Analysis: Power sector woes - living from tanker to tanker

Pakistan’s power plants consume Rs1 billion worth of furnace oil every day.

KARACHI: Pakistan is living from tanker to tanker. Every month, something like six to nine cargoes of furnace oil dock at the Keamari oil terminals in Karachi and their cargo is ferried to power plants upcountry almost immediately. 

Each tankers cargo is consumed within days by the hungry power plants that have sprung up across Punjab as power sector reforms stalled in the late 1990s.  Every day, these power plants consume more than one billion rupees worth of furnace oil.

If this precarious supply line breaks, the power plants shut down within days since none of the players in this game can afford to maintain stocks, and the country’s power generation falls steeply.

The riots engulfing cities across Punjab are a sly reminder that countries living from tanker to tanker might want to refrain from threats to cut off other people’s supply lines, because Pakistan’s energy supply line is now operating in the danger zone and even the slightest disruption can send shockwaves through our society.

The silver lining is this: the crisis has spurred a hectic round of activity in Islamabad.  Everybody, it seems, has woken up to the power sector’s woes.  From the President and Prime Minister, to senior
private sector players, Islamabad has been abuzz with meetings and proposals for radical restructuring.

The results need to show within days.  As of this month, Pakistan State Oil (PSO) has defaulted on its payments to refineries, and has letter of credit (LC) payments in excess of Rs80 billion to pay. HUBCO is comprehensively shut, weighed down under a fuel bill of over Rs65 billion, and KAPCO’s output is slowed to a trickle of less than 150 MW. Between them, these plants contribute up to 2,600 MW to the national grid.

A total of 3,500 MW of generating capacity has been shut down due to inability to pay their fuel bills.  A ‘normal’ shortfall of 3,500 MW for this time of year has therefore ballooned to 7,000 MW, the largest it has ever been.

The crisis has been sparked by the refusal of Pakistan’s creditors to continue financing power sector losses in the absence of serious and fundamental reform decisions, and the refusal of the finance ministry to play along as well.

Firefighting will not help the situation any more.  If fundamental reforms are not undertaken in earnest, and decisions taken before the weekend, the collapse can spread to the financial sector as well which is caught up in the net of the circular debt as an unwilling accomplice.

That means it doesn’t end here.  Riots in the streets can be matched by default on domestic and international obligations.  PSO has been avoiding default on its Letters of Credit on oil imports by getting the banks to convert these LC’s into loans.

Once the reverberations reach the financial sector, this will turn into an economic meltdown in addition to a social upheaval.

The decisions that are required are no secret.  We are suffering from our growing dependence on imported furnace oil for power generation, a dependence that is boosted by our dwindling gas reserves.  Additionally, our power plants are choked with inefficiencies, our distribution system plagued by leakages and losses and recovery issues.

Last night PSO received 10 billion rupees payment from HUBCO, KAPCO and WAPDA, barely enough to pay for 10 days worth of supplies.  On Monday night the Petroleum Minister gave a ‘directive’ to PSO to continue supplying subsidised furnace oil to KESC.  The directive did not say how the government intends to pay for the differential, nor did it clarify how last year’s price differential claims, that are still pending, will be cleared.

This action does not inspire confidence.  What is needed is a set of fundamental and strategic decisions that hand over operative control of the power supply chain to independent bodies staffed by private sector professionals.  Ad hoc decisions, constant firefighting, and government by directive is the approach that got us into this situation, and it must be abandoned immediately if this crisis is going to be contained.

Published in The Express Tribune, October 5^th, 2011.