Energy sector – ‘a nightmare’

Caretaker Prime Minister Anwaar-ul-Haq Kakar in a statement this week has described the energy sector as “a nightmare for the country” mainly because of the fact that the government produces costly electricity and sells it at subsidized rates.

This fact is well known to all and sundry; and it is experienced by consumers day in and day out. What is not in public knowledge is the extent of appalling governance and incompetence that makes the cost of production of electricity exorbitant and is shrouded in the unsustainable gap between the production cost of electricity and the price at which it is sold to the consumer.

It is not only humongous and mind boggling but also exists at every node of the energy supply chain - moving up from the procurement of fuel for generation, its transportation, the role of Independent Power Producers (IPPs) and the power transmission and distribution companies in the public sector and the conduct of many consumers. Each extracts its pound of flesh, so to speak.

This truth can be well confirmed if one digs deeper into the causes of circular debt in the power sector that has ballooned to Rs2.31 trillion and continues to mount in the absence of any meaningful corrective measures by successive governments. The easy way out has been to take only two measures: (1) subsidy; and (2) tariff hike. These measures too are now at the tail end with the International Monetary Fund’s (IMF’s) ‘veto’ to any subsidy and consumers’ outcry and protests against massive tariff increases. Words ‘what now’ therefore constitute a question mark?

Leaderships of previous governments experienced similar nightmares but none ever gathered the required courage to confront the menace head on. The government of PPP (Pakistan People’s Party) and PML-N (Pakistan Muslim League-Nawaz) leveraged this nightmare into an opportunity for the rampant induction of IPPs (independent power producers) based on imported fossil fuels, which turned into a fiscal fiasco. Whereas, the government of Pakistan Tehreek-e-Insaf (PTI) tried to overcome this challenge by renegotiating the agreements made by the former two governments with IPPs. This could not deliver the desired result as the mess in the energy sector spread beyond the fiasco created by IPPs in the first place.

The impact is now so humongous that despite a massive increase in tariffs, the circular debt stock of Pakistan’s power sector increased to Rs2.31 trillion by the end of June 2023, up from Rs2.25 trillion at the end of the previous fiscal year (FY22).

A similar problem besets the gas sector. The Director General (gas) of the government of Pakistan, in a briefing to the Senate Standing Committee, testified that the sector would suffer a revenue shortfall of Rs210 billion because of the outstanding old recoveries and supply of LNG to the domestic sector on subsidized rates. Therefore, they have no other option but to increase the gas prices. He further told the committee that the circular debt of gas sector was increasing by 40%, adding that it had hit the Rs2.1 trillion mark.

The International Monetary Fund (IMF) loan conditions have strictly forbidden subsidies, whereas, the tariff increase has reached a level which is no longer sustainable by industry and domestic consumers alike. The cleaning up of the mess in the energy sector requires a strong political government and leadership to own up to this situation and take it head on. When and if such a strong government and leadership would emerge is a big question.

Privatisation of public-sector enterprises in the energy (power and gas) sector appears to be the only realistic way out of the nightmare, which may mitigate much of the bad governance and incompetence by ushering in competent managements, funding and transparency in this sector.

But this option too appears out of reach anytime soon as the privatization of loss-making public sector enterprises is slow-pedaling - a bit forward and a bit backward. On the other hand, the hitherto wait-and-see approach is no longer an option. Something needs to be done and done soonest possible.

Copyright Business Recorder, 2023