In a shocking revelation, it has been disclosed that inefficient captive power plants (CPPs) in Pakistan have been absorbing a significant portion of subsidies, contributing to the growing subsidy burden in the power sector. Experts in the power sector point out that these CPPs are supplied with cheaper indigenous gas, while they continue to use more expensive Liquified Natural Gas (LNG) and other fuels, leading to higher subsidies.
The Secretary of Energy, Rashid Mahmood Langrial, recently shed light on this matter. He explained that customers of Faisalabad Electric Supply Company (FESCO), Lahore Electric Supply Company (LESCO), and Islamabad Electric Supply Company (IESCO) are effectively subsidising the entire power sector within the service areas of these distribution companies (XWDISCOS).
Conversely, the highest subsidy, amounting to Rs170 billion, is being provided to customers within the K-Electric (KE) serviced territory. This subsidy is primarily due to the use of expensive RLNG (regassified liquefied natural gas) supply from G2G level contracts with Qatar and spot purchases by Pakistan State Oil (PSO) and Pakistan LNG Limited (PLL).
The crucial point of contention is that cheaper indigenous gas is supplied to privately held, inefficient captive and export-oriented units. This has raised concerns about the distribution of subsidies in the power sector.
Secretary of Energy (Power Division), Rashid Langrial, took to X (previously known as Twitter) to share that the net required subsidy from Pakistan in its entirety is Rs327 billion.
These subsidies, funded by the government of Pakistan, are critical for maintaining a uniform tariff policy across the nation. This ensures that electricity rates remain relatively consistent for different categories of consumers under the government’s tariff regulations.
FESCO, LESCO, and IESCO jointly contribute Rs156 billion towards the government’s subsidy policy, while the remaining XWDISCOS, including Quetta Electric Supply Company (QESCO), Sukkur Electric Power Company (SEPCO), Hyderabad Electric Supply Company (HESCO), Multan Electric Power Company (MEPCO), Gujranwala Electric Power Company (GEPCO), Peshawar Electric Power Company (PESCO), and Tribal Electric Supply Company (TESCO), consume a total of Rs314 billion in subsidies. This is despite these companies having access to more cost-effective options in the national energy mix.
In contrast, KE, a privately controlled utility, receives a budgeted subsidy of Rs169 billion from the government. The main reason for this subsidy is the supply of imported RLNG to KE, which generates its own power and also receives up to 1000MW of power from the government through National Transmission & Despatch Company (NTDC).
The arrangement of supplying RLNG to KE allows the government to sell the expensive RLNG it procures through G2G agreements and spot purchases via PSO and PLL. However, if the government supplied the more economical indigenous gas of 276mmcfd to KE, as per the Economic Coordination Committee’s 2008 decision, this subsidy could potentially be reduced to zero.
Supplying RLNG to KE has enabled the government to divert cheaper indigenous gas to inefficient captive and export-oriented private units. It’s also important to note that KE doesn’t receive any operational subsidies, unlike other loss-making DISCOS. The company is managed by a privately held consortium of investors primarily from Saudi Arabia and Kuwait, among others.
As of June 2024, Pakistan’s combined circular debt has reached a staggering Rs2.31 trillion. The Ministry of Energy has recently proposed a plan to reduce the circular debt in the power sector through a combination of budget subsidies, policy and agreement revisions. The draft plan has been shared with a committee of the Special Investment Facilitation Council (SIFC), a civil-military forum, and further refinement is expected in consultation with the Ministry of Finance, according to government sources.
Published in The Express Tribune, October 26th, 2023.
Pakistan’s economy stuck in ‘low-growth trap’: WB
Martin Raiser, the World Bank’s Regional Vice-President for South Asia, has warned that Pakistan’s economy is stuck in a “low-growth trap” with poor human development outcomes and increasing poverty.
Raiser reaffirmed the bank’s commitment to support the people of Pakistan in his address during a ceremony in Islamabad.
In his address, Raiser delivered a stark assessment of the nation’s economic landscape.
“Pakistan’s economy is stuck in a low-growth trap with poor human development outcomes and increasing poverty. Economic conditions leave Pakistan highly vulnerable to climate shocks, with insufficient public resources to finance development and climate adaptation,” warned Raiser.
“It is now time for Pakistan to decide whether to maintain the patterns of the past or take difficult but crucial steps towards a brighter future.”
Raiser’s remarks underscore the urgency of the significant policy initiatives he unveiled during his visit. These initiatives, encapsulated in a series of policy notes, highlighted the critical policy shifts required for fostering a more productive, sustainable, resilient, and healthier Pakistan.
The policy notes—focusing on child stunting, fiscal sustainability, private sector growth, energy, learning poverty, agriculture, and climate change—are the culmination of several months of outreach and engagements conducted across the country under the “Reforms for a Brighter Future – Time to Decide” banner.
They are intended to help inform the public policy dialogue in the context of the upcoming elections.
The policy notes advocated that Pakistan needs to address its acute human capital crisis—including the high prevalence of stunting and learning poverty—by adopting a coordinated and coherent cross-sectoral approach to basic services involving both provincial and federal governments.
They suggested that Pakistan should improve the quality of public spending and take serious measures to expand the revenue base, ensuring that the better off pay their share.
They also stated that the country should pursue business regulatory and trade reforms and reduce the presence of the state in the economy to increase productivity, competitiveness, and exports.
He said that Pakistan should remove distortions that undermine the performance of the agricultural and energy sectors, including through subsidy reform and privatisation of electricity distribution companies.
Highlighting Pakistan’s acute human capital crisis he said: “Almost 40% of children in Pakistan suffer from stunted growth, more than 78% of Pakistan’s children cannot read and understand a simple text by the age of 10. These are stark indicators of a silent human capital crisis that needs priority attention,” said Martin Raiser.
“With additional spending on water and sanitation of around 1% of GDP per year and better coordination at the local level, stunting could be halved over a decade with significant positive impacts on growth and incomes. This is just one example of the huge economic benefits a coherent and decisive reform strategy could have”.
During his visit, Raiser will meet government officials at the federal and provincial levels, and representatives from the private sector and academia.
He will also visit the Dasu and Tarbela hydropower projects, as well as project sites in Sindh and Punjab.
Little prospect of Russia oil deal
Russia is reluctant to strike a long-term commercial oil export agreement with Pakistan at a price cap of $60 per barrel, say officials.
The European Union and the United States had agreed in December 2022 to slap a price cap of $60 per barrel on Russian crude supplies in a bid to put pressure on Moscow and choke revenue flows over its war in Ukraine. The cap was also aimed at ensuring continuous supplies and avoiding potential shortage of the fuel across world markets.
Washington has given its concurrence for Pakistan’s oil deal with Russia while remaining within the price ceiling. However, Moscow has rejected the price cap.
Pakistan’s government had decided in October to negotiate a long-term oil supply pact with Russia within the price cap. It wants Russia to set free-on-board price at $60 per barrel. Free on board means the actual price charged at port.
design: Ibrahim Yahya
However, Pakistan shelved plans for a government-to-government contract and instead allowed Pakistan Refinery Limited (PRL) to clinch a crude purchase agreement on a commercial basis.
Following that, PRL struck a long-term contract with plans to bring first cargo in December this year.
PRL had been nominated as a procuring entity as per commitments made in the Pakistan-Russia Inter-governmental Commission meeting in January 2023.
PRL will purchase crude oil from Russia according to commercial terms, as agreed from time to time, without violating the international commitments of Pakistan and the international framework governing such transactions.
The refinery has already imported 100,000 tons of Russian Urals crude and processed it successfully. It also made a profit on that transaction. The oil was loaded at a Russian port and offloaded at an Oman port on two small shuttle vessels for onward delivery at Karachi port.
Though PRL, on sidelines of the Russian Energy Forum in October this year, inked a long-term agreement with its Russian counterpart for crude oil supply at mutually agreed specifications, during commercial negotiations, the Russian side did not show its willingness to enter into long-term contracts at the price cap.
In a bid to break deadlock, a Russian delegation is set to arrive on Tuesday (today) to meet key Pakistani officials.
Sources pointed out that Pakistan could not agree on an agreement that would be in breach of the price cap, which could invite US sanctions.
Earlier, Russia shipped one crude oil cargo of 100,000 tons that took one month to reach Pakistan. Freight cost was also borne by the Russian side.
However, “if Russia does not pay freight charges on future cargoes, a deal may be unlikely,” an official remarked.
Experts say Pakistan can benefit from Russia crude oil if it makes regular imports.
The above crude cargo was brought on a trial basis, which PRL processed at a cost cheaper by $7 per barrel.
Russian crude is said to produce 32% high-speed diesel (HSD) and 50% furnace oil as compared to the Arabian Light crude that produces 45% HSD and 25% furnace oil.
Initially, PRL blended 50% Russian oil with the same quantity of Arabian Light being imported from the Gulf market. Later, it mixed 35% Russian crude with 65% Arabian oil that produced a low quantity of furnace oil.
So far, Pakistan has been relying on the Middle East market for its oil requirement but the import of Russian oil has opened a new avenue, which will diversify markets.
Meanwhile, PRL has awarded a contract to contractors for kicking off work on doubling its production capacity from the current 50,000 barrels per day (bpd) to 100,000 bpd. With the expansion of the refinery, there will be potential for significant imports from Russia as well.
Published in The Express Tribune, November 28th, 2023.
Foreign companies repatriate record $272.5m in October
Foreign companies operating in different sectors of Pakistan’s economy have continued to freely repatriate profits to their headquarters abroad, totalling a 39-month high profit of $272.5 million in a single month, October 2023.
October marks the second consecutive month in which they have continued to send profits with no restrictions from the government and the central bank, sending a strong signal to global investors to initiate new investment projects in Pakistan.
Cumulatively in the first four months (Jul-Oct) of the current fiscal year 2023-24, multinational companies (MNCs) have dispatched $485.4 million. This is significantly higher than the total repatriation of $331 million in the previous fiscal year 2022-23, according to the data released by the State Bank of Pakistan (SBP) on Monday.
The central bank’s data suggests the total repatriation in the fourth month was seven times (or 581%) higher compared to $71.3 million dispatched in the same fourth month of the last year.
Overseas Investors of Chamber of Commerce and Industry (OICCI) President, Amir Paracha, acknowledged the resumption of profit repatriation by foreign companies from Pakistan in the wake of improvements in the supply of US dollars in the country in recent times.
He said the government’s support to foreign companies in resuming sending profits to their headquarters abroad would support the country in attracting new foreign investment.
The resumption of repatriation has taken place as the Securities and Exchange Commission of Pakistan (SECP) is making efforts to attract investments in the agriculture, mining, and IT and telecom sectors, mainly from Middle Eastern countries.
Pakistan has been attracting foreign investment mainly in financial, power, oil and gas, and telecommunication sectors. While these four sectors remain top dispatchers of profit from the country.
Multinational companies (MNCs) faced challenges in repatriating profits in the past one-and-a-half years.
The multinational companies have repatriated an average profit of $1.6 billion a year in the past 10 years. They notably sent a high of $2.3 billion in profit alone in 2018.
The latest central bank repatriation data suggests the MNCs have sent the monthly earned profit in addition to the profit withheld in the country in months of low foreign exchange reserves in Pakistan.
Pakistan has never officially announced or unannounced a ban on the repatriation of profits by MNCs in the past two-and-a-half decades. However, the recent depletion in foreign exchange reserves to a critically low level of less than a month has led concerned authorities to delay the dispatch to avoid default on foreign debt repayment.
Profit repatriation had remained low in the previous one-and-a-half years, ranging from $2 million to $60 million a month.
Published in The Express Tribune, November 28th, 2023.
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