billion.

The unrecovered RLNG diversion cost starting from FY19 to FY22 has accumulated to a whopping figure of Rs260 billion for which the IMF has not allowed the finance ministry to extend the next year’s budgetary allocation of subsidy.

The industrial and high-end consumers are extending the cross-subsidy of Rs110 billion to the protected and some unprotected gas consumers. In the power sector, the industrial sector is providing the cross-subsidy of Rs240 billion to lifeline and some domestic consumers.

The government can reduce the industrial tariff at regionally competitive energy tariff (RECT) to stimulate the exports of the country to a large extent on a sustainable basis if the sitting regime shows political will by withdrawing the cross-subsidy that the industrial sector is extending in both power and gas sectors.

Under this scenario, the government will have to increase the gas tariffs of protected and some non-protected consumers and hike the power tariff of lifeline and some more consumers using up to 300 units a month or it will have to arrange the social safety nets to the said consumers.

Changing the board of directors of DISCOs is not the solution towards reforms as every government in the name of reforms changes the BoDs of the DISCOs and NTDC apparently to adjust their own loved ones.

The real issue is to give financial autonomy to the DISCOs boards and allow them to make and implement their business plans.

The baboos in the power division still keep running the DISCOs, NPCC, CPPA and NTDC and want to keep their unjustified influence in the DISCOs’ affairs.

So running the DISCOs from the power division has served nothing rather it inflicted huge injury on the power sector.

Though this regime is trying to privatize FESCO, GEPCO, IESCO, LESCO and MEPCO and hand over HESCO, SEPCO, QUESCO and PESCO to private management on long-term concessions, still it is a Herculean task as the power sector is no longer a sustainable sector.

During the caretaker regime, CCI (Council of Common Interest) had allowed exploration companies to directly sell to the private sector companies 35% of gas from future gas fields to improve the liquidity crisis of the exploration and production firms but subject to approval of implementation framework from ECNEC (executive committee of national economic council). Four months and twelve days have passed, but the petroleum division has not yet submitted the implementation framework to the ECNEC for approval.

So the unnecessary delay to this effect has also irked the SIFC (Special Investment Facilitation Council) as the said initiative was approved by CCI with the backing of SIFC.

In the last executive committee of the SIFC meeting, the petroleum minister and his secretary were not on one page on this particular issue as the petroleum minister was not satisfied with the CCI decision, but the secretary said it was the right one and should be implemented as soon as possible. This bickering between the secretary petroleum and his minister annoyed the SIFC meeting participants.

The other issue is the signing of the implementation agreements (IAs) between OGRA and refineries to ensure the production of Euro-V petrol and diesel which is more environment friendly and reduction in furnace oil production to the minimum level, but this issue has been delayed as petroleum division has sought the six months extension from CCoE (cabinet committee on Energy) in signing IAs to rope in PARCO and Cenergyco as part of the upgradation policy. However, the three refineries — ARL, NRL and PRL are quite ready to sign IAs.

PARCO may complete feasibility within six months to assess which kind of upgrade project should be initiated i) a clean project of $500 million, ii) a bottom-of-barrel project of $1.75 billion or iii) a project in between both valuing $1.2 billion.

The sitting regime also needs to open up the LNG import sector to private companies which can have the ability to import LNG at lower prices than the government entities.

This would help bring down the average price of RLNG to a reasonable level. The import of LPG by Sui Southern is highly questionable in the presence of the JJVL LPG extraction plant which has been non-operational since June 2020 and it can be used as an LPG import substitution project saving foreign exchange reserves that have been borrowed from friendly countries.

Last but not least, the government authorities should immortally remove all hurdles in the way of implementing the TPA rules (third-party access rules) in the oil and gas sector.

The reforms are the only recipe to harness efficiency gains in the energy sector which can play a role in slicing down the energy tariffs to an affordable level.

Originally published in The News