The energy crisis

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According to a Business Recorder exclusive, the government has extended 119 billion rupees to the Independent Power Producers (IPPs) as subsidy in the first three months of the current fiscal year. The budgeted subsidy for the entire year for Wapda/Pepco was 134.9 billion rupees with 120 billion rupees earmarked for inter-disco tariff differential while an additional 50.3 billion rupees was earmarked for KESC with almost the entire amount to be allocated for picking up the tariff differential.

Another report indicates that the KESC's power tariff is likely to be slashed by 7 to 37 paisas under the monthly fuel adjustment formula - a formula that does not take account of KESC defaulting on NTDC dues, estimated at around 59 billion rupees, accessing around 700 MW from the national Wapda grid at a subsidised rate while allowing its own generation to be well below capacity and ignoring all directives with respect to conservation efforts. At the same time, it was also reported that the government was unable to generate 57 billion rupees to enable it to pay for electricity imports from Iran and the fact that the multilaterals including the World Bank and the Asian Development Bank have refused to extend financial assistance for the 4500 MW Diamer-Bhasha dam because of the necessity to get a no-objection certificate from India as the dam is to be located in a disputed territory.

Thus there are three major issues that are at present plaguing the energy sector. First and foremost remains poor governance of the sector which encompasses failure to ensure full recovery of the bills from both the private and the public sector to promoting the non-performing discos through the inter-disco tariff differential to failure to resolve the inter-circular debt that remains the major cause of a severe ongoing liquidity problem in the sector, necessitating large periodic outlays to enable the sector to import fuel. Second and equally important is the fact that the Finance Ministry has been unable to budget a realistic annual subsidy to the sector; for the past three years the Ministry of Finance has more than doubled revised estimates for the inter-disco tariff differential as against what was budgeted. This year too the situation is not likely to be different given that within the first three months of the year the government had already allocated over 88 percent of the budgeted subsidy. This has obvious repercussions on the budget deficit estimates with a consequent impact on country's major macroeconomic indicators, thereby compromising the country's capacity to attract investment, be it local or foreign, and/or support from multilaterals/bilaterals. There is little doubt that the International Monetary Fund's decision not to extend a Letter of Comfort that would have enabled access to budgetary support from other multilaterals was premised on our failure to reform the power sector and to contain the deficit to sustainable levels.

And finally, the federal government appears to be rather nave about accepting overtures of financial support from multilateral staff who are focused on their own personal career paths that include extending as much assistance as possible at the market rate of return given that in common with commercial banks a staff member who extends the maximum loans at market rates gets the fastest promotion. Such a focus may require a commitment that the multilateral has little expectation to fulfil as it is unlikely to be approved by its Board of Directors; in the case of Diamer-Bhasha dam specifically it is relevant to note that a multilateral is unable to support a project proposal that is located on a territory that is considered disputed between two member countries. It is unfortunate that Pakistan's negotiating team was unaware of this element in multilateral support and what is even more disturbing is the fact that the government of Pakistan's appointee as a member of the Board of Directors of the Asian Development Bank did not caution our negotiators that they were being led up the garden path by the ADB management.

Thus there are lessons to be learned and one would hope that the government team has learned them. However what is disturbing about the energy crisis is that there are many steps that the government can take to resolve the issue - steps that it continues to drag its feet over. These steps include ensuring full payment of utility bills and the disconnection staff must be accompanied by law enforcement agencies, the subsidy should be more tailored to the poor sections of society and the budget deficit's sustainability must be kept in focus at all times and multilateral negotiations need to be carried out in an informed manner which would require negotiations with relevant bureaucrats rather than the political leadership.


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