Sunday, September 23, 2007

A solution to energy crisis

THE NEWS: 23-09-2007


It is important to analyse biofuel prospects in Pakistan in a sustainable development context

By Shaheen Rafi Khan

The Climate Change 2007 Fourth Assessment Report has muffled the sceptics. The current findings replace speculation with scientific certainty -- in fact, the reality has overtaken modelled forecasts. Earth is heating up faster than predicted, with extreme events in their several manifestations spiralling out of control. Glacier retreats, polar ice meltdowns, sea level rise, tropical cyclones, storms and hurricanes have triggered natural and human calamities on an unprecedented scale. There is a corresponding urgency to address both the causes of climate change (mitigation) and its effects (adaptation).
Renewable energy in general and biofuels in particular have begun to look like an increasingly viable mitigation option. The 'bio' in biofuels refers to crop and wood-based raw materials such as molasses, rice husks, corn and wood waste, which are processed into fuel. For developed countries, biofuels offer prospects for meeting their emission reduction commitments under the Kyoto Protocol. For developing countries, biofuels present a means to reduce energy import bills as well as earn precious foreign exchange. Reconfiguring the fuel economy to renewable sources, however, is not without risks, as global environmental benefits also generate adverse local environmental impacts. Similarly multinational corporations offer price incentives to farmers to switch from growing food crops to biofuel crops, which threatens food security.
The rapid uptake of biofuels reflects the ease with which they can replace or be blended with fossil fuels, such as petrol and diesel. The technology is simple, cost-effective and environment-friendly. The blended fuels provide a higher octane content, improving vehicle efficiency while reducing carbon emissions. Developing countries also enjoy a cost advantage -- they experience year-round growing seasons, they can access cheap farm labour, and they can use crop by-products to fertilise fields and fire up distilleries. For instance, Brazil is able to sell ethanol for $25 a barrel, compared with $50 and $70 for the United States and Europe respectively.
Not surprisingly, many countries have picked up on biofuels as a way to reduce their oil bills or to earn foreign exchange. Thailand is building over a dozen ethanol plants using sugar cane and rice husks as a fuel source. China has constructed the world's largest fuel ethanol facility at Jilin. It is reportedly planning to import Brazilian ethanol as well. Japan has already gone that route -- the country signed its first 15 million-litre deal with Brazil in May 2006 preparatory to replacing up to three per cent of its gasoline.
Still, this emerging global market in biofuels is not clear of the political thicket. Developed-country farm lobbies lend momentum to biofuels market development, but they also demand protectionist barriers. "Everyone pretends (their enthusiasm) is for the environment, but it is all about agricultural subsidies," biofuels expert Christian Delahouliere warns. To encourage biofuels, the European Union pays farmers 45 euros for each hectare of 'energy crops' they grow. That provides them a huge incentive to produce 'energy crops', effectively barring cheap foreign bioethanol from entering their market.
When Pakistan gained special access to EU markets in 2002 and began shipping bioethanol, local farm lobbies persuaded Brussels to change course and re-establish tariffs. The US also imposes a 50-cent-a-gallon import duty on Brazilian ethanol. Additionally, almost every country has its own biofuel standard with different specifications that may be manipulated to hinder market access.
In this article, we evaluate the biofuel prospects in Pakistan in a sustainable development context. The specific biofuel is ethanol, extracted from molasses, a by-product of sugar. The potential for producing biofuels from corn, rice husks and wood waste exists, but has not yet been tapped. We will also examine the external and internal policy constraints that have prevented the domestic ethanol production from taking off.
Production trends
The sugar industry in Pakistan is the second largest after textiles -- 76 sugar mills are currently operating at or below their capacity. The production of sugar reached 4.0 million tonnes in 2003-04, from 2.89 million tonnes in 1991-92. The production potential, however, has not been fully realised in Pakistan, as the sugarcane yield remains well below the global average. Also, because of sugar prices doubling since 1992, Pakistan continues to remain globally non-competitive. The emerging markets in industrial alcohol and fuel ethanol offer prospects of making sugarcane production economically viable.
About 80-85 per cent of the total sugarcane production goes towards producing sugar. The remaining 15-20 per cent is converted into gur, a local variant of sugar, which is largely produced and consumed in the NWFP. Cane crushing produces sugar and molasses as a by-product. The molasses-to-bioethanol conversion process is conducted in distilleries. Currently, 21 distilleries produce industrial alcohol in the country. Most of these distilleries are a part of sugar mills and are situated on-site, making the production cycle an integrated one. The mills receive the cane, crush it for sugar, store the molasses in storage tanks on-site and then pass it on to the distilleries for industrial alcohol production. Industrial alcohol can be converted into fuel alcohol by using molecular sieve technology, which requires a capital expenditure of about $1.5 million and a completion period of five to six months. As many as eight distilleries have so far installed the molecular sieve technology to process industrial ethanol into fuel ethanol. The fuel ethanol conversion plant is linked to the industrial alcohol plant.

Export trends
Until recently, the bulk of the raw molasses was exported -- with exports ranging between 0.70 million and 1.75 million tonnes -- and only small quantities were converted into industrial alcohol for domestic use and export. In the last five years, however, a substantial proportion of these molasses was converted into alcohol. Fuel-grade ethanol, which is blended with petroleum products, fetches the highest price in the world market.
The distilleries in Pakistan have three major buyers. The domestic industry purchases industrial alcohol for various purposes. Fuel ethanol is currently only being sold domestically in small quantities to the Pakistan State Oil (PSO), as part of a pilot project under which ethanol (10 percent) is blended with gasoline (90 percent). The third and predominant outlet is exports. Most of the industrial and fuel ethanol produced in the country is exported through international trade houses. It is brought from distilleries throughout the country to the Karachi port for onward shipping to different parts of the world.
Alcohol exports have increased rapidly in the last five years, reaching 167,600 tonnes in 2006-07. The average export price for different grades of alcohol ranged from $560-680 per tonne; the total earnings amounted to $100.6 million in 2006. The value-addition in molasses through its conversion into alcohol has enabled exporters to earn as much as eight to 10 times more foreign exchange. The bulk of exports went to Japan and the EU, with Italy being the single largest recipient country within the EU. However, exports to the EU as a whole declined in the wake of Pakistan's removal from the GSP scheme.

Sustainable development
Bioethanol is produced entirely from molasses, a direct by-product of sugar production. While other indigenous raw materials -- such as maize, rice, wood pulp and other forest residues -- are available in large quantities, they do not offer the same scope for value addition that sugarcane does. In other words, the opportunity cost of producing bioethanol from sugarcane is substantially lower than from other available sources. The sustainable development implications are, therefore, positive. Bioethanol production is not likely to displace food crops or cause deforestation. This is because there is a large untapped potential to convert raw molasses into bioethanol, provided the right kind of policy incentives are in place. However, in the long term, the sustainable development concerns may materialise if the production of biofuels in Pakistan takes off. In view of the increasing scarcity of water and land, land-use conversions (deforestation) and crop-switching (threatening food security) would then become legitimate concerns. The wriggle-room here would be provided by sugarcane yield increases and the introduction of sugar beet on a large scale. Sugar beet can be inter-cropped with sugarcane, and it has relatively higher yield as well as a higher molasses-to-ethanol conversion ratio.
Another environmental concern relates to industrial effluents. Wastewater flowing out of distilleries is highly contaminated; if left untreated, it can pollute fertile land and harm aquatic life in water bodies. However, despite the general lack of effluent treatment by industries in Pakistan, most distilleries have installed treatment plants, albeit with varying efficiencies. Cost savings associated with waste treatment are the main incentive for distilleries to be environmentally conscious. Distillery wastewater treatment is an anaerobic process through which the organic components of the wastewater are converted into biogas, with negligible excess sludge production.
The two major products of the treatment process are methane gas and carbon dioxide. Methane gas is recycled as an energy source in the distilleries, meeting as much as 70-90 per cent of the total energy requirement. In effect, distilleries have a 'closed carbon cycle'. The final discharge, when diluted with subsoil saline water, has BOD and COD concentrations reduced by as much as 97 per cent and can be used for land irrigation. The environmental gains from wastewater treatment are thus obvious, while the cost-savings incentives to distilleries are written in. In relation to the end-use, the consumption of fuel ethanol in automobiles leads to a substantial reduction in emissions. The blended fuel provides a higher-octane content without any presence of lead (traditionally used in gasoline as a booster), thus enhancing car performance and at the same time reducing disease-causing emissions from car exhausts. Although no Pakistan-specific estimates are available, the general norm is that for blended gasoline carrying 22-24 per cent fuel ethanol, reduction of fossil carbon dioxide from the tailpipe could be as high as 80 per cent. The clearly demonstrates that economic and environmental benefits associated with bioethanol production have failed to induce adequate policy responses, both domestic and foreign.

(The writer works with
Sustainable development Policy Institute.


By By Naeem Ahmed 9/24/2007
The major issues of the taxation system and revenue organisation during pre-reform period in Pakistan were; discretionary powers with tax officials, corruption, narrow tax base, high tax rates, SRO culture, low share of direct taxes, low buoyancy, heavy reliance on withholding taxes, delayed refund payments and a non-friendly environment in tax offices. These factors not only reduced the tax collection but also resulted in the loss of credibility of the tax machinery in public. Within income tax, the rates for the corporate sector were exceptionally high which not only discouraged tax compliance but also encouraged tax avoidance and evasion. During the year 1992-93 banking, public and other companies were taxed at the rate of 66 per cent, 44 per cent and 55 per cent, respectively. Similarly, income tax returns submitted by the taxpayers were subjected to full assessment resulting into un-manageable litigation process and un-necessary wastage of precious time of taxpayers. It may be realised that the direct taxes are generally progressive in nature, help in maintaining the overall proportionality of the taxation system and equitable distribution of income. The direct taxes also play a key role in ensuring a sustainable level of economic growth and development. Historically, the share of direct taxes in total tax collection in most of the advanced countries has been higher than indirect taxes. But, in Pakistan, the share of direct taxes in total federal taxes has been historically low.In this backdrop there was a need to address these issues in a manner that the taxation system becomes less complicated and cumbersome. In year 2000, the government constituted a Task Force on Reform of Tax Administration, which presented its report in April 2001. The focus of the reform report was to raise tax revenues through simplified tax laws and procedures and a congenial business environment and to regain the taxpayers’ confidence in revenue organisation. The old Income Tax Ordinance, 1979 has been replaced with the Income Tax Ordinance, 2001. The fundamental change introduced from July 2002 was the introduction of a regime of Universal Self-Assessment Scheme (USAS) in income tax. The objective of USAS was to facilitate the taxpayers, to minimise the contact between taxpayers and tax collectors and to enhance income tax revenue through increased confidence of tax payers in the system. On the other hand, the introduction of USAS had also put great responsibility on the shoulders of the taxpayers to respond positively by assessing their own income and to pay tax, due on them, honestly. The new law is in accordance with the international practices in all developed countries around the world and a first such experience in this part of the world, which has curtailed the most abused discretionary powers of the taxation officers. Some of the salient features of the Income Tax Ordinance, 2001 are: (1) The taxpayers themselves assess their income and determine their tax liability. (2) The powers of the taxation officer to make the assessment and impose tax have been reduced to a large extent.(3) All income tax returns are accepted without any conditions of compulsory enhancement of tax liability over previous year to qualify for acceptance. (4) A certain percentage of returns filed are selected for tax audit on the basis of risk assessment to verify the accuracy and correctness of income tax returns.(5) Rates of tax for the banking and private companies to be gradually brought down to 35 per cent by the year 2007.Impact on income tax revenue and compliance:There are three major components of income tax in Pakistan, namely: the collection on demand, voluntary payments, and withholding taxes. The collection on demand includes arrear demand and current demand, voluntary payments include; payments with returns and advance payments. Whereas, withholding taxes are collected from more than 20 sources - the major sources are salaries, bank interest, contracts, imports, exports, electricity and telephone bills. Until the recent past, there was heavy reliance on withholding taxes and collection on demand, contributing nearly 70 per cent of the total income tax collection (Graph-1). However, the introduction of USAS in 2002 has proved to be a success in the income tax regime, as it has shifted the focus from enforced collection to voluntary compliance with the result that the voluntary payments (VP) have emerged as a major source of income tax revenue. (see graph) In absolute terms, the collection on account of VP was Rs50.1 billion in 2002-03 which has increased to Rs165.6 billion in 2006-07. In other words, a growth of 207 per cent has been recorded during this period. During the same period, even though withholding taxes grew by 98 per cent, the overall contribution of WHT in income tax fell quite rapidly. The acceptance of USAS and new system can be further validated through the analysis of income tax returns during the last few years. (see table)It is evident that the income tax filers have increased remarkably, after the introduction of USAS. The new system has been helpful, not only in improving taxpayers’ confidence in the system; the revenue collection has recorded a notable growth of 78 per cent. Particularly, the response from the corporate sector and AOP has been very encouraging. More than 50 per cent growth in the number of returns filed has been recorded in the categories of corporate and AOP during the last four years. Moreover, during the year 2006-07, an unprecedented growth of 48 per cent has been recorded in the net income tax collection. This remarkable performance of the direct taxes enabled the CBR to achieve the rather ambitious target of Rs835 billion.To conclude, it is indeed very inspiring to observe that the government has gone out of way to commit itself to bring about qualitative changes in CBR. The reform program being undertaken in CBR through investment in technology, infrastructure and human resources has been designed to make the organisation efficient and transparent. The initial assessment is that reform objectives are being achieved and there is a definite change in the way the new taxation regime is evolving. The revenue collection is increasing significantly, a business friendly environment has been created and tax laws have been simplified. The USAS has been welcomed by the taxpayers by responding positively up to a large extent. The taxpayers are now visiting CBR field formations without any hesitation and fear. There is an unflinching resolve to pursue the reform process relentlessly with the hoe that the new approach of the revenue organisation will pave the way for further revenue generation, investment, economic growth, poverty reduction, and a dawn of new economic era in the country.— The author is Second Secretary, CBRTABLE-1: INCOME TAX RETURNS ANALYSISNo. of Returns ReceivedTaxpayers 2003-04 2006-07 Growth (%)Corporate cases 10,318 15,481 50.0AOPs 22,133 34,735 56.9Salaried individuals 431,583 76,465 -82.3Non-salaried individuals 498,690 655,876 31.5Statements 54,741 1,029,794 1781.2Total returns received 1,017,465 1,812,351 78.1