Resource Curse

Resource Curse

 

Natural resource is a curse, especially the mineral resources particularly when these are exploited by large foreign mining interests for export purposes without any linkage to the local host economy. Royalties of 2-4% are a mere pittance, as compared to the environmental degradation that is caused to local lands often depriving the poor communities of their livelihood. Resources have typically invited occupations, invasions and colonialism. Mineral resources generate local conflict and instability by promoting unrealistic dreams and ideologies bordering secession from other federating political entities. The empirical evidence is abundant. Only a few countries have positively benefited from mineral resources; which are Chile, Botswana and Malaysia etc. On the other hand, there is a long list of failed states and near-failed states that have mineral based economies. Do countries like Angola, Bolivia, Congo, Zaire, Mali, Chad and Sudan have an image of prosperity, growth and development; far from it?

 

A resource rich Kuwait invited aggression from greedy Saddam of Iraq, which many argue was done to keep oil supplies intact. Iraq is on course to dismemberment, as oil rich Kurdish areas want to go it alone with their oil and have already started exporting oil without central government’s concurrence. Late Mujibur-Rehman laid the foundations of Bengali nationalism on “jute” once considered golden fiber and now forgotten as a dirty and course item, resulting in much repressive and retrogressive regimes of Major Zia as similar to Zia-ul-Haque of the parent country Pakistan. Nigeria was divided under factional fights. Almost all African mineral countries are suffering from one or the other kind of factional fight largely originated by quarrels over the exaggerated perceptions of mineral incomes and benefits.

 

Europe benefited from its coal, because it utilized its coal and fired its industry and power plants on it. Had they exported coal and depended on its export revenue, the face of Europe would have been different. Similar is the story of Australia and the USA. China and India consumed their iron and coal in an integrated industry with forward and back ward linkages. In the colonial period, the two countries were commodity exporters.

 

Economists have discovered many other side-effects of the resource- disease. One of it is Dutch effect. The steady stream of commodity exports, strengthen the currency and thus discourages exports of competitive local products, which require a continuously depreciating and competing currency. The non-resource sector suffers and does not develop. Based on new found wealth, in the form of oil price increase in 1973, Shah of Iran entered into a hasty and unprecedented militarization consuming petrodollars in weapons purchase. His lopsided economic policies and accompanied repression resulted in a revolution which again pursued un-economic policies due to resource abundance with the result of a bad economy, high inflation, stunted growth and persisting poverty. Similar is the case of other oil rich states of Arabia.

 

In Pakistan, people think that Pakistan is a resource abundant country. In the hey days of communism, the popular myth was that the foreign countries were stealing our wealth. In the more enlightened period that followed and now, the myth is that Pakistan is a rich country but its rulers have looted it and do not let the country benefit from its resource richness. Far from truth, Pakistan is a poor country in terms of resource endowment. Water and land two basic resources are highly limited. Half the area is covered by troubled Balochistan where only 8 million people live, and on the remaining half bulk of the population of 180 million is cramped. Baloch nationalists harp the mantra of exploitation, when Pakistan has not emerged on the map as a mineral country. There is very little mineral activity. Only Sui gas has been produced. In Saindak Copper project where GOP lost a lot of money and had to beg Chinese to take it over. Balochistan resources would benefit Balochistan and rest of Pakistan due to the utilization of these resources in Pakistan economy creating jobs and skills for both Balochies and other Pakistanis. Other wise it would be the same as happened to rich Africa. I would strongly urge the GOP to arrange trips and visits of our nationalists leaders to Bolivia, Angola, Zaire, Congo and other mineral rich countries so that they can vividly the worth of so called natural or mineral resources.

 

The perception of income from resource is ill founded. As mentioned earlier 2-4% royalty is a pittance. The market is structured around this pittance; you cannot insist on more, in view of prevailing competitive price and the over eagerness of host countries and their leadership, tribal and national, for easy money and the loot that usually follows.

 

However there is a pending case of correcting the gas royalty situation of Balochistan and paying the royalty arrears due to unrealistically low well head prices that were applied to Sui gas. I have made a strong case in favor of Balochistan in a separate particle.

Petroleum Prices Controversy.

Unnecessary hype has been created by some people over petrol prices and it's taxation.I have dealt with the issue of petroleum prices in my forthcoming book"Pakistan's Energy Development, The Road Ahead".I would like to make the following points:

1. Peroleum taxation is not new and unique for Pakistan.Throughout Europe, heavy taxation is applied.In Europe petroleum prices and taxation are more than two times that of Pakistan.Elsewhere in the world also petroleum taxation is high.
2. Pakistan's petroleum prices and taxation are lower than in India, Turkey and other countries with comparable stage of development and bieng oil importers.
3. GOP provides a subsidy of Rs.100 billion to electricity sector, which in part is a subsidy to the oil consumed for electrical power. Renaming of the tax from PDL to Energy tax is quite appropriate in view of this subsidy.
4. Only rich motorists except motorcycle owners, are still on petrol.All low income and middle income groups have converted their vehicles to CNG.
5. Energy is generally cheap in Pakistan as compared to other countries.Gas prices are less than half on the average as well as electricity. Successive governments have maintained low prices due to low income of people in Pakistan.But as the portion of local production declines, imported items have to be paid for at their market price.
6. There is a lot of waste of energy including that of petrol, electricity and gas.Cars are not tuned, domestic appliances and motors are 50% less efficient than comparable devices. Industries leak and waste natural gas. Inefficient airconditioners add to peak power demand and other technical problems.
7. GOP , utilities and petrol companies can make the energy affordable by encouraging the consumer in using energy efficient appliances.Also GOP should take the steps in educating producers to produce energy efficient appliances.
8. Judiciary would be well advised not to act without the benefit of adequate infomation. Instead of contacting selected individuals who may have an "agenda", a public enquiry should have been conducted inviting inputs from a wide body of people who have the requisite know-how and knowledge. Reports have been compiled on selective and selected inputs.There are so many other areas needing the time and resources of judiciary's attention where a proactive role could be played with greater dividend.Even more importantly a future usurper of power would make these judicial interferences as a basis for winding up the whole system,even cutting the newfound freedom and space for judiciary. We want sustainabe freedom and justice not occasional and activist.
9. Prices are obviously higher than oil producing countries of Middle East where through massive subsidies, oil is sold virtuallly free or the price are lower than Pakistan and in the destitute and unfortunate African countries, where affordability issues are worst than in Pakistan and many Pakistanis would not like to be in their shoes.Except for the US and the oil producers , higher oil/energy prices correlate with the level of development.
10. Petroleum taxation has been a classical tax, initially applied a s a tax on consumption and later more so as a road user charge and more recently as Carbon tax. In Germany 20% of elctricity retail tarriff goes towards energy policy taxes and about 12% in the USA goes towards PURPA, public purpose projects such as induction of renewable energy.
11. It is unfortunate that naming conventions of tax has been exploited to cause undue difficulties to GOP, which is facing liquidity crunch due to a variety of well known reasons. All taxes go to consolidated fund.Taxes need not be used exactly in accordance with the tax name.These are legacy names like excise duty and salt act etc,.Elected representaives of the people have a right to make determinations of spending priorities.

In coming days I will be posting actual data.

KESC MULTIYEAR TARRIFF-2002.

This is a review by authors in International Journal Of Regulation and Governance .bookstore.teriin.org/doc/journals/IJRG-Dec03.paper4.pdf

KESC/CPPA, Transparency In Electricity Affairs.

See my previous post on KESC petition for the thread.

1. 
   At this moment,we notice NEPRA activity wrt new projects and Discos petitions.In Discos petitions NEPRA is apparently occupied only with distribution margin and PPP increase.DM constituting less than 10% of the average sales rate , the major componenet PPP is taken without contest or review. At least it is not in public domain.
   


2. 
   There are several problems and issues with PPP/CPPA. The purpose of common pool of CPPA apparently was to build a uniform price.We are not in a regionally differentiated price regime. All primary energies and many commodities are subject to inland freight equalising margin regime.But CPPA bills different prices to different Discos.Most objectionable, apparently, is higher CPPA rates to the politically sensitive areas of PESCO and QUESCO, from where cheaper hydro electricity and gas is supplied.That it is finally mitigated with higher subsidies is a rather comic and strange excercise. Often uninformed public is misguided by higher CPPA prices by politicians having seperatist agenda.
   


3. 
   CPPA's workings are strangely enough , as it appears, not under NEPRA's review.If this is true , it is a compromise of NEPRA's role and responsibility. It would not be appropriate to assume that most or all of IPP's tarriff has been awarded before NEPRA's establishment.Annual payments to IPPs require a lot of adjudication. Usually there are many grey areas and variables ie.,availability, dispatch, fuel consumption, heat rates .these should be subject to NEPRA's oversight and review. If IPPs and Gencos are exempt then , Discos should also be exempt especially their monthly adjustment which requires a mechanical application of PPP increase and adjustment and no more. Of CPPA, nothing appears to be under public domain. If there is a beauracratic ruling on this ,there should be a judicial review of such restriction on regulatory oversight.Who will bell the cat?
   


4. 
   KESC has booked a lot of electricity purchases from PASMIC , KANUPP and IPPs . No proceedings have been noticed of NEPRA tarriff award for these organistaions.Is KESC bilaterally negotiating the price? It is an accepted regulatory practice that alll electricity purchases that go into regulated price , are also subject to regulatory review.In my earlier comments , I have proposed to route all third party purchases through CPPA with latters' uniform basket price.
   


5. 
   Finally your information/transparency policy is not implemented uniformly.Petitions are often placed on your website after the decision has been made.However, KESC petition has been placed before hearing/ decision.AES/ imported coal project petition was not put on your website , and a copy was not e mailed to me despite my several requests to your department.There is a requirement of payment of Rs. 5/ hard copy. This puts the non- Islamabad residents into a lot of inconvenience and disadvantage as expensive and inconvenient banking processes are involved.This condition is an invisible barrier to transparency.Please reconsider your policy and publish petitions before hearing on a uniform basis.
   

Comments and Recommendations to NEPRA on KESC petition.

From: Akhtar Ali, Chief Executive, Pro-Plan Associates, KarachiAkhtar Ali is a resident of Karachi and energy expert and consultant. This submission heavily draws from the work he has conducted for his forthcoming book, Pakistan Energy Developments “the road ahead”.
Comments on KESC’s tariff petition
NEPRA has not yet established bench-marks for the performance of the IPPs and DISCOs. In the absence of bench-marks, fuel pass-through, and guaranteed rate of return, there is not much incentive on the part of the utilities to improve their performance and reduce costs. Control of fuel costs exercised through bench-marks could alone help substantially in reducing or even eliminating the subsidies that GOP has to provide towards reducing tariff to politically acceptable level.

I was struck by the current petition of KESC in which it has petitioned higher fuel cost (heat rates) on account of high fuel consumption. It is all right to demand compensation for increase in fuel prices. As we shall see from the following table, fuel consumption in our utilities incl. KESC is already too high as compared to elsewhere. There is a very strong case for reducing fuel consumption and not for asking for more. Often most fuel inefficiencies, it has been found in score of studies, emanate out of bad technical management and poor maintenance practices. A mere improvement in house- keeping (cleaning and replacing filters, cleaning and washing of heat exchanger tubes, preventing leaks of gas, water, hot air, steam, de-dusting and washing of plant and lastly careful monitoring of operating parameters) of plants can improve fuel consumption efficiency significantly. If there is a more paying area of bench marking on utility performance, it is fuel consumption. And it is rather easy, compared to other factors. NEPRA instead of yielding to such demands should establish norms and bench-marks and then may allow a differentiated but well considered treatment to various entities differing in their objective or unique conditions. In fact a healthy competition among organizations can be created by announcing rewards for competittion.

Certainty improvements come gradually. But without financial incentives tied to it, and a firm action plan utility management, and the stick of the regulatory body, there improvements do not come about, As is the case not only with KESC, but other GENCO plants also. We have provided same targets for fuel consumption in the same table. Infact, plants are closed down elsewhere in the world, if these do not give the performance as given in the targets. These are not the optimum efficiencies, but the minimum ones. So perhaps everything else that KESC has petitioned may be reasonable, but higher fuel consumption should not be encouraged.

Fortunately high fuel consuming plants in KESC are smaller, only 10% of the total capacity. Normally, these are used for peak load purposes and are put on and off frequently and are simple cycle. Average heat rate of KESC plants is 11,122 Btu/KWh as per reference tariff, which is already 6% higher than Pakistan average of 10523 Btu. However KESC claims that actual consumption is more, of the order of 5%. If this plea is accepted, it would affect the tariff by Rs.0.1829 per unit. If the average heat rate is brought to 10,000 Btu per KWh, an improvement of 10% fuel cost saving would be of the order of Rs 0.40 per kwh.

The only time NEPRA can induce or enforce efficiency is at the time of tariff setting. Any relaxation granted should be tied to an action plan, should be time-bound, and automatically trigger penal tariff measures in case of non-achievements of agreed targets. Finally, a cash-strapped company goes down gradually and inexorably. It breeds demoralization and instability, which is anathema to efficiency improvement. A fair recovery of costs and RoI is a must along with a long term commitment of investors and management.

Long term recommendations

No body has a panacea to the problem of increasing energy cost. A commercial enterprise, public or private, cannot be expected to engage in welfare activities. Government can do it and is doing it. What government can do better is to help the utility in preventing ever increasing trend of electricity theft. No measure, except one-sided assessment of the extent of theft in distribution losses can be given, which cannot become a basis for financial awards and determinations.

One of the complicating reasons of KESC issue is that around the time the privatization was done, the new electricity regime started to take shape. Perhaps, it has reached a level of maturity only relatively recently; the unbundling of WAPDA, establishment of PEPCO and GENCOs and DISCOs as separate organizational and legal entities. The existing tariff agreement with KESC is about to complete its seven years terms and a new arrangement is to be brought about.

The current practice of a separate treatment of KESC should be abandoned. This system has worked because in the absence of cheap hydro resources, KESC had cheap natural gas to have a tariff that is comparable with the rest of the country. Iranian gas deal has shown that natural gas is not cheap any more. In five years time we will be importing Iranian gas that will be at-least twice as expensive as the current local gas prices and almost approaching the price of oil. There will be even more significant issues of equitable allocation of electricity investments, which may and will be made according to the rules of economic issues. Separate treatment of KESC would create a lot of problems in future. I would like to make the following recommendations

1. Accounting separation of generation and distribution functions of KESC, within the scope of one company, irrespective of whether it remains in private sector or its privatization is reversed.
   
2. Acquisition of transmission assets of KESC by NTDC.
   
3. Treatment of generation assets of KESC as an IPP, applying the standard regulation and financial rules.
   
4. Treatment of destruction functions as are DISCOs treated.
   
5. Direct purchase of electricity by KESC from Kannup, PASMIC and other IPPs be done away with. It should come via CPPA/NTDC with their standard pricing framework.
   
6. All other generations’ capacities installed by KESC must be treated as independent IPPs.
   
7. Similarly all distribution investment should be treated as DISCOs are treated.
   
8. As a corollary to the afore-mentioned, two tariff rates are to be there for KESC; one for generation and another for distribution.
   
9. Generation investments in Karachi should be open to all third parties and should not remain the exclusive domain of KESC. In its current and expected future financial condition, it may not be able to make generation investments, any way.
   
10. Ministry of Water & Power, PPIB and other agencies relevant to power sector, should plan for power requirements of Karachi, in an integrated fashion and should not depend or relegate Karachi’s power planning to a private agency which is beset by many problems and is expected to remain in doldrums.

Reversing privatization of KESC : A Pandora’s box

KESC is under severe criticism by the people and the representatives of Karachi due to frequent and long spells of power break-down in the city. Karachi is the business hub of Pakistan, and load-shedding in this city particularly is more hurtful than lesser areas. There is load-shedding throughout Pakistan due to general power shortages, although blackouts are also due to poor maintenance, heavily-loaded and weak distribution systems. Comparative data on blackouts are not available to see if Karachi is as badly suffering as any other place or is it suffering more due to KESC performance. The demand for reversing the privatization of KESC is getting stronger. Reportedly, KESC is under notice from the highest quarter in the country to improve its performance.

Privatization of KESC, as a bundled entity is an anachronism. It is not a recommended practice these days, among the electricity planners to bundle generation, transmission and distribution together. For this accepted principle, the earst-while WAPDA has been broken down into generation, transmission and distribution entities. Generation largely is and going to be in private IPP sector, especially thermal one. Transmission is under a separate company NTDC and there are eight government owned distribution companies. What is true for else where in Pakistan, should also be true for Karachi. There is a long list of reasons for keeping the three electricity sectors i.e. transmission, distribution and generation separate and independent entities, the main ones being the ability to monitor technical and economic performance. Being together, there is a no clue to various interconnected issues; it is all mixed up. And that is what is happening perhaps with KESC. There is a lot of incentive with a private party not to make the required expenditure and investments for improving quality of service and availability, because the current regulatory system does not penalize the service provider for poor quality of service or lack of availability.

There are many complicating reasons of very high distribution losses, a considerable portion of which is theft of electricity by consumers, rich and poor, weak and powerful. Kundas are flagrantly abundant. The issue is strewn in labyrinth of local power structure business and trade circles. It is difficult for a private party to have a handle on such problems. Infact it was difficult prior to privatization also. Lacking professionalism in Pakistan’s private sector, the task of separating technical losses from theft become very difficult and the compensation issue compounded.

KESC had been privatized as almost a bankrupt and insolvable company. Not many parties were really willing to take over it. The company was sold to a fluid if not shady ownership. Shares are changing hands, new parties coming in, and old ones being fed-up.

In a lot of parts of Europe and elsewhere, electricity distribution still is in public sector and mostly owned at-least in part by local or provincial governments. An outright de-privatization of KESC many not be feasible or even advisable. There would be complicated legal issues. A negotiated settlement may be reached with KESC on the following lines. Distribution may be taken away form KESC, while generation facilities be left with the KESC owners, to function as other IPPs are working. There is a clear-cut financial formula to govern generation IPPs. Distribution assets and management may be given in public sector as elsewhere in Pakistan, and handled in uniformity with other distribution companies. A more workable arrangement would be as follows. Distribution management could be taken from KESC management while assets may remain with them with the standard return-on-assets formula of 12%, for which KESC is to be compensated annually. Electricity purchasing and selling can be in public sector. It is also high time for NEPRA to modernize its working and rules, factoring in performance based payment and other improvement schemes as have been practiced in the region (India) with exemplary improvements in utility performance. Bench mark studies are conducted almost every where by regulating agencies comparing the performance of the regulated companies. Same should be done here.

Utilities are used to stable environments, unlike manufacturing which often face chaotic and highly variable market conditions and operating environments. Uncertainties regarding the future handling of KESC issue would further deteriorate the performance of the company. The owners, who were already, shy if not averse, to making investments would be further discouraged. A definite policy announcement either in favour of status-quo, or an alternative plan such as proposed in this brief, must be made by both provincial and federal governments.