ECONOMIC CRISIS HAS ROOT IN ENERGY CRISIS

ECONOMIC CRISIS HAS ROOT IN ENERGY CRISIS <!--[if gte mso 10]> ECONOMIC CRISIS HAS ROOT IN ENERGY CRISIS By M. Iqbal Patel, Chartered Accountant, Karachi Although the Advisor to Prime Minister on Finance had said that power tariff would be raised before April 2009 to meet the conditions under SBA of the International Monetary Fund, but the government has increased power tariff by six paisa per unit with retrospective effect from February 2009 for all consumers except agriculture and those who use electricity up to 50 units. It is comprehended that there will be further increase in April too. This burden on the people of Pakistan under the World Bank's insistence would have been avoided, if Mr. Tarin would have advised the government to generate revenue through home grown industrial programme to meet the economic crisis of the country. Besides the increase in power tariff by the government, the consumers of Karachi Electric Supply Corporation (KESC) will face power tariff hike on account of variation in fuel and power purchase prices and loss of revenue it suffered due to the 4% cap in tariff adjustment as allowed by Nepra to it. The increase in electricity charges will add tax burden of the consumes because electricity is subject to sales tax and withholding income tax besides to the misery of the people of Pakistan who are already under financial stress being over burdened by escalating price hike all around which goes without check by the government. More shocking fact is that increase in electricity charges is made without any assurance by the government that hike in power tariff will provide relief and there will be no load shedding in future. The government is not getting the matter seriously as the power crisis has badly affected the business activities of the financial hub of the country which has 75% shares in the country's revenue generation, rather it's machinery is defending them offering different arguments from time to time; some time it is attributed to shortage of water in reservoirs, increase in prices of furnace oil, increase in input cost and expenditures on distribution and line losses etc. The KESC is the only integrated power utility in Pakistan. It is working in the areas of electricity generation, transmission and distribution. It was established to serve the electricity needs of Pakistan's largest city Karachi. It has a licensed network spanning 6,000 square kilometers. Though a combination of self-generation and power import from IPP's and the national utility WAPDA/NITDC, KESC'S total supply capacity is approximately 2,344 MW but it does not match with the growing demand of power. The people of Karachi wonder that post privatization scenario of KESC is not improved but rather it has deteriorated. The people have lost confidence in the privatization process due to deals in KESC, which produced worst results. It has not invested a penny in development which would increase the power generation through installing new plants etc. as committed by them. The privatization of KESC was non-transparent no due care was exercised in selecting the buyers of this giant utility company. The Privatization Commission (PC) sold it at throw-away price to the foreign investors who are estate developers and specialized in investment activities; none of them had any previous experience of running utility power project. Further the buyers transferred the management to three investors one after the other within three years of its acquisition in violation of ban imposed by the PC for change of management before three years of its sold. But the government did not act against this breach of conditionality of privatization. This being the state of affairs of KESC, it appears that present crisis is due to managing a giant power generating company by non-experienced and non-technical management which has created a panic like situation and crippled business of the country by resorting frequent unscheduled load shedding for hours. The energy crisis has affected the industrial growth badly, resulting in large-scale unemployment and closure of manufacturing units and social unrest as witnessed recently in Punjab. Energy crisis pose a challenge to the government's efforts to maintain fiscal discipline and meet the targets set under IMF programme. The country may also face acute food shortage due to non-pumping of water in the absence of electricity. The government defends the increase in electricity tariff, irrespective public suffering, on the ground of increase in oil prices, whereas the fact is that the oil prices has plunged more than 72% from $147 in July 2007 to around $40 now a day as the financial crisis cuts energy demand in top energy consumer, the U.S. and other industrial countries. Similarly furnace oil price has also been decreased remarkably in the international market. The main reasons of power crisis of KESC may be attributed to the electricity theft, line losses and circular debts. The KESC is currently facing 40% line losses and 14% electricity theft and the ban on new connection. This has resulted increase in illegal connection, like Kunda system which has increased electricity theft. The KESC alleged that it is' facing liquidity crunch due to not receiving its outstanding dues of around Rs.35 biln from the public services departments of the government like KDA, KMC, Income Tax, KWSB etc. Hence it is not in a position to purchase furnace oil and is reluctant to increase power generation capacity to cater the increasing power demand. It therefore, burdens its consumers with frequent hike in electricity tariff to meet its financial needs. It, therefore, transpires that the government shares the responsibility of power crisis for withholding payment of the electricity utilized by it. Consequently it can not make payment to independent power producers (IPP) two of them have recently cut supply to it. Further two power generating units in rain Qasim of KESC are closed, one of them is lying shut up for unavailability of furnace oil The government should take the challenge of energy crisis on priority basis. There is need to tackle the issue on long term and short term basis. The long term solution of power crisis lies in building hydel power plants and big dams such as Kalabagh and Bhasha which are not political matter but it is a need of the country. The short term, the KESC should reduce the cost of electricity because there is not only problem of short of electricity but cost of it is also a matter. Further in order to reduce pilferage and line losses it should lift ban on giving new connection to the consumers at affordable cost which will improve it liquidity position. It is interesting to note that the KESC also recovers its line losses and theft of power from its consumers contrary to the international practice that such losses are generally borne by the distribution companies themselves. The government should assist it in recovery of its debts from its departments for this purpose it should constitute a task force to find a way out to liquidate inter-corporate debts by any means on the line of clearing house of the banks. Anyway under the SBA signed with the IMF, the government is required to prepare, by end March 2009, a plan for eliminating the inter-corporate debt within the fiscal deficit target. Despite the government holds minority shares of 27% of the KESC, yet it is forefront in defending the management of KESC who has failed to manage the affairs of the company efficiently which has caused shortage of power. In fact the government should ensure that the company should be governed under the sound business principles, failing it should face the actions under the Companies Ordinance 1984 (CO) is registered thereunder. Tile KESC is listed on all three stock exchanges of Pakistan. Thy Securities Exchange Commission of Pakistan (SEC) has complete jurisdiction to investigate the affairs of KESC under section 265 of the CO on some of the grounds for instance the management has committed breach of trust as it did not meet its commitments, the affairs of the company have been so conducted as to have deprived the members thereof of a reasonable return being it is sustaining losses, the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices and the financial position of the company is such as to endanger its solvency etc. There is a need of drastic action against the KESC so that it should either get its house in order, failing it should face sever action like denationalization or change of management under section 271 of the CO. too. Moreover, a committee may be constituted comprising cross-section representatives of government officials and business community who should examine the covenants of sale, and recommend amendment, if any, in the terms and condition of the privatization agreement and possibility of reversing the privatization of KESC, if any, find out the reasons of power shortages, liquidity crunch, look into its management affairs, the reason of net loss sustained at Rs.7.964 bin in the half year ended December 31, 2008 and other relevant issues and suggest the measures to end the worst energy crisis of KESC. The issue of privatization of KESC preferably be discussed in the Parliament