Manufacturers jolted by energy shortages

The biggest and the most worrisome of the crises that Pakistan faces today, is the energy crisis that has adversely impacted economic growth in more than one ways; from a slowdown in industrial production, to unemployment, inflation and social unrest.
The reasons for the energy crisis are multiple and mostly well-known. But let''s, for once, not dwell into what causes the energy shortage as the topic is widely-covered and debated almost everywhere these days. In summary, these include the discussions on how the inefficient distribution companies, the circular-debt-hit refineries, the security situation-hit exploration companies, and the non-paying private and public sector constrains the economic progress of Pakistan. How badly do these elements hamper Pakistan''s manufacturing sector, therefore, is an aspect, undoubtedly, of keen interest.
A look at the latest Large Scale Manufacturing numbers reveals a dismal picture. While some may argue that the LSM slowdown is not necessarily only because of the energy crisis, it still has a major role in it. The LSM index, during the current fiscal year to date, has fallen by nearly 2 percent, with a majority of the industries in the red zone. Only a handful actually improved their production, mostly those having a lower weight in the overall production index.
The shortage of oil, gas and power matters most to those industries that rely heavily on energy resources as their primary source of production. A perfect case in point is that of the fertiliser sector, which has been hammered by gas curtailment for more than six months, resulting in less than optimal production of the vital farming input. Fertiliser production during the first half of FY11 went down by 8 percent.
Lesser production, naturally, results in higher imports at a much higher cost which means erosion of the foreign exchange and higher retail price for the farmers. The energy shortage in this case acts as a double-edged sword, as not only does it result in suspended and delayed supplies, but also in increased product prices. The local producers, in the battle to keep their margins intact, pass on the impact of gas curtailment to the farmers, raising their input cost.
The cycle continues as the farmer is consequently compelled to sell his produce at an even higher rate, which is one of the many causes of the food price increase that has been witnessed of late.
Industries such as textiles, that happens to be the backbone of Pakistan''s exports, face an even bigger hit than the fertiliser sector, since the former does not have the pricing power enjoyed by fertiliser manufacturers. The immense gas shortage and failure of the gas distribution companies to ensure uninterrupted supply to the textile sector resulted in an average 8 percent decline in various categories of textile sector production.
And this loss has more to it than just the lesser quantity produced. Being a business where on-time delivery is valued probably as much as the quality itself, it is tough for textile makers to fulfil orders in time and the failure to do so often results in either cancellation of orders or a loss of reputation - both of which are not easy to repair.
Gas curtailment is not a headache for manufacturers alone; the threat also looms over labour - especially those employed on a daily wage basis. And the textile sector employs a lot of them. Prolonged power outages result in lesser work hours, which is a huge blow on the pockets of poor labourers'' who are entirely dependent on daily income for their livelihoods.
"We have been struggling to operate with any consistency and have been forced to go back to two shifts a day. We produce less, earn less, have to fire many workers, yet we have to incur huge costs to make sure uninterrupted power supply through standby generators," said a local textile player - adding that a lot of smaller players will inevitably quit the scene as the cost of doing business is inching higher by the day, and energy shortage is the biggest obstacle.
A lot of industries battling the energy crisis have been looking for ways to stay afloat - and in the quest to do so, the inevitable strategy is rightsizing, the axe of which generally falls on the lower-income working class, creating more unemployment in an already underemployed society.
The performance of the refinery sector is perhaps the most ironic example of the vicious cycle that the energy sector has. That their production so far has slid by 8 percent is just a number, but this loss has a lot to do with the energy sector inter-corporate circular debt, which stems from the inefficiency of the power distribution companies and the non-payment from the customers, primarily the government itself.
Since, the refineries now operate far below the optimal efficiency level, Pakistan has to rely more on imported crude oil and refined products to meet the requirements, which has a telling impact on the foreign exchange. Moreover, lesser production also means disruptions and delays in fuel supply to electricity producers that augment the problem of prolonged power outages.
The energy crisis is also partly responsible for higher finance costs that the industries have to bear to keep their businesses up and running.
The delays in fuel procurement or working capital arising from the energy crisis forces many companies to borrow short-term on expensive terms that further dents their bottom lines. The companies, therefore, are working along various lines to mitigate the issue, that often leads to product price rise or downsizing, both of which are detrimental to the health of the economy.
All this time, the energy crisis has forced a large part of the industry to look for alternate energy solutions. The electricity problem is, by and large, dealt with being less reliant on the national grid and having a power plant for internal generation purpose, which also has high costs associated with it. But those who are highly dependent on fuels for which alternative solutions are not readily available such as gas, have to face the brunt.
And not every other industry has the might and the size to go for the alternates, a problem most faced by SMEs. "The SMEs are living on thin wire because of the prevailing energy crisis. We do not have the capacity to install alternate power plants...it is hurting our production, our profits and also the quality of work," shared a Smeda official with BR Research.
The SMEs constitute a large portion of the economy and employ millions of workforce without much support form the government. The energy crisis has hit them bad and "a lot of small industries are under immense pressure and many have been forced to shut down, leaving thousands unemployed", the official said.
It is high time that the energy sector reforms are carried out on a priority basis if the country is to save the ailing industrial sector - irrespective of the size and type. Sadly, there has not been much progress in the right direction. In fact the government seems to go further backwards dealing with the energy reforms, which is a big threat to the future of the industries and hence the country''s growth.
The writer is a Research Analyst at Business Recorder. He can be reached at [email protected]