Lack of response to energy crisis disappoints US: Zardari informed by Holbrooke

[Naveed Yaseen]

MUSHTAQ GHUMMAN
ISLAMABAD (August 21 2009): Washington has expressed disappointment at Islamabad's un-preparedness to deal with the current energy crisis, saying Pakistan's response to address her energy problems so far has been sporadic, seeking silver bullet in gas imports from Iran and Turkmenistan pipelines and turning to expensive oil-fired rental power plants for the short-term, and requesting Saudi Arabia for free oil.

This was revealed in a sensitive but unclassified documents, presented by the visiting US President's Special Representative to Pakistan and Afghanistan Richard Holbrooke and submitted to President Asif Ali Zardari at a meeting in the Presidency a couple of days ago.

The US believes that Pakistan suffers from an overall shortfall in production. Pakistan's electricity supply shortages result from distorted pricing, weak management, conflicting responsibilities and the absence of a comprehensive plan. This has been true for over 25 years as Islamabad ignored repeated international warnings.

Non-payment by customers and non-payment of government subsidies to producers and generators have resulted in a large stock of outstanding private and public debt (guaranteed by the government) totalling 4.6 billion dollars or two to three percent of the gross domestic product (GDP), which also prevents producers from purchasing sufficient fuel to operate at maximum rates, the document further discloses.

Washington is of the considered opinion that if the government of Pakistan lives up to commitments per the Stand By Arrangement with the International Monetary Fund (IMF), a gradual tariff increase will be passed on to consumers and the government will begin immediately to pay subsidies to the sector.

These actions will improve the cash flow and show results with fewer blackouts rather soon. But it will be politically costly to Zardari in its initial stages. According to the document, the US government has instructed the USAID to develop a viable business plan for the electricity sector as soon as possible for the short-term assistance defined as within one-six month timeframe.

The documents further states that a bilateral energy dialogue should be convened to discuss needed policy reforms with the Pakistan government's leadership. The dialogue would be an opportunity to roll out overall US approach on needed policy reforms and the US ideas on international support.

"We could also present available technologies and gather the US business community to discuss opportunities and challenges in the Pakistan energy sector. For this, there is no need of additional funding," the paper admitted. Washington is also of the view that the IMF programme puts pressure on Pakistanis to rationalise finances in the energy sector.

Any alternative would continue to bust the budget. Programme eliminates, over time, both overt and hidden subsidies and transfers "circular" debt (resulting from the government policies) out of sector and on to government books. "We must ensure that the government of Pakistan follows through with the commitments to pay subsidies to the sector and that the money is used to boost power generation.

"Active US Exim Bank, USTDA and OPIC may support the US companies, which are actively pursuing energy projects in Pakistan which include Virginia-based 'AES' plans in imported coal plant; "4Gas," an affiliate of the Carlyle Group, plans a facility to import liquefied natural gas for integration in the national grid; Oklahoma-based "Walters Co", plans a series of thermal plants nation-wide; and "Global Edison' plans, a gas-fired plant.

"The US can announce a special energy finance initiative after seeking the appropriate buy-in from OPIC, USTDA and Exim. For this project, 10 million dollars will be needed as new funding, which could be taken from the FY10," said the paper.

Regarding allocation of funds for rural electrification in Fata and NWFP, the US emphasis is on microhydro and renewable energy to provide off grid, community-based hydro (similar to off grid programme in southern and eastern Afghanistan currently being funded at 100 million dollars). The project will require 25 million dollars, which will possibly be taken from the existing FY10 or pipeline funding to assist with transmission losses by improving the current generation/distribution companies.

The USAID began its project to help improve consumer efficiency in April. It is currently developing the partnership and capacity for implementing its programmes. Additional funding could accelerate the process and help to identify any particular transmission bottlenecks. The cost of this project will also be 10 million dollars (or more) in additional funding.

OTHER ACTIONS, WHICH HAVE BEEN PROPOSED IN THE DOCUMENTS ARE:

Medium-Term Assistance: 6-18 month Timeframe:

(A) PROMOTE AGGRESSIVE EXPLORATION: Shortfalls are due to failure to pursue domestic energy resources, declining natural gas production could be offset with aggressive exploration whereas coal and hydro potential could be developed by resolving long-standing provincial-Federa1conflicts over mineral rights and profit sharing. At present, exploration permits are not attractive to the private sector and the US could assist with restructuring exploration permits and advise on methods of Federal/ provincial co-operation. Its cost will be one million dollars.

B) TO BUILD A NEW SMALL SCALE HYDRO PLANT: The US intends to allocate funding as capital contribution for either a new small hydro plant or a major renewal project such as a wind farm in Karachi operated as a public-private partnership, a major renewable project or other major energy project.

By helping to meet the capital requirements for an existing project, the US could make a shovel ready project real and produce a rapid public impact, but would need a transparent means of selecting partners. Building a plant from scratch for government ownership would delay results significantly. The cost of this project will be around 100-200 million dollars.

C) Development of a programme to keep the lights on for the poor. Provide funding for a strengthened programme to be developed with the GoP and World Bank to provide cash payments to poorest to offset increased electricity charges. Its estimated cost is 25 million dollars.

D) The document further suggests that the US may encourage greater engagement by the international financial institutions in large-scale energy projects in Pakistan. Asian Development Bank (ADB) has dedicated 800 million dollars to its multi-year financing facilities for improving transmission (Pakistani technical losses over 20 percent are well above international standards) and generation.

It is also considering financial support for the Bhasha Diamer Dam (in Kohistan district) project, which will cost 11 billion dollars over a 10-15 year construction period to produce 4500 MW of capacity. The World Bank, in addition to supporting policy reforms, is looking at a range of projects: re-powering gas plant, large scale hydro, developing pilots to repower irrigation and hot water to solar power, and Thar coal policy development.

E) Encouraging international bilateral donor co-ordination for energy. Other bilateral donors are considering loans to Pakistan and searching for sectors in which to engage. The US should help the GOP develop a credible plan for energy projects, which could be funded by donors and co-ordinate donor spending for pooled resources on specific large (mainly hydro) projects. For example, as part of their one billion-dollar Tokyo pledge the Japanese plan to disperse a 700 million-dollar soft loan, which could provide a significant down-payment on a large scale energy project.

F) Actively engage on regional energy projects: Centra1 Asia South Asia Electricity Link (CASA provides 1300 MW from Kyrgyzstan and Tajikistan to Afghanistan (300 MW) and Pakistan (1000MW). This project is stalled (six months overdue), awaiting reworked World Bank analysis on its economic viability. The bank needs to finish reconfirming its data and move forward with negotiations to finalise the project, which could deliver within 3-4 years.

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