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Eid Mubarak to everyone celebrating! The hope is you’re staying home, staying safe and catching up on all the Macro Pakistani articles you haven’t had the chance to go through yet. Most have found the details in the articles useful in understanding things we skimmed through in the newsletter. Please ask your friends and family to subscribe at macropakistani.com if you find it useful too!

What role has electricity in Pakistan played in improving Ease of Doing Business?

All positive news in Pakistan should be encouraged, but it is useful to know where it's coming from. When the Ease of Doing Business report was launched last year, there was a lot of hype around how Pakistan jumped 28 places in one year for the first time. Let’s understand what the ranking constitutes first:

Opening a business which includes starting a business and employing workers
Getting a location which includes dealing with construction permits, getting electricity and registering property
Accessing finance which includes getting credit and protecting minority investors
Dealing with day-to-day operations which includes paying taxes and trading across borders
Operating in a secure business environment which includes enforcing contracts and resolving insolvency

Pakistan improved across a few different areas but by far the biggest contributor to the improved ranking was ‘Getting electricity’.

Getting electricity is easy

Ease-of-Doing-Business-in-Pakistan-1

Source: World Bank; Ease of Doing Business

Within this sub-category are sub-sub-categories and Pakistan improved most in one of them: time required to obtain an electricity connection. By cutting down the time required to get a new connection from 162 days to 123 days, Pakistan made it easier to do business in the country. Existing businesses continue to suffer because, while pricing is measured by the World Bank, it is not included in the ranking.

Let's keep it real

The green line below shows the real change in utilities, which is part of the Industrial sector under electricity generation and electricity and gas distribution. The red line shows the GDP deflator or change in prices.
GDP-contribution-of-electricity-in-pakistan

Source: Pakistan Bureau of Statistics (PBS)

Utilities actually contracted in real terms between 2016 and 2018 as input prices for generation companies rose sharply. Growth in real terms only normalized after increase in electricity prices, which has hurt consumers. This is actually a sector that has had a reasonable flow of investment, but that money usually goes into generation. Lack of productivity and inefficiencies are spread across the value chain so let’s understand that better.

Paying for electricity is not easy

Let’s start with the end consumer because that’s not the most relatable part. Electricity in Pakistan is more expensive than it is for comparable countries. For industrial consumers, it is 26% and for residential consumers, 28% more expensive than average.
Electricity-prices-global-comparison-to-Pakistan-1

Source: Engro Energy Thought Paper; Bloomberg New Energy Finance

Note, here we are talking about average for simplicity and talking about the past. The government has actually agreed to lower tariff for export oriented sectors to US 7.5 cents/KWh but it is yet to be implemented fully. In the past, if a manufacturer in Bangladesh bid for an export order, they could undercut you by more than US 2 cents because their electricity was cheaper. This is after you would have invested and become at least as productive as the manufacturer in Bangladesh. Somethings are out of your personal control and you need the government to step up and deliver.

However, industrialists did take matters into their own hands and switched to captive power. Industrial consumption of electricity grew by just 3.6% compared to the average in the country of over 6%.
Demand-of-electricity-in-pakistan

Source: Economic Survey of Pakistan 2019-20; Engro Energy Thought Paper; NEPRA

It is estimated that close to 50% of industrial demand for electricity is met by captive power generation. Industries find it cheaper to build their own personal power stations rather than buy expensive electricity from public utilities.

Roti, Kapra aur Makaan

For households, it is not exactly easy to set up personal power plants, though generators have become commonplace in the country. In an earlier post, we discussed how Pakistanis spend almost twice as much on housing and household fuels as their peers. This inflated spend on electricity in Pakistan leads to higher consumption, lower saving and lower investment.
Cost-and-supply-of-electricity-in-Pakistan

Source: Economic Survey of Pakistan 2019-20; Engro Energy Thought Paper

Let’s talk about the rest of the value chain. So we know consumers pay a high price but what is the cost behind this price? At the very start of the value chain are the generators of electricity, which get a fixed payment as long as they have the capacity to produce electricity called Capacity Purchase Payments (CPP). This is agreed upfront when they are setting up a power plant. They also get a variable payment depending on the fuel price and how much electricity they actually supply called Energy Purchase Price (EPP). This electricity is bought by a central buyer called the Central Power Purchasing Agency (CPPA) and then transmitted to distribution companies (DISCOs) to distribute to end users.

On average, cost of electricity in Pakistan was US ~11.7 cents/KWh out of which fixed amount of CPP was ~US 3.2 cents/KWh or 28% of total. The variable amounts were split between EPP (48%), distribution (20%) and transmission (4%).

More is good but more is bad

Read the full article if you want to understand what the difference between annual demand and peak demand is and how the fixed portion of the cost is calculated. Just know that the government has to provide a lot of electricity during summer months but other months that capacity sits idle. Also know that if we consume less, we have to pay more.
Investments-in-electricity-in-Pakistan-1

Source: Pakistan Bureau of Statistics (PBS)

To tackle the issue of load shedding, the government invested in increasing generation capacity which was necessary. As generation capacity built up to over 33,000 MW, our utilization fell from 52% to 45% in 2019. When utilization is not 100%, there is idle capacity and consumers have to pay. Ideally, we would increase demand, bring back the industrialist that are using captive power and improve the efficiency of DISCOs so we don’t have to keep building power stations.

They do care for us

Circular-debt-in-Pakistan

Source: IMF

I mentioned how the variable portion of EPP changes with fuel prices. The government actually does care for consumers because when fuel prices increase, it does not transfer the cost to the consumer right away. Read the full article below to understand how this also contributes to circular debt and how we keep taking more loans through the Power Holding Private Limited (PHPL) to pay off old loans. However, there is only so much care that the government can give us. The recent price increase of electricity in Pakistan is their attempt to pass on the burden of circular debt to consumers. This will further increase consumer spend on housing, which we will cover next time.

Read the full article in the link below

What role has electricity in Pakistan played in improving Ease of Doing Business?

Deep dive into electricity in Pakistan with focus on how high prices have hurt businesses, what investments have been made and why circular debt is an issue.
Read more
Electricity in Pakistan

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