ADB’s Power Proposal

Source: http://jang.com.pk/thenews/apr2008-weekly/busrev-14-04-2008/index.html#1

ADB’s proposal to further
increase power tariff would spell disaster
Pakistan’s power tariff is already the highest in the world, and the
government must vigorously resist all proposals to increase it further

By Kaleem Omar

The Asian Development Bank last week proposed to the government a further increase in Pakistan’s electricity tariff, claiming that the measure could be used as an ‘energy conservation tool” and a source of earning “additional revenue”. The question is: additional revenue for whom? (a) For the Independent Power Producers, who are already earning huge profits based on their front-loaded capacity-payment-cum-power purchase agreements and their very high internal rate of return of 18 per cent guaranteed by the government under the 1994 Energy Policy? (b) For the privatised Karachi Electric Supply Corporation, which has notably failed to live up to its commitment to invest in additional generation capacity, or in upgrading the distribution system – throwing the city’s electricity supply regime into chaos and resulting in massive power cuts in the summer months, with disastrous economic consequences for the industrial and commercial sectors? Or (c) additional revenue for the national exchequer?

Even if it is supposed to be additional revenue for the national exchequer, there will, in fact, be no additional revenue going into the public kitty when the consequent effect of loss of industrial production and the slowdown in commercial activities and in the services sector are taken into account. To paraphrase an old American saying, what we would gain on the swings, we would lose on the roundabout. Moreover, any further increase in Pakistan’s electricity tariff, which is already the highest in the world, would further fuel inflation across the board, increasing manufacturing costs and making the country’s products even more uncompetitive in international markets. This, in turn, would further widen Pakistan’s rapidly growing trade gap, which has doubled in the last three years and is currently running at an annualised rate of $ 19 billion.

The growing trade gap, in which soaring international oil prices are the biggest factor, has started to eat into our foreign exchange reserves, which have fallen to $ 13.5 billion from $ 16 billion only a year ago. Exports have been stagnating at about $ 17 billion a year for the last several years, while imports continue to shoot up. This state of affairs cannot continue indefinitely, and the new government needs to take urgent steps to arrest the trend. A further increase in the power tariff, as proposed by the Asian Development Bank (ADB), in hardly the way to go about it.

It is high time that our planners stopped thinking of electricity as an end in itself aimed only at increasing the revenues and profits of the public and private sector utilities and started thinking of it as an input in the development process to be made available to consumers at cheap rates.

High electricity tariffs, besides encouraging power theft, have forced many factories to go off the national grid and resort to setting up their own generation facilities. The additional investment involved in buying, installing and operating gas-fired or oil-fired generators has further added to manufacturing costs, making Pakistani products more expensive domestically and less competitive in export markets, with very adverse consequences for the economy as a whole.

Given this sorry state of affairs, government planners simply cannot afford to procrastinate any longer and must quickly find realistic solutions to the problem. The ADB’s proposal to further increase the electricity tariff as a means of “energy conservation” is a no-brainer that should be dismissed out of hand. If factories are forced to use less electricity because of higher tariffs, what will happen to their level of production? It will go down – that’s what!

For boosting economic growth and exports, token cuts in electricity tariffs will not do the trick. To have a meaningful impact on reducing manufacturing and farming costs and making Pakistani goods and commodities more competitive in export markets, electricity tariffs need to be slashed by at least 50 per cent.

The time for tokenism is over. What is needed now is a new approach to the whole question of the price at which electricity should be sold to industrial consumers and farmers, the two sectors that produce exportable goods and commodities.

The government needs to look at electricity not as a product on which to levy higher and higher taxes but as one of the key inputs in manufacturing and agriculture. In this context, the government should even consider selling electricity to consumers at below cost if that is what it is going to take to boost GDP growth and exports. The deficit resulting from selling electricity at below cost would, in the long run, be made up for many times over by the boost that low-priced electricity would give to industrial and agricultural output, and, consequently, to exports.

A plan to reduce electricity tariffs need not involve re-inventing the wheel. A model for it already exists in the form of the very successful, people-friendly approach adopted by planners in the United States in the 1930s for reviving the economy of the impoverished Tennessee Valley region in the depression-era dustbowl states.

The Tennessee Valley Authority (TVA), created in 1933, was the first agency of its kind in the world and one of the most successful even today. Back in the 1930s, vested private interests in America, led by private power companies, accused the TVA of selling electricity at an uneconomical price. But when the capital costs of a project are allocated among the many subtle and diverse activities fostered by the TVA, who can determine the exact price of the consequent electric power?

The TVA was aimed at the re-birth of the entire watershed of the Tennessee River, and all its tributaries, including parts of seven US states and more than 40,000 square miles. This was regional planning on a proper scale. Private enterprise could not afford the vast outlay. And seven states could not integrate seven plans for seven sections of the Tennessee Valley. An unprecedented form of authority was needed and an unprecedented use of money. Yet nothing short of such a grand design could restore hope to an impoverished people.

Of all the new and startling programmes announced by the TVA in 1933, the one that caused the loudest uproar was the plan for generating electric power and the method of distributing it to the people living in the Tennessee Valley.

Could the federal government, using taxpayers’ money, set up an arbitrary yardstick for measuring electric power rates? Was this a fair method of determining what a consumer should pay for a kilowatt-hour of energy? So went the argument, back and forth. Yet the widespread use of low-price electric power generated by the TVA eventually came to play a vital part – indeed, perhaps, the most vital part – in the reconstruction of the land in the Tennessee Valley.

By 1933, the valley’s people seemed lost, seemed abandoned, in twentieth century America – while successive US presidents (Calvin Coolidge and Herbert Hoover) droned their banal tales of prosperity vetoed bills sponsored by Senator George Norris of Nebraska aimed at blocking the sale of hydroelectric rights on the Tennessee River to the car magnate Henry Ford for private exploitation.

Coolidge and Hoover thought that the government could only do evil by intervening in the economic process. Would the soon-to-be new president, Franklin D. Roosevelt, under the wise old Senator’s guidance, reconsider this time-honoured American doctrine? Hence the trip to Muscle Shoals on the Tennessee River on which Norris took Roosevelt early in 1933, when half the depression-hit American banks were closing and Roosevelt still had a month to wait for his inauguration.

Daring was the order of the day, for it needed absolute daring to imagine that the long woes of the Tennessee Valley might be repaired by human foresight, human planning. But Norris had faith that it could be done. Thus he unfolded his plan to Franklin Roosevelt on that fateful day at Muscle Shoals. And two months after Roosevelt’s inauguration, the Congress of the United States created the Tennessee Valley Authority.

The plight of the inhabitants of the Tennessee Valley could not have been redressed without this investment of the whole nation’s energy, money and imagination. Therefore the power plants at the great TVA dams are all labeled: “Built for the People of the United States”.

It is high time that Pakistan, too, adopted a similar people-friendly approach to the whole question of electricity tariffs.