Energy mega scams

Wednesday / Sep 02 2020

Newspaper : The News

Pakistan’s exports have stagnated at $25 billion while Bangladesh, Vietnam while many other Asian countries have forged ahead. A key factor in our industrial collapse is the element of mega corruption in the energy sector by successive past governments.

We have huge natural energy sources that should have been tapped. With the fifth largest irrigation network in the world, we are blessed with a potential of about 50,000 MW of clean electricity but only a small portion of this resource was tapped. In 1984, about 60 percent of our electricity came from hydroelectric power. Due to corruption at the highest levels, it dropped to less than 30 percent over the subsequent three decades with the major portion of our energy mix now coming from expensive imported oil and LNG.

The loot and plunder began in 1994 when independent power producers (IPPs) were allowed, under a policy steeped in corruption, to import low efficiency single cycle obsolete power plants with profits guaranteed by our government, however high the costs may be.

The Rental Power Plants present an even more shocking tale of corruption. The cost charged to the government by these thermal power plants varied, going up to a ridiculously high rate of Rs25 per unit, and since they were running well below their capacity, in some cases the costs went up even to Rs50 per unit as the agreements were based on capacity and not on actual output. This was done at a time when hydel power production costs varied between Rs1.18 and Rs4 per unit while the cost of electricity from coal was about Rs7 per unit. In another criminal act, Wapda was stopped from building its own power plants so that obsolete plants could be imported from abroad.

When I was the Minister of Science and Technology I had initiated a project for the wind mapping of Pakistan under the Pakistan Meteorological Department. This had revealed that there was potential of producing about 50,000 MW of electricity in the Kati Bander-Gharo-Hyderabad triangle in Sind and in the coastal areas of Baluchistan. That was about 20 years ago. This huge potential largely remains unexploited. We should be manufacturing our own wind turbines, as India and China do, and producing electricity from this valuable source.

The proven reserves of coal in Pakistan are about 579 million tons, while the estimated reserves are much higher, about 186 billion tons. These have been largely ignored in the past. In Pakistan only about seven percent of our energy needs are met from coal, while in India the figure is 55 percent and in China it is 67 percent. There are also significant gas reserves in Tal Block near Kohat that can be exploited. Nuclear power plants have a high capital cost, but their pay back is in the long term and they are a much better option than the obsolete oil-based power plants that we imported.

According to a report by Fahd Ali and Fatima Beg, the World Bank, one of the main advisers of the government at the time, was at fault and should have recommended a much lower tariff to be agreed with IPPs. This huge lapse that laid the foundations of the destruction of industries of Pakistan was finally admitted by the World Bank (World Bank. May 11, 2001) when it criticized its own preparation of PSEDP 1 and 2. It was admitted that the long-term credit fund (LTFC) and its future were not given adequate thought.

The Bank’s Implementation Completion Report (2001) stated; “Insufficient attention was devoted during appraisal of PSEDP 2 to the affordability of private power in Pakistan”. The corrupt energy policies of the government at the time are largely responsible for the current sad state of Pakistan. By 2013, about 55 percent of our energy mix had become dependent on expensive imported oil, severely draining our much-needed foreign exchange reserves. Under the take or pay agreement, it was alas agreed that the entire risk including plant inefficiencies was to be borne by Wapda. To this day, Wapda continues paying millions of dollars as ‘capacity payment’ for idle power plants, thereby raising our power tariffs and stifling industrial growth.

The PML-N government inherited this power crisis but alas continued in the same direction. Instead of relying on hydroelectric power, coal or wind resources, the PML-N government relied on imported LNG and imported coal. Again, corruption appears to be the major driving force of what transpired. It was obvious to the experts in the field that the LNG prices were at the brink of a huge fall and all the indices pointed in this direction. International buyers were therefore entering only into short term contracts for LNG purchases.

Alas, Pakistan took another devastating step against industrial growth in February 2016 when it signed a large 15-year Long Term Sales Agreement (LTSA) with Qatar for LNG at 13.35 percent of Brent price. As expected, the price has now fallen to less than half of what it was then, but our government is chained to the contracts concluded by the PML-N government and our industries lie closed because the power tariffs are uneconomical. The PML-N government should have set up power plants on the basis of our local Thar coal instead of relying on imported LNG and imported coal. Local coal-based power plants would have produced power today at 6 cents /unit. If the 3,600 MW indigenous coal-based power plants, under installation today, had been established earlier, then this would have saved Pakistan about $10 billion over two decades.

The present government inherited this alarming situation and it is trying desperately to correct the directions. In August 2020, the government announced that by 2030 it plans to reduce the imported energy component of the total mix to 23 percent with greater emphasis on renewables including solar and wind. Under the new renewable energy policy of the present government, a wind power project was recently awarded at a very attractive price of 4.7 cents/ unit. The previous government however had awarded the Quaid Azam solar park project at a ridiculous 12 cents/unit.

Pakistan stands at a cross-roads of history. We cannot prosper without cheap and reliable energy. Our industries should be getting energy at a maximum of 6 cents per unit (less than Rs10 per unit) in order to compete in exports with industries in Bangladesh, India, and Vietnam. This requires giving major subsidies to our export industries so that our exports become competitive.

One good way of doing that may be to give a 50 percent discount immediately on electricity rates to our export industries. This immediate relief is necessary, as the cost of electricity will only gradually come down over the next decade as the changes in the energy mix take effect. We cannot wait until then but must act with a sense of urgency.

Lastly, we also need to rationalize our duty structures. In most cases, the duties and taxes on the components needed for manufacture are much higher than those on the corresponding finished products. This is preventing our industry from manufacturing a whole range of items.

The time to act is now or never.