BR – ePaper November 27, 2018 Editorial Page 18
Expensive energy
Shahid Sattar and Asad Abbas
Pakistan’s economy is currently passing through many internal and external challenges and threats. The most
prominent among them is energy. In the last decade there was shortage of gas and electricity in the country. As of
today, there is over-capacity in power as well as exorbitant tariff rates which render energy unaffordable for all
consumer categories.
Over the last 10 years, the domestic gas supply has stagnated at 4 bcf. There was a time, 26 foreign Oils
companies were operating in Pakistan which have now dwindled to only 3. This is a sad reflection of the official
apathy that has been extended to this sector. It may be that we were only focused on signing expensive RLNG
contracts. It is high time to work on supply side issues of gas sector.
The energy tariffs in Pakistan are now one of the most expensive in the world. The very high upfront tariff and
capital costs have resulted in the high price of electricity and loss of competitiveness of Pakistani Exports and
Industry leading to a massive Balance of Payments crisis.
On the electricity front: There are two coal power plants, which are working in Pakistan on exorbitant tariff rates.
Port Qasim and Sahiwal Coal Power Plants of 1320MW each are getting the tariff of USc 8.3601 & USc 9.16,
respectively, as per Nepra determination and delivering 9.25 billion units of electricity per annum, separately. These
plants are allowed to include the cost of the jetty and additional transportation cost in the upfront tariff which further
enhanced the tariff structure. Over-payments to these two projects are estimated to be $ 475 million per annum
and over the life of the will be more than $ 14.25 billion.
On bidding for Jamshoro Coal Power Plant (1320MW) the tariff has been set at levelized 6.2 cents by Nepra. This
is a reflection of the high costs associated with projects that are not subject to competitive bidding.
India’s Mundra Ultra Power Coal Project (4000MW) is far cheaper than Pakistani plants on a tariff rate of Indian Rs.
2.64/ Kwh. Bangladesh signed three contracts of coal-fired power generation at the same time, the average tariff
for the power plant was set at 5.42 US cents/Kwh.
On the solar side, 4 power generation projects (100MW each) are operational in Pakistan with first 10-year tariff
rates of 18 to 19 cents/kWh. Whereas solar tariff in India is between 7-8 cents. As solar tariffs cannot be directly
compared across countries due to the difference in the solar radiation and the only logical comparison, in this case,
is India, the tariff comparison for the same period of projects is given as:
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Projects Capacity Location Reference
(MW) Tariff
Close
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Solar projects(100 each) 400 Pakistan 18.04
NSM Batch 350 India 8.79
Uttar Pradesh Phase 2 215 India 8.04
Punjab 500 India 5.65
Rajasthan- 420 MW bundli 420 India 4.35
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There are 17 wind power projects and they are operating on a high upfront tariff approved at Rs 15.322/Kwh levelized. Assumed capital cost of these projects is in the range of $ 1.5-1.8 million/ MW while worldwide average at the US $ 0.8 million, in India it is less than the US $ 0.7 million. Current worldwide Wind power tariffs are as low as 2.6 cents/Kwh, world average tariffs are around 6-7cents/Kwh. The household sector, as well as industrial sectors, are paying high tariffs as compared to regional tariffs which are making them locally and globally uncompetitive. Consumers in Pakistan are paying high prices with low per capita income and worldwide consumers are paying lower tariffs with far higher per capita income. This declining worldwide tariff implies that our industry and economy will further face a relatively higher cost of production even if our electricity rates remain the same as today. The government needs to identify the factors behind the determination of high tariffs and revisit the tariff structure so the economy may get rational tariff structures leading to higher economic growth. The government could also consider the capacity payments to be sunk costs and not charge the consumers for the inflated costs. On gas side, it was decided to import RLNG to cover the demand gap which is unaffordable and uneconomical. The rate of domestic produced gas for industry is Rs. 600 per mmbtu and rate of imported RLNG is Rs 1700 per mmbtu. The cost of gas/RLNG includes an unrealistic level of Unaccounted for Gas (for gas/line losses) of over 10%. The partial solution to the problem can be found through the extensive exploration focused on the areas where there are known structures and are confirmed to have gas. One such area is Block- 28 which has recently been acquired by Mari Gas Company. This is by far the most promising exploration acreage in Pakistan with expectation of reserves exceeding the Sui field in multiple structures. It is hoped that Mari Gas Company will rapidly deploy exploration in the area and waste no more time as this area had been in force majeure since 1991.

Urgent Need for Long-Term Textile Policy
Shahid Sattar and Hira Tanveer
“Business Recorder”
November 21, 2018
Pakistan was once the leading textile exporter and was considered the most efficient and technically advanced textile sector in the region. The sector gradually started losing its galore post-2000. Pakistan’s textile and clothing exports have lost international market share by dropping from 2.2% in 2006 to 1.7% by 2017. Poor trade performance in the last decade is an outcome of diminishing export competitiveness and imprudent national policies. Export competitiveness, as indicated by the country’s market share of global exports, has been declining over the years, while market share of peer economies such as Malaysia, Mexico and Thailand has doubled.
Over the period 2013-15, Pakistan only managed to increase its export share in nine out of its 20 biggest export markets. World exports to China dropped by 5.4 percent over the period 2013-15, while Pakistan’s exports to China dropped by a higher rate of almost 10 percent. Similarly, world exports to the UAE dropped by 2.9 percent during the period 2013-15, while Pakistan’s exports dropped by 20.2 percent. Pakistan’s higher ‘decay’ rate, as opposed to the world decay rate for China and the UAE, points to the existence of barriers to trade that have hindered growth in exports.
Textiles being the largest industrial sector of the country, contributing almost 60 percent of total Pakistan’s exports, demands special dedication of the authorities to help improve exports. Pakistan has had two five-year textile policies, first five-year textile policy was developed in 2009 and the second one came in 2014, both policies were comprehensive on paper but they failed because of their non-implementation and technical shortfalls. Over the same period, Pakistan’s textile and clothing export growths have decreased, whereas, our regional competitors are seeing a multiplying growth with Vietnam’s newly emerging textile market growing at the rate of 107% (2011-17) while Pakistan’s declined by 10% (2011-17).
TEXTILE & CLOTHING EXPORTS GROWTH Countries % Change 2011-17 (Value $ “Billion”)
India     31%
Bangladesh  63%
Vietnam  107%
Sri Lanka  20%
Pakistan -10%
The major reason behind this decline is that country’s textile sector failed to innovate and modernize production owing to systemic inefficiencies, administrative delays, low profitability due to ever-increasing cost of doing business, squeezed profit margins and liquidity crunch due to cash flows soaked up by FBR and State Bank in delayed refund/drawbacks along with tariff and non-tariff barriers on import of raw materials. Currently, more than 70-80% of textile machinery is more than 10 years old while an international GHERZI benchmarking study in 2007, deduced that Pakistan’s textile infrastructure was the most updated and had modern spinning technology in the region compared with India, China, Indonesia, Egypt, Vietnam and Bangladesh at that time.
Over the past decade, Pakistan’s export market base, much like its product base, has also remained stagnant. Traditionally, our trade partners include America, China and European countries. America’s share in our textile and cloth exports is 30%, European countries 41% and China has 18% share. While, on the other hand, Africa, which we have failed to focus upon so far, is going to be the single largest buyer of textile and clothing in coming years. Africa is the second highest populated region in the world share in world with Sub Saharan Africa economy of 2 trillion dollars. Looking at future size of their economy, it is high time to establish ourselves in the emerging markets in order to reap economic benefits in the future. Simultaneously, we also need to reform our product mix within our industry to compete with the world. A decade or two back, share of cotton products trade was more than 70 percent when Pakistan had its name internationally, which has now declined to 30 percent. Now World trade has started moving away from cotton products, preferences have shifted to Man Made Fibers (MMF) and yarns globally due to their affordability and durability, whereas, Pakistan’s export mix has stayed the same leaving us out of the arena. In order to produce exportable surplus, raw materials should be made available at affordable prices but our policies are distorting both cotton and synthetic fibre market and they have become so regressive in last years that cotton is burdened with an import duty of 11 percent. While, the import duty on Polyester Staple Fibre (PSF) which is spun to make Manmade Fibre (MMF) yarns reaches up to 20 percent – 7 percent import duty and 2.9 to 11.5 percent anti-dumping duty.
Looking at the current dismal situation of once leading export sector and future opportunities, a two-pronged strategy shall be developed to restructure and revive textile industry. Those textiles units, which are suffering from the general market slump but are otherwise technically viable should be helped through transitional support in the form of loan restructuring, interest rate relief, relaxation of prudential regulations, additional financing, investment tax credit etc. Others that lack technical viability shall be encouraged to merge with sounder units through the vehicle of Resolution Trust Corporation (RTC). Bankruptcy law shall be introduced which is absolutely necessary for development of a robust corporate sector in the textile industry. The government reform its approach and implement progressive policy measures, the textile industry of Pakistan has committed to deliver increase in export volume to US $ 45Bn plus in next five years along with creation of 3-4 million additional jobs through tapping unutilized potential, exploring nontraditional markets and setting up industries focused on value added textile products and apparel. The threat of increased competition in the global textile market is serious and becoming progressively more so, in order to compete with the world and also regionally, there is need to reduce our cost of doing business and make it comparable to regional competitors like India, Bangladesh, Vietnam and Thailand and for that a long-term policy is mandatory.
(https://fp.brecorder.com/2018/11/20181121425474/)

Shahid Sattar and Hira Tanveer
“Business Recorder”
November 15, 2018
The cost of electricity from renewable energy technologies has been consistently falling, and even dramatically in recent years, especially after 2000, with the rise of solar and wind power generation as viable commercial options. Globally, this has led to a point today where power generation from renewable sources and technologies has become increasingly competitive with the formerly less costly than fossil fuel-based or nuclear power. However, Pakistan has already locked in its electricity generation for next decades on much higher tariffs based on RLNG, coal and hydel generation. This will ultimately impede Pakistan benefitting from much cheaper and environmentally sustainable energy generation options. In 2018, Pakistan’s hydel share in energy mix has reduced from 32% in 2013 to 29% in 2018, while the thermal (IPPS) share has increased from 40% to 45% during the same period. We have become overly dependent on imported fuel thermal power while the solar and wind tariffs have reduced across the world. The future energy mix projections of The National Transmission and Dispatch Company’s (NTDC) has restricted the growth and development of renewable cheaper options of solar and wind beyond 2021. According to a report from the International Renewable Energy Agency (IRENA), the cost of renewable energy is now falling so fast that it will be consistently a cheaper source of electricity generation than traditional fossil fuels within just a few years.
The organization says the cost of generating power from onshore wind has fallen by around 23 percent since 2010 while the cost of solar photovoltaic (PV) electricity has fallen by 73 percent. With further price falls expected for these and other green energy options, IRENA says all renewable energy technologies should be competitive on price with fossil fuels by 2020.
IRENA’s Renewable Power Generation Costs in 2017 report says that globally, onshore wind schemes are now costing an average of $0.06 per kilowatt hour (kWh. In comparison, the cost of electricity generation based on fossil fuels typically costs up to $0.17 per KwH. Parallel to fall in tariffs of renewable options, their global growth in the electricity generating capacity graph shows the drastic rise in solar generation along with a consistent fall in fossil fuels power generation.
At present, there are 4 operational solar power generation projects in Pakistan with a total power generation capacity of 400 MW and their tariff is approximately 18 to 19 US cents/KwH in the first ten years. The upfront tariffs of wind power plants completed in 2015-16 in Pakistan, averages at more than 12 cents/Kwh. The current worldwide wind power tariffs are as low as 2.6 cents/Kwh, world average tariffs are around 6-7 cents/Kwh.
While the world is moving towards renewable energy sources, Pakistan is investing in coal power plants with much higher tariffs. The coal power plants tariffs awarded in Pakistan are 8.36 US cents per Kwh whereas in India, Mundra Ultra Power Project with generation capacity of 4000MW is Indian Rs. 2.64/ Kwh and a few years ago Bangladesh signed three contracts of coal fire power generation, the average tariff for the power plant was set at 5.42 US cents/Kwh. In Pakistan Jamshoro coal Power Plant awarded through competitive bidding has a tariff rate of 6.2 US cents/KwH.
These high tariff rates in all sources of power generation are a result of shortsightedness of policymakers, corruption, and mismanagement. One can safely conclude that existing furnace oil, imported coal and new solar/wind tariffs are not viable options in the long term. The most curious and alarming decision to date was of introducing imported coal-fired power stations to Pakistan, just as the entire world is moving away from coal technology with the US alone in the process of decommissioning a proposed 30,000MW in the short term.
When the electricity prices will be declining all over the world, Pakistan will be unable to reduce its prices for its consumers with much lower per capita income as compared to developed counties. Not only domestic consumers will suffer but also the exporting industry of Pakistan which already pays higher electricity charges as compared to regional competitors. Declining worldwide tariffs will automatically mean that our industry will further face relatively high cost of production even if our electricity rates remain the same as today. The new government has come up with an approach to subsidize energy tariffs for zero rated exporting industry to make them internationally competitive in an effort to narrow current account deficit following export promotion strategy. The question remains are these subsidies sustainable with tight fiscal space in the long run.
The overpayment on account of unjustified higher tariffs awarded earlier has been estimated to cost the country’s economy and the consumer base an extra $1 billion per annum. Pakistan’s economy is already passing through many external and internal challenges. In the current economic situation every possible effort should be directed towards averting monetary losses to the economy.
Current situation is fraught with a similar danger as the IPPs in 1995-96; it has tied the country once again to long-term watertight agreements which are unaffordable. Pakistan being unable to change energy mix in the long run along with higher tariff rates for decades necessitates identifying the policy issues in energy sector and debating them in order to save future of ordinary Pakistani consumer and industry.
(https://fp.brecorder.com/2018/11/20181115423779/)