Amir Zia: Wasted Energies

Amir Zia: Wasted Energies

Wasted Energies

By Amir Zia
Weekly Money Matters
The News
October 3, 2011

While the KESC-SSGC dispute is taking its toll on the people of Karachi, fundamentally it remains a policy issue, which the government needs to resolve

It is a tussle between two vital public utilities – the privately-run Karachi Electric Supply Company (KESC) and the state-run Sui Southern Gas Company Limited (SSGC) – which daily punishes millions of residents of the teeming port city of Karachi in the form of frequent and prolonged power outages.

The KESC accuses the SSGC of “unjust and inadequate” supply of natural gas -- the cheap and clean fuel source for power generation. The KESC management says that against the “approved quota” of 276 MMCFD of gas, it is being supplied only 160 MMCFD for power generation, which remains well below its needs. This forces the KESC to use three time costlier furnace oil for power generation, which makes its operations financially unfeasible and results in a sharp increase in tariffs.

The SSGC management says that it has no formal agreement with the KESC for the gas supply. “Without an agreement, we are not bound to ensure gas supplies to the KESC,” says SSGC’s Managing Director Azim Iqbal Siddiqui. “They (the KESC) keep referring to the ECC (Economic Coordination Committee) decision, but there is nothing in writing. But still we keep supplying gas to the power utility in the larger public interest.”

The problem between the two companies is aggravated due to the fact that the KESC owes SSGC a staggering 30 billion rupees worth in outstanding dues, which is almost one-fourth of the gas company’s total balance sheet, according to SSGC officials.

However, the KESC says that its total payable to SSGC remains around 23.3 billion rupees to-date. The power utility remains unable to clear this outstanding amount because of its dues worth 81.5 billion rupees out of which nearly 50 billion rupees are owed by the government and its various departments. The Karachi Water & Sewerage Board alone owes 15 billion to KESC. "But the KESC has paid SSGC 22.6 billion rupees against the gas purchase of 25.6 billion over the last 12 months," says Ghufran A. Khan, KESC’s chief marketing and communication officer.

The issue of non-payment of dues by one energy company to the other is part of a much larger problem of accumulated circular debt worth 284.4 billion rupees as on September 14, 2011, according to government figures. This is having a crippling affect on the entire energy sector.

Siddiqui, the SSGC’s managing director, says that when KESC was a state-run company, there was no need for a written agreement or guarantees. But being a private company now, the KESC has to operate under some framework, he said.

The cash-strapped SSGC has to perform a high-wire act to clear dues of its suppliers – especially the foreign oil and gas companies operating in Pakistan, including the ENI and British Petroleum, which have been given sovereign guarantees by the government.

The KESC and SSGC managements have a long list of complaints against one and another, but the fact of the matter remains that the current crisis stems from poor management and planning and lack of vision in the energy sector, which is now hurting each and every segment of society and taking its toll on the country’s already battered economy.

The way this government has been handling the energy sector in general and affairs of the KESC in particular sends negative signals to foreign investors around the world, underling the country’s inconsistent policies and unpredictable pattern of decision-making. This comes on top of the chronic problems of political instability, terrorism, crime and insecurity which infest Pakistan today and discourages both foreign and local investment.

Those foreign investors, who have somehow landed in our country despite all these odds, are given a rough deal. The KESC, which earlier faced the wrath of government-backed trade unions for months that adversely affected its power generation, distribution and maintenance operations, is just one example of how foreign investors are being treated in the country. The government assured the KESC a gas supply of 276 MMCFD for its existing plants when the Dubai-based Abraaj Capital took its management control in late 2008, and later committed an investment of $361 million. The government also promised an additional 130 MMCFD for KESC’s under construction 560 megawatts capacity power plant worth $450 million, but failed to deliver on any of these commitments.

The SSGC says that lower gas production from some fields forced it to slash KESC’s supplies. On paper, it may seem a fair excuse, but a deeper analysis shows that the woes of KESC and the people of Karachi are linked to the highly flawed gas allocation policy for private captive power plants. It is a known fact that most captive power plants, which are run on low-cost gas, benefits industries of the high, mighty and politically connected of this land. These industrialists get uninterrupted gas supplies on lower rate than the KESC.

Considering the fast depleting gas fields, the government needs to review its gas allocation policy keeping in mind the interests of the larger section of the population rather than small pressure and interest groups. Yes, industries are important and they need uninterrupted power supplies to keep the wheels of the economy moving, but this needs to be done in a fair and transparent manner and certainly not at the cost of the larger public interest.

According to estimates, SSGC supplies around 300 MMCFD of gas to commercial entities and industries, including around 175 MMCFD to captive power plants in Karachi alone. The quantum of gas supply remains higher than that of the KESC, which has to meet the electricity demands of more than 15 million people of Karachi.

The KESC management says that if an additional 175 MMCFD gas is diverted to its power plants, the utility would be in a position to significantly reduce power outages in Karachi and stem the rising tide of electricity bills.

“This would also help the government to significantly reduce payment on account of Tariff Differential Claim that in turn would help to eliminate the ongoing circular debt crisis,” said Ghufran A. Khan of KESC.

It is not just the KESC, but the entire power sector that has been suffering because of the controversial gas allocation policy despite the fact that it pays the highest gas tariff.
The industrialist lobby maintains that they had been forced to go for captive power because of KESC’s inability to ensure electricity supplies, while the SSGC says that it has to honour its commitment for the gas supply to these plants.
If the government wants to mitigate the negative fallout of the scarce gas resources, it will have to review and prioritize the use of gas and ensure parity of price between the power sector and the captive power plants.

On June 30 this year, the ECC decided to implement the uniform gas load management policy and observe two days per week gas holiday in industries and CNG stations with a view to divert gas supplies for power generation. But this decision was never implemented due to the pressure of the vested interests.

“It is ironic that the KESC’s flagship 560 MW new power plant is suffering and its testing phase is being compromised due to insufficient gas supply while industries and CNG stations are enjoying uninterrupted supplies,” said Khan of the KESC.

The SSGC supplies 80 MMCFD gas to 670 stations, which is around eight percent of its total supplies of 1.1 billion MMCFD. The Sui Northern Gas Pipelines Limited (SNGPL) supplies gas to nearly 4,000 CNG stations and allocates much higher quota of gas for the transport sector.

The government needs to rethink and revisit its flawed policy of encouraging the use of CNG for road transport purposes. The use of CNG for passenger buses and public transport make sense as it benefits the low-income group and remains environmentally friendly. But the policy of subsidizing, the fuel cost of the middle and upper middle classes and their cars needs to be revisited and changed. One way is to increase the CNG price and bring it at par with that of petrol. But will the vested interests allow the government to take any right steps?

While the KESC-SSGC dispute is taking its toll on the people of Karachi, fundamentally it remains a policy issue and not a row between two institutions on small technical matters, which the government needs to resolve. So far it has only allowed matters to deteriorate. That’s what we call the tragedy of delay in typical Pakistani style.