Energy Intensity Trend: The Need for Efficiency and Conservation
Shahid Sattar & Madiha Nisar
“Business Recorder”
April 28, 2019
Energy has been globally recognized as one of the key inputs for the economic growth and social development of a country. Pakistan is one of the rapidly growing developing countries, where the annual growth rate of final energy consumption has enhanced considerably by 9.7% and reached to 55 million tonnes of oil equivalent during 2017-18 due to major increase in consumption of industry, agriculture and transport sectors. . In this situation, the concept of Energy Intensity comes under special focus to ensure energy security in an environmentally sustainable way.
The energy intensity level of primary energy is the ratio between energy supply and gross domestic product measured at purchasing power parity at constant prices. It is an indication of how much energy is used to produce one unit of economic output. A lower ratio indicates that less energy is used to produce one unit of output.
Energy Intensity of Pakistani industries is among the highest in the world and stands for enormous energy consumption with an annual increase of 5% to 6% of electricity demand. In 1980, Pakistan had the same level of energy intensity as India, nonetheless, improvement in energy-use efficiency in India (at 1.9 percent per annum) and Sri Lanka (at 1.5 percent per annum) was somewhat faster than in Pakistan (at 1.3 percent per annum). Now Pakistan is 15 percent more energy intensive than India.
The major energy-intensive manufacturing industries of Pakistan are that of iron and steel, brick kiln, textiles, fertilizers, cement, and paper, of which cement industry is the most energy-intensive followed by the textile industry. These industries account for over 37.46% of the energy consumed out of total energy supplied to the country. Transport is the second highest energy intensive sector with 33.8% consumption of total energy supplied.
The latest value for the energy intensity level of primary energy (MJ/$2011 PPP GDP) in Pakistan was 4.43 as of 2014. Over the past 24 years, the value for this indicator has fluctuated between 5.63 in 1999 and 4.43 in 2014.
The decline in overall energy intensity, however, conceals the fact that in some sectors of the economy, e.g. commerce and transport sectors, energy intensity has in fact increased, implying less efficient use of energy in these sector. Ironically, these two sectors benefit heavily from the total energy supplied to the country.
Energy inefficiencies play a prominent role in increasing energy intensity while structural changes cause a small reduction in intensity. In the global perspective, some countries (like US, China, India) have improved the level of energy intensity through the implementations of energy efficiency measures while others (France, Canada, and the United Kingdom) with structural changes.
Pakistan remains one of the most inefficient countries in Energy Consumption and conversion rate to GDP. Inspite of this, the energy savings potential in Pakistan from energy conservation and efficiency measures is substantial, at an estimated 20% of total electricity use, according to NEECA. The savings of 11 million TOE of energy can best be achieved by appropriate pricing and product standardization policies, which force consumers to make appropriate changes in equipment and lifestyle changes. This has happened in the industry, which has stayed energy efficient in order to stay competitive. However, the residential sector that is the biggest consumer of electricity and substantial user of gas remains unmoved because of the low energy commodity rates.
Recently chaos was created by consumers and media on overbilling issues by gas companies. Nonetheless, they ignored the fact that the main reason for overbills is inefficient appliances used by the domestic sector. Currently almost 90 percent of energy consumers use appliances that are only 22 percent energy efficient whereas in other countries no appliance is allowed to enter the market if it does not meet
the minimum efficiency standard (i.e. 50% energy efficiency). To tackle this problem, government should launch standards and labelling regime for energy-guzzling inefficient electric and gas appliances. Awareness campaigns should be started to motivate consumers to replace their conventional inefficient appliances with solar and hybrid appliances. These corrective measures to save gas and electricity can save 4 billion dollars per annum to economy, if fully implemented.
Moreover, energy prices have a significant effect in reducing energy intensity through efficiency channel. High energy prices propel consumers to switch towards energy conservation and more energy efficient appliances. Nevertheless, high energy prices badly impact the competitiveness of the manufacturing sector and decrease the performance of the external sector of the country. Therefore to avoid competitiveness, uninterrupted energy should be available at reasonable and regionally competitive rates.
Transitioning to a liberalized energy market model by bringing greater competition into electricity and gas markets in the interest of creating more competitive markets and reductions in price by privatization, is the way to ensure that the benefits of reliable and affordable electricity can translate into higher economic growth and shared prosperity.
There has been a strong policy bias in favor of household consumption of energy vis-à-vis consumption in productive sectors. The policy needs to be a little more balanced between the final use of energy and its use as an input into economic activity.
Pakistan had experienced high energy intensity since its inception. However, no target was ever set for a significant reduction in energy intensity and no steps were taken to reduce it. As Pakistan has
the potential of energy savings, relevant policies should be implemented to reduce energy demand pressures prevailing in the economy.
Government interventions through legislation enforcing minimum standards are required to make a serious impact on the inefficient use of energy. Energy conservation measures are profitable investments compared to new energy supply capacity – also cheaper and quicker to implement.
Without far-reaching institutional restructuring, piecemeal reforms are unlikely to form the basis of a sustainable and efficient energy sector. The quality of Energy Sector Regulators has continuously been declining as a result of creeping bureaucratic capture of both NEPRA and OGRA whereas DGPC remains a government department.
The technical organization and manpower needed to regulate a vibrant market-based energy sector were never hired. The regulators as a consequence have very narrowly interpreted their mandate and limited it to functions they were already performing i.e. tariff setting. The government should redefine the role of the regulators focusing on operational rather than just tariff setting. The regulators must focus on the creation of energy markets as defined in their acts.
Furthermore, there are no incentives present in Pakistan for small and large consumers to conserve energy and adopt energy-efficient products. Government should recognize and publicize the measures taken by large consumers to save energy. Government should also start awareness campaigns for the people about energy-efficient appliances through the publicity.
Reduction in energy intensity will not only increase the energy savings but will also contribute to increase the economic and social welfare in the economy.
(https://fp.brecorder.com/2019/04/20190428467951/)

SHAHID SATTAR AND ASAD ABBAS

APR 18TH, 2019

Textile sector of Pakistan is facing many internal and external challenges including energy affordability and availability, current account deficit, shortage of raw material, credit availability, lack of institutional support, infrastructure constraints, skill development institutes, perception management, market access, GSP plus status continuation, sustainable supply chain, BCI cotton, water footprints reduction, social standards compliance and last but not least compliance linked
with SDGs and the WTO rules.

On the Cotton front, it is not only an essential segment of economic strategy but has social dimensions as even the farmers’ schedules of social activities which are dependent on expected cash flows from the value chain. Cotton as the basic raw material for the Pakistan textile industry accounts for almost 70% of the basic cost of production in the textile industry and any movements in price or quantity have significant impacts.
Cotton crop variety, quality and production witnessed a diminishing trend over the last few years. A decrease in cotton acreage, per hectare yield and imprudent government policies, have taken a heavy toll on cotton production. According to the Pakistan Central Cotton Committee’s (PCCC’s) report, cotton production target has been missed by 23 percent for the year 2019. Over the last five years, cotton production has decreased from 13.86 million bales to 10.84 million bales, witnessing a decrease of 22pc which has caused a huge loss to the economy. The shortfall requirement of the industry is 15.5 million bales and hence 5 million bales are short.

The cotton produced in Pakistan is of average quality with short fibre length (10-25 mm length) which cannot be used for producing high-end products required for exports. In Baluchistan, production of long staple length of cotton is expected and more areas are required to be exploited. Mostly, long staple length cotton is imported from Brazil, Egypt, Greece, Turkmenistan, the US, India, and Spain. Currently, the cotton crop is suffering from the encroachment of land (sugarcane encroached best cotton growing area), poor quality seed, cotton leaf curl virus (CLCV), pest management issue, lack of plant resistant seeds, depleted technology, late sowing and the severe shortage of water. There are 24 well-known pests and diseases of the cotton crop in the world, Pakistan has 22 of them. There is no adequate pest and disease control mechanism available in Pakistan to bar impact and spread of pest attack. Reasons for low quality and production include old technology, lowquality seed, changing weather conditions, low-quality pesticides, and high prices of competing crops.

On the basis of issues, a detail way forward is suggest as follows:
There is a dire need to improve cotton quality by controlling contamination and trash content through enforcement of the standards laid down in the Cotton Control Act and Cotton Standardization Ordinance. Pakistani ginned bales contain up to 10% trash, world averages 2 to 3 percent. Encroachment of crops in cotton growing areas shall be curtailed through the adoption of appropriate policy changes in sugarcane pricing and cropping patterns. The land under sugarcane cultivation is 1,217,000 hectares while under cotton, it is 2,489,000 hectares; wheat is produced on 9,052,000 hectares. If we revert even half area (608,000 hectares) under sugarcane production with the help of corrective measures of the government which restrict its cultivation area, this area with cotton cultivation will add an additional 0.25 percent to GDP, along with minimum 1.273% of additional wheat contribution to GDP per annum. Most of the sugar mills have doubled the extension beyond the sanctioned capacity. Therefore, unsanctioned enhanced capacities should be cut back. Zoning laws for crops may be enforced strictly.

The government of Pakistan should ensure import of best quality seed and its availability at affordable prices to farmers. A package deal should be negotiated with Monsanto to ensure better quality seed availability for farmers.
— A comprehensive training and capacity building program shall be developed to establish a system in the private sector for grading and classifying cotton. Incentives shall be provided to ensure that proper premiums are paid for increased production of contamination-free graded cotton. Labelling of cotton bales with trash content, moisture content and weight of cotton bale should be made mandatory.Measures shall be introduced for production of long-staple cotton for value-added products and to meet domestic demand for high-quality fabrics, including the introduction of BT cotton on priority basis. Trained staff from relevant government department should carry out training sessions, provide farmers with information about soil analysis, crop management, weather and On the other side, Pakistan Central Cotton Committee (PCCC) has totally failed to launch new seed qualities due to lack of dedicated and sustained research. Pakistan’s average cotton yield is 17 maunds whereas progressive farmers are getting 40 maunds yield in Pakistan. PCCC is required to ensure availability of cotton to the industry at reasonable prices throughout the year and develop such varieties of cotton seeds that are resistant to diseases and enhance per acre cotton yield. The industry requirement is increasing with each passing year but indigenous production of cotton is further decreasing. It would be difficult for the textile industry to compete with textile giants like China, India, Bangladesh and Vietnam when we have to import a larger amount of expensive cotton to meet the shortfall of our cotton requirements. Promotion of cotton means the promotion of exports while the failure of cotton crop translates into heavy damage to the country’s economy.It is mandatory to increase the cotton production to 15 million bales within the next 2 years and 20 million bales in the next 5 years

(The views expressed in this article are not necessarily those of the newspaper)
Pakistan: cotton area, production & yield

=======================================================================
PERIOD AREA ‘000’ HECTARES PRODUCTION 000′ BALES OF 170 KG YIE
=======================================================================
Sindh Punjab Total Sindh Punjab Total Sindh
=======================================================================
2014-15 596 2,323 2,919 3,573 10,277 13,850 1,019
2015-16 621 2,243 2,864 3,766 6,002 9,768 1,031
2016-17 637 1,815 2,452 3,597 6,978 10,575 960
2017-18 612 2,053 2,700 3,775 8,077 11,946 1049
2018-19 394 2290 2,684 2,600 8,077 10,847 1122
=======================================================================
SOURCE: TCO/PCCC/PBS

Independent’ money producers?
Shahid Sattar and Madiha Nisar
“”
April 07, 2019
Water and Power Development Authority (WAPDA) and the Karachi Electric (KE) owned all power generating plants in Pakistan up until the mid-1980s. In 1985, a lack of funds in the public sector forced the Government to discontinue its support to WAPDA. Consequently power policy 1994 was formulated to meet power shortages and it was highly successful as it attracted substantial foreign direct investment to Pakistan’s power sector. However, the policy also generated a great deal of controversy in which the independent power producers used various means to secure money-spinning contracts.
The largest private sector power generation venture in Asia; HUBCO and the rest of Pakistan’s independent power producers(IPPs); all of them thermal plants, now account for almost 46 percent of total installed capacity of electricity generation in Pakistan.
However, this share enjoyed by the IPPs does not exist without a price. Since the introduction of the IPPs in the country in 1994, the electricity tariffs have been rising constantly. The liberalization of the power generation sector has drained power sector resources and trapped it into huge losses. According to financial reports of WAPDA and the Discos’, the utilities incurred a Rs. 325 million operating loss in FY17 and now it has reached to billions of rupees. Nevertheless, the IPPs alone cost the government billions of dollars in capacity payments every year. Hypothetically speaking, this means that if all of the IPPs in Pakistan do not produce a single unit of electricity, government would still have to pay them for the availability of their capacity. The latest estimate of fixed costs versus variable costs of CCPAC states that 70 percent of costs are not variables.
Previous governments offered very lucrative incentives to investors to actively attract investment for the power sector. The incentives include a cost plus method to determine tariffs and the cost used for tariff determination was based on assumptions, not on actual cost of IPPS. Power plants were said to be instrumental in getting very high upfront tariffs. Apart from high tariffs they had the leverage to use any technology and any main fuel they want. These seemingly unrealistic power tariffs, high inefficiencies, low payment recovery and the inability of the government to manage its subsidies mechanism caused massive losses to the country, which has been estimated to be 2 percent of GDP per annum.
Through purportedly questionable means wind power projects successfully got high upfront tariff of Rs. 12.71/KWH and levelized tariff of Rs. 15.32/KWH (world-wide Wind power tariffs are 2.6 cents/Kwh) against the assumed capital cost of $1.5-1.8 million/MW. While the installed capital cost of similar projects worldwide average at US $ 0.8 million and even in India it is less than US $ 0.7 million. Similarly, coal projects have been awarded on very high costs and high tariffs causing a gigantic loss to the energy sector.
These practices created cost inefficiencies on the IPP side as they were assured return on equity regardless of their performance whereas the efficiencies stated in the NEPRA determination were already 2.5-3 % below the actual efficiency of the power projects, apart from the other costs being massively overstated. By virtue of these suspicious terms, IPPs received huge overpayments causing billion of rupees to the economy of Pakistan.
Pakistan’s history is full of instances where governments have formulated policies based on exaggerated growth models and misplaced assumptions, ultimately implementing them in a highly
non-transparent manner. The long-term consequences are often ignored for short-term political and personal financial gains. The IPPs made, and are still making huge profits on virtually zero-risk investments.
Case of the oil-based IPPs: NEPRA determined 15 percent return on equity to IPPs but, each oilbased IPPs, is receiving a profit of $27 million against a legitimate return of $6.2 million per annum. This excessive profitability is almost $160 million per IPP in the last 8 years equating to 61 percent return per annum in dollar terms on a80:20 debt equity ratio. This has only been possible as the NEPRA tariff determination procedure was manipulated and understated efficiency figures and massively overstated costs. The government tried to stop this through energy audit and NEPRA redetermination of tariffs but couldn’t succeed.
The oil-based IPPs were also allegedly involved in sale of excessive fuel oil (because of higher efficiency) in the underground market.
Governments since 1994 have accused each other of corruption, disloyalty, and political victimization, and absolved themselves of all responsibility. In the meantime, the public has been paying ever-rising electricity bills. The question remains: who should be blamed for this fiasco? The IPPs, the governments, or the consumers who are not standing up for their rights? In the meantime the entire industry and economy of Pakistan has been priced out of the international market due to the excessive energy costs.
Power sector issues can only be resolved by formulating fair and just polices. Looking ahead, taking heed from mistakes of the past is the key to formulating a workable economic recovery plan. An energy audit and tariff redetermination is required to recover the overpayment of over $1 billion in the last 8 years to these oil-based IPPs.
The government should also take steps to strengthen NEPRA by decentralizing it making it more transparent and accountable to Parliament. NEPRA should be expanded to include over sight and monitoring both technical and financial to avoid repetition of such blunders.
======================================================================= Summary of Overpayments to Power Projects ======================================================================= Power Source Annual Overpayment Life of the project Million Billion ======================================================================= Coal Power Projects (2400 Mws) $ 475.00 $ 14.2 Wind Power Projects(2000 Mws) $ 430.00 $ 10.7 Solar Power Projects (400 Mws) $ 94.64 $ 0.9 Fuel Oil Based IPPs(1400 Mws) $ 80.00 $ 1.8 TOTAL AMOUNT $ 1,079 $ 27.77 Billion =======================================================================

Policy measures for enhancing textile exports
Shahid Sattar and Madiha Nisar
“”
March 20, 2019
Pakistan’s poor trade performance in the last decade is an outcome of diminishing export competitiveness and imprudent national policies. Pakistan has had two textile policies, first fiveyear textile policy was developed in 2009 and second one came in 2014. Both policies were comprehensive on paper but these failed due to non-implementation and technical shortfalls. The appraisal of last policy and its achievements depicts a 5 percent level of implementation.
Nevertheless, incumbent government’s commitment to implement export-led growth policy incentivizing the exporting industry is heartening and will provide impetus to country’s exports. Initiatives such as regionally competitive electricity and gas prices for exporting industry and rationalizing import duties on raw materials to reduce cost of doing business will help certainly render our exports more competitive in the world. However, to sustain increasing exports, huge investments in balancing, modernizing and expansion are required.
The government’s determination to reduce cost of doing business, textile sector is willing to invest in its manufacturing infrastructure and upgrade production units with a view to enhancing exports. However, there are some corrective policy measures recommended, which if implemented, can further facilitate exporting industry which is envisioned to increase textile exports from $13.53 billion (FY2017-18) to annually $29.15 billion (FY2023-24) with an additional accumulative investment of $9.30 billion. Some of proposed policy measures are:
Increase domestic cotton production: Decrease in cotton acreage, per hectare yield and imprudent government policies have taken a heavy toll on cotton production. According to figures released by the Pakistan Cotton Ginners Association, Pakistan’s cotton production up to March 3 fell by 6.8 percent. To protect the cotton industry from further downfall, concrete policies are needed. The cost of cotton inputs should be reduced and new version of Bt technology seeds should be provided to farmers. Efforts should also be made to explore the feasibility of cotton production in newly available arable areas, e.g., in Balochistan and KPK. Encroachment of crops in cotton growing areas shall be curtailed through adoption of appropriate policy changes in sugarcane pricing and cropping patterns.
Transfer of administrative control of PCCC to textile ministry: The administrative control of Pakistan Central Cotton Committee (PCCC) should be transferred back from Ministry of National Food Security and Research (MNFS&R) to Ministry of Textiles and management to the textile industry to implement pro-cotton policies more successfully as MNFS&R has failed to arrest a sharp decline in cotton production so far.
Removal of irrational customs duties: For the success of any export-led industry, local availability of basic raw material is considered as an added advantage being a key factor in reducing cost of doing business. But unfortunately, over the last five years, our cotton production has decreased from 13.86 million bales to 10.8 million bales creating a supply deficit of 3.7 million bales which is to be filled through cotton imports. It is encouraging that government has taken initiatives like rationalizing import duties on raw materials in an effort to reduce cost of doing business. But the abolition of cotton duty should not be confined January to July only, it should be available 12 months a year to fulfil excess demand of cotton.
On the other hand, we also need to reform our product mix within our industry to compete with the world. A decade back, share of cotton products in the world market was more than 70 percent and
Pakistan had its name internationally. Now world trade has started moving away from cotton products, preferences have shifted to manmade fibres (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. We are still stuck in old cotton strategy whereas basic raw material for synthetic textiles is burdened with up to 20 percent regulatory duties. Such irrational duties should immediately be removed to facilitate largest exporting sector.
Payment of refunds: The working capital of the textile sector remains blocked due to delays in sales tax refunds, customs duty drawback and income tax refunds. All pending refunds should be lodged and paid within a reasonable time to provide much-needed liquidity for the expansion of the export base and investment and modernization of the industry. The amount of pending refunds are shown in the table.
=================================================== Schemes Pending refunds (in Million Rupees) =================================================== Sales Tax (Current) 44 Sale Tax (on account of defe 22 Custom Duty Drawback 10 PM Package 30 No DLTL refund made for 2017-18 Textile Policy 2014-19 3 Textile Policy 2009-14 31 Total 140 ===================================================
Expansion of DTRE and other export scheme for indirect exporters: The duty and tax remission scheme (DTRE); a government’s temporary importation scheme, which allows traders to import duty-free goods only if they re-export them needs revision and expansion. This scheme should be expanded to indirect exporters too which will result in surplus raw materials available to direct exporters and will foster exponential growth in manufacturing sector.
Expansion of LTFF: The long-term financing facility (LTFF) scheme enables borrowers to avail loans to build their infrastructure or business channels. It is time that the LTFF scheme is expanded to the entire value chain of the textile sector to enable a wholesome expansion of the industry for sustained export growth. Further, the maximum company limit of Rs 1.5 billion should be increased to Rs 3 billion and State Bank of Pakistan’s overall limit should be enhanced to Rs 300 billion to create a borrowing space.
DLTL on value-added: In order to fully develop the value chain in the domestic market, all future DLTL schemes may only be applicable on the value-added products in Pakistan. Further, the DLTL rates may be designed to favour end products. Imbedded in the cost of doing business the possible rates could be as per table.
======================================================================= Proposed Duty Drawback Rates ======================================================================= Commodities 2018-19 2019-20 2020-21 2021-22 2022-23 ======================================================================= Cotton Yarn 4% 3% 2% 1% 0% Greige Fabric 4% 3% 2% 1% 0% Processed Fabiric 5% 4% 3% 2% 1% Made Ups 6% 7% 8% 9% 10%
Garments 7% 8% 9% 10% 11% =======================================================================
Exemption from turnover tax: The regressive tax of 1.25% on export items acts as a disincentive for exporting industry so exporting industry should be exempted from any such tax.
To remain competitive in the international market, necessary support is obligatory to attract further investment in new machinery and technology as compared to the incentives given by our competitors such as Vietnam, china, India and Bangladesh. Investors are also reluctant to invest due to huge burden of taxes, regulatory procedures and unsustainable policies.
We hope that these proposed corrective policy measures, aimed at increasing exports and textile production will be adopted by the government so that Pakistan’s exports can once again proudly lead the country to prosperity and economic sustainability.

Impact of PKR depreciation on exports
Shahid Sattar
“Business Recorder”
January 10, 2019
In contemporary economics, it is believed that currency devaluation directly translates into enhanced exports. This is not the case as the increase in exports is always a function of the elasticity of the inputs that make up the goods exported. Pakistani currency has devalued enormously but many will plausibly argue that our exports have not yet seen a resultant increase. Taking the example of Pakistan’s largest export sector textiles which was able to rise around nine percent to $13.53 billion for the fiscal year 2018 ended June 30 while Rupee lost around 20 percent against the US dollar since December 2017 to the fiscal year end.
In Pakistan, a 6 percent currency depreciation from Aug17-March18 was followed by 10pc increase in exports. But unfortunately later depreciation of almost 20pc from March to November 2018 has not yielded any positive results in terms of export improvement.
The explanation to the above mentioned imbalance in the equation can be derived from several factors that are: 1) overvalued currency for extended period before recent devaluation, 2) increase in raw material import cost post devaluation that has increased product price, 3) energy price of RLNG that is supplied to industries being pegged with dollar which has gained weight against our rupee, and to some extent the inefficiency of the export industry.
It is an established fact that Pakistani currency has remained overvalued for the last many years which has hurt the entire export sector, including textile exports. The policy of pegging rupee to a fixed 100/US dollar left industry uncompetitive internationally as well as domestically as imported products were artificially kept cheaper due to over-valuation. This is evidenced in an immense increase in countrywide imports to more than $50 billion, while exports fell to $20 billion. Now that the currency is heading towards its actual value, the results of this devaluation will start showing in export numbers in times to come.
Dissecting textile and clothing export sector of Pakistan, all the factors hold merit and each factor has been separately analyzed. Most of the input factors are dollar denominated, so any increase in currency exchange rates inflate the input prices and the inflated cost of doing business offset the positive impact of devaluation on exports. Resultantly exports stay stagnant and do not increase as much as they should after currency devaluation due to their low elasticity, which means a lot more needs to be done to reach export target. In a highly competitive low margin industry to expect anything different would not be fair.
Textile sector’s basic raw material cotton and manmade fibre are majorly imported. Pakistani market cotton spot rates are directly linked to New York cotton rates, which mostly means if the dollar’s value increase resultantly even our domestic cotton rate increases with it. In addition to that, this year our cotton production remained just around 9.9 million bales against its target of 14 million bales, while the domestic demand is almost 15 million bales. This leaves a shortfall of more than 5 million bales which has to be imported at devalued currency along with 11% duty on import of raw cotton. The import duty on manmade fibre polyester reaches up to 20% which increases input costs of the textile sector and denies 70% of the world export market to Pakistani products. In fact our textile imports are increasingly turning towards MMF apparel and given the duty structure Pakistani manufacturers are even losing domestic market share.
In addition to raw materials, the energy cost of production accounts for almost 30% of total processing
cost in textile industry. Pakistani energy rates for both electricity and gas provided to industries have remained well above against our regionally competitive countries, predisposing Pakistani exports to a disadvantaged position in international market. Re-Liquefied Natural Gas (RLNG) is supplied to industry which is directly linked to Brent (dollar component). A year on cost analysis of RLNG reveals that on 31st January 2018, the notified rates of RLNG by SNPGL were Rs 1112 ($ 10.79; $=Rs 103) per MMBTU. On 31st December 2018, it was Rs 1770 ($12.73; $=Rs 139) per MMBTU (Source: Ogra). Hence, an increase of 59% was witnessed due to devaluation of currency accounting for 59% increase in 30% cost in just within a year. Other than the automatically infused increased cost of doing business owing to devaluation of currency, the imprudent government policies on the domestic front remains the major reason for dismal textile export performance. As many as 125 textile mills closed down in last 2 years due to high cost of doing business, uncompetitive energy prices for many years, loss of liquidity and squeezed cash flows due to stuck-up refunds/rebates with the government and low profit margins in textile sector. The current scenario is that the refunds held by government far exceed the profit margins created by the textile industry.
The textile mills that remained in business after seeing the crunch were unable to sustain and upgrade machinery through fresh investment in production processes. Investments are made when cash surpluses are created, textile sector efficiency didn’t improve since there were no surplus created to invest back in innovation and technology up-gradation. Let alone up-gradation and innovation, Industrialists tried to survive utilizing all their resources and credit lines just to keep their factories running. Systemic inefficiencies, administrative delays, ever increasing cost of doing business in the country has led to downfall of once an efficient textile industry.
Now that the new PTI government has taken prudent policy measures and is committed to implementing export-led growth strategy, results will start showing in the coming months. It will take time to create surpluses for fresh investment in the sector and exports to reach a 45 billion target over next five years but now it can be stated that Pakistan is certainly moving in the right direction.
(https://www.brecorder.com/news/4662140/impact-of-pkr-depreciation-on-exports-20190110438458)

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:
=========================================================
Projects Capacity Location Reference
(MW) Tariff
Close
=========================================================
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
=========================================================
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/)

Playing the game with your skin in it
Shahid Sattar and Hira Tanveer
“Business Recorder”
October 24, 2018
Who should you let decide your future and wellbeing? Clearly not someone who does not share the stakes in the outcome. Nassim Nicholas Taleeb, a contemporary author who himself spent 2 decades as a risk taker before becoming a full-time essayist, illustrates this concept for success in his book “Skin in the Game”. What is Skin in the Game? “One cannot take risks and decisions that might bring benefit from harm to others without being subjected to them oneself”.
The logic behind this concept is that when decision makers have skin in the game, when they share in the costs and benefits of their decisions that might affect others, they are more likely to make prudent decisions than in cases where decision-makers can impose costs on others and escape any retribution. Whereas, Taleeb sees skin in the game as not just a useful policy concept but also a moral imperative. Further, the phrase is often mistaken for one-sided incentives: the promise of a bonus will make someone work harder for you. No, this says that people should also be penalized if something for which they are responsible goes wrong and hurts others: he or she who wants a share of the benefits needs to also share some of the risks.
Looking at the dynamics of decision making in Pakistan, one will spot clear disregard to our policy makers having stakes in the outcome of their decisions. On the macroeconomic level the Pakistani nation has multiple times seen that politicians load the system with debt and finance the economy with loans to “improve growth and GDP numbers”, and let the successor government deal with the delayed results of their skewed policies.
The current menace that our economy is going through can be easily attributed to a person seeking medical holidays in London, not ready to take any responsibility for taking historic loans, pegging dollar to Rs 100 to boost national ego, not increasing gas prices for last five years to keep their voters and themselves happy.
We now hear the new government venting about previous risks and the game that was played without any skin in it. This phenomenon can be seen moving on to the next level at bureaucracy. Bureaucrats are transferred between different departments and ministries in utter disregard to their professional experience or area of expertise leading to no accountability of their decision-making and without their career growth and promotion at stake.
Board of Directors of all important institutions like ex-Wapda power distribution companies Discos, Sui Northern Gas Pipelines Limited, Sui Southern Gas Company Limited, Pakistan Steel Mills and Pakistan International Airline, etc., are selected on the basis of kinship, PR and the more powerful pseudo-scholar that Taleeb calls IYI (Intellectuals Yet Idiots) you look. They are given lofty amounts for their meetings and they share no burden in the outcome of their decisions, the companies work on rate of return formula having no stake what so ever even if the institution goes bankrupt in the process.
However, the sense is that the captain who goes down with a ship no longer has a ship, reckless pilots end up in ocean beds and relentless risk traders if they trade with their own money are often seen becoming taxi drivers. Then why are these white collar scholars and fancy designated persons not
made liable for the risks they take and penalized for the harm they cause to the millions of population of the country? Back in 1754 BC in the code of Hammurabi, a well-preserved Babylonian code of law of ancient Mesopotamia. The ruler Hammurabi knew this simple logic of putting the skin in the game for people whose choices impact others. Code of Hammurabi had one law pertinent to discussion about the architects. If a house was built and it collapsed resulting in the death of the owner then the architect who designed the house also had to die. The law may sound harsh upfront but this made the architect careful in constructing the building, using the best possible material and building techniques to build the best possible house that would last for a long time. The builder literally has his own skin in the success & longevity of the building. The above mentioned law is a ray of hope for the future, still people and institutions can be made liable for their omissions and commissions of tasks. This can be done by decentralizing the system and not centralize it as we have been doing. Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions. The career path and promotion of the bureaucrats has to be reflective of the outcome of their decisions. In this age of specialization the concept of the generalist bureaucracies has to be changed, so that decision makers stay responsible for their actions and inactions. The principle of “Skin in the Game” is also reflected in the core Islamic Financing Ideology, i-e you get a return based on the profitability of the venture and share in the downside should the venture not succeed. Pakistan is in need of reforms that rewards and penalizes every cog in the wheel in accordance with the decisions and their outcomes.
(https://fp.brecorder.com/2018/10/20181024418237/)

Shahid Sattar and Hira Tanveer
“Business Recorder”
October 14, 2018
By 2023, Chinese province Xinjiang is about to become not only China’s largest cotton textile and apparel market but also that of Central Asia and Europe, just over four years from now. The Chinese government is investing heavily and providing vast subsidies to industries in the province of Xinjiang located right next to Pakistan. According to the ten-year plan designed to industrialize poverty struck Xinjiang, by 2023, China will build its largest cotton textile production and garment export processing base there. In order to achieve the above-mentioned objectives, China’s Xinjiang Uygur Autonomous Region has announced the following incentives for Industry especially textiles:
 Rent-free factories in industrial parks and Xinjiang’s less-developed southern area of Hotan, Aksu, Kashgar and Kizilsu Kirgiz prefectures.
 Interest-free loan deals to boost the local textile industry
 Creation of 110,000 jobs.
 Fund for textile and garment companies to help them increase exports.
 Cheap electricity at US 6 cents per Kwh.
 Transportation subsidies.
 Maximum tax rate of 15%.
The main driver of these initiatives is to build a complete cotton supply chain which is heavily subsidized. Some estimates indicate when all subsidies are added in total, the cost of cotton production is reduced to almost zero.
As a result of these incentives and subsidies provided by the Chinese government, by the end of current year 2018, it is estimated that there will be more than 15 million spindles dedicated to cotton in Xinjiang producing 9 million bales which is greater than production of Vietnam or Bangladesh. As of 2017, the number of textile companies registered in Xinjiang was more than 2,700. These companies have provided jobs to more than 350,000 local residents just in a short span of 4 years. The world’s largest textile mill for spinning colored yarn was launched 3 months back in northwest China’s Xinjiang Uygur Autonomous Region. Further, China has decided to improve its export tax rebate policy to reduce the business burden and bolster foreign trade. They have reduced seven tax brackets to five and have increased rebate rates. On top of that, tax refund procedures will also be simplified, with the year-end goal of shortening the average time needed from 13 workdays to 10.
Pakistan’s struggling textile industry is facing new threats of losing its market share to China, which is heavily investing in textile manufacturing facilities in its province bordering Pakistan. The anticipated glut of textile and garment from the Xinjiang textile park in the export as well as domestic markets of Pakistan poses a serious threat to Pakistan’s textile sector already struggling to remain afloat. Setting up of the textile park at Xinjiang will deal a heavy blow to Pakistani textile exports.
According to a study by Jerigan Global, even today China is the second largest supplier of home textiles with 25.22% market share, 1 out of every 4 cotton towels is from China. The matter of concern that requires our attention is that China’s penetration of the US home textiles market is at the expense
of India and Pakistan. Imports of cotton towels into the US from the top suppliers in India are down by 14.19% through July and down 8.47% from Pakistan, the third largest supplier.
China’s Xinjiang Uygur Autonomous Regions multiple incentives for industry especially textiles are in order to take full advantage of China-Pakistan Economic Corridor projects. This takes away the comparative advantage of Pakistan in textiles exports. The role of a well-coordinated Textile Policy cannot be under-estimated under this scenario. Refund and rebate claims of Pakistani exporters remain pending for years with FBR and State Bank squeezing liquidity of textile sector of Pakistan. Furthermore, the dumping of Chinese textile products in Pakistan through CPEC in near future along with fully advanced and modernized textile hub next to Pakistan’s border requires immediate policy steps and incentives similar to that of Chinese for local industry to invest in their production setups.
Pakistan’s home textiles and spinning sector has remained the backbone of our exports but now with huge production setups and investment like these just across the border in the aftermath of more connectivity through CPEC routes necessitates progressive policies and similar production capacity enhancement incentives to our own local spinning sector and textile value chain on the whole.
(https://epaper.brecorder.com/2018/10/14/14-page/744072-news.html)