Energy sector's some profound woes

BUSINESS RECORDER

EDITORIAL (January 13 2010): Energy sector's woes appear to be multiplying. According to sources in the Ministry of Finance, inter-corporate energy sector's gross receivables have now crossed Rs 419 billion against their payables of Rs 279 billion, leaving a huge gap of Rs 140 billion.

Total receivables of Pepco stood at about Rs 175 billion on January 4, 2010 as against its payables of about Rs 141 billion, leaving a gap of about Rs 35 billion, while PSO's receivables stood at Rs 75 billion against its payables of about Rs 60 billion. Likewise, receivables of OGDC against power and gas companies stood at about Rs 53 billion, while Pak Arab Refinery Limited owed about Rs 23 billion to oil and power companies. KESC's total payables stood at about Rs 45 billion on 4th January as against its receivables of about Rs 13 billion.

In an attempt to reduce inter-corporate circular debt (ICCD), Finance Ministry released Rs 15 billion on 6th January and a part of this amount would be paid to refineries and gas companies on behalf of the PSO to improve their cash flows. A Rs 24 billion capital injection by the Federal Government in June, 2009 had reduced the size of the ICCD by Rs 106 billion through a cycle of book adjustments.

It was also confirmed that Pepco would not be given more than Rs 55 billion as subsidies during the current year, in accordance with commitments made to international lending agencies and its revenue shortfall would be bridged through recoveries, efficiency and tariff increases.

While the above situation would look like a nightmare, the case of PSO, which plays a central role in supplying the needed fuel to the energy sector, is of special significance due to its extremely negative ramifications on the economy of Pakistan and its people. There are reports that refineries have refused to honour the order of PSO because of non-payment of their dues, which have soared to over Rs 60 billion.

PSO is also unable to import furnace oil due to acute financial constraints. In the latest development, the arrival of two ships carrying furnace oil has been delayed due to non-availability of the required liquidity. Fuel reserves are reported to have declined by 50 percent from 24 days' stocks, putting the internal power generation in the country in the danger zone.

This decline has occurred at a time when the country is in the grip of massive loadshedding and in dire need of efficient supply of fuel. As of January 4, oil stocks for Kot Addu Power Generation Company were reported for one day only, while Hubco and AES Pak Gen+Lalpir had stocks for three days and two days, respectively.

Thermal power-generation came down to only 2,261 MW as against the installed capacity of 4,828 MW. Obviously, this appalling situation would further aggravate if the slow supply of fuel to thermal houses continues and PSO fails to import more furnace oil.

Clearly, this nightmarish situation has not developed in a day or two but is a self-inflicted disaster, which owes its origin to criminal mismanagement in the past. In too many ways the frightful situation has the true potential to inflict harm on the economy beyond all hope of repair.

In fact, even a modern, vibrant and industrialised economy is unimaginable without an adequate and smooth supply of energy throughout the year. A combination of factors has added to the woes of the energy sector in Pakistan. Authorities of the country have not been able to exploit the full potential of hydropower generation mainly due to political reasons.

Adding insult to injury is the fact that the water level has significantly decreased in both the Tarbela and Mangla dams. Their capacity to produce electricity has been constrained due to silting and more recently, canals have been closed for cleaning and are likely to remain so for another month.

Thermal power is decreasing fast due to a serious lack of liquidity at PSO, a huge amount of circular debt and a lack of proper planning and management. We talk too much about alternative sources of energy, including from coal, but there is almost nothing practical on the ground. The import of gas from Iran or other sources, which could have solved the problem to some extent, still looks like a distant possibility.

There are nuances of irony in the present situation. All and sundry, including the government, talk too much about impending energy shortages, but there is nothing on the ground to indicate a measured response to such challenges.

Even the issue of circular debt is not likely to be resolved soon despite a clear understanding with the IMF. As a last resort or in a desperate bid, government gives some money to PSO or other concerned entities or asks the banks to come to its rescue, but budgetary constraints would not let the government use this option freely in future.

All of this suggests that the stage is set for a collision between problems that have the capacity to literally bring the people on the streets and the country on its knees. We would implore the government to urgently attend to the issue before it becomes truly catastrophic. So far as tackling the problem through improved recoveries and efficiency is concerned, nobody could be sure about the success of such a strategy because of past experience.