Energy pricing

EDITORIAL: Energy Ministry is bifurcated into power and petroleum/gas divisions however pricing decisions of different fuels (inputs) are disturbingly not taken in conjunction as is the case in the rest of the world, which is one of the major reasons for the consistent rise in the intractable circular debt.

And while the price of the output — electricity — is the same throughout the country yet this requires subsidies (because the generation cost is very high due to the flawed policy under which the Independent Power Producers operate that guarantees their profits in US dollars) which the government can ill afford and which international donor agencies insist must be phased out with full cost recovery, the economically feasible option, the only way forward. To achieve this objective successive administrations, including the incumbent one, raise the end user charges, (Business Recorder has reported that the Circular Debt Management Plan required under the ongoing International Monetary Fund programme envisages a further increase of base tariff by over 2 rupee per unit — over and above the quarterly adjustments and the fuel adjustment charges), which is also a politically challenging situation. And notwithstanding government subsidy policy that has spanned over decades the energy sector continues to be heavily taxed as are fuel imports — items considered low hanging fruits from the perspective of revenue collection. Therefore, the need for reforms in this sector has assumed critical levels.

The axiom in a federation like ours is that the more politically challenging the reforms are the greater is the need for rapprochement between the federating units to achieve a consensus with the overarching objective of ushering in reforms that are vital for the economic well-being of specific sectors as well as the national economy. In the gas sector the Energy Minister Hammad Azhar noted on the floor of the House that Sindh understands the importance of the weighted average cost of gas (first proposed by Dr Asim Hussain, the Petroleum Minister during the last Pakistan People’s Party government) but not implemented due to the: (i) constitutional provision, Article 158, that allows the province in which a wellhead of natural gas is situated takes precedence over other parts of Pakistan; Punjab, the most populous province, has a negligible quantity of gas wellheads. And to further complicate matters domestic gas is no longer able to meet domestic demand, with around 9 percent increase in shortfall each year, requiring the much more expensive LNG imports. There is therefore an urgent economic need to revisit pricing of domestic gas and imported LNG; and (ii) with respect to hydel generation the constitution stipulates that “the net profit earned by the federal government, or any undertaking established or administered by the federal government from the bulk generation of power at a hydro-electric station shall be paid to the province in which the hydroelectric station is situated”.

Thus the federation must use its leverage to reach a consensus with the provinces if it is to succeed in reforming the poorly performing energy sector. The constitution of the country makes available two forums where a consensus can be forged. First, the Council of Common Interest which is tilted in favour of the ruling party in the centre with the only proviso being that it has a majority in at least one province; however, this available forum has been used very sparingly and not very effectively as far as implementation is concerned, not only by previous administrations but also the incumbent administration which has been lax in calling a meeting every three months as required by the constitution. And second, the National Finance Commission award pending since 2015, due every five years, is a forum that can be used as leverage by the federal government and/or its federating units. However, for the effective use of these two forums in letter, and more importantly spirit, necessitates bringing down the political temperature from what has prevailed for the past three to four years.

Notwithstanding repeated claims by senior members of the cabinet, including the Prime Minister, that the economy is no longer in a perilous situation, disturbingly its insistence on the passage of the two bills recently passed in the lower house of parliament, money bill and State Bank of Pakistan amendment bill, with reported resistance from within the cabinet on the money bill and the Prime Minister’s office reportedly expressing concerns on the SBP bill, suggests a tacit acknowledgement that there is no option but to accept these particularly harsh upfront International Monetary Fund (IMF) conditions. It is, therefore, imperative for Imran Khan to think and act as a Prime Minister which requires toning down his rhetoric against leaders of the opposition and seek their cooperation to achieve across the board reforms that would ensure his place in history rather than to think as a politician up for re-election.

Copyright Business Recorder, 2022