THE reversal of its earlier decision to subsidise gas for captive power, as part of a package to help five export industries cut their production costs, has dealt a severe blow to the fledgling Imran Khan government’s ‘credibility’ in the eyes of Punjab’s business community.
The government had also announced its intention to decrease the electricity price for exporters to $0.075 a unit, which also remains unimplemented.
“Our confidence in the government’s ability to make a decision and firmly stick to it is badly shaken,” M. I. Khurram, a leading knitwear exporter from Lahore, said in frustration. “Who’ll take ministers at their words now? By reneging on its promise, the government has set the stage for more industrial closures in Punjab.”
‘Who’ll take ministers at their words now? By reneging on its promise, the government has set the stage for more industrial closures in Punjab’
The decision to provide subsidised gas to five zero-rated industries — textiles and clothing, carpets, surgical and sports goods, and leather — across their supply chains was taken by the Economic Coordination Committee (ECC) headed by Finance Minister Asad Umar in early September.
The ECC statement followed an Oil and Gas Regulatory Authority notification that clearly mentioned captive power plants among the beneficiaries of the committee’s decision. It was made to help cut energy cost for exporters from Punjab currently using expensive imported LNG for both in-house electricity generation and steaming processes.
The original ECC decision promised to provide 300 million cubic feet per day (mmcfd) of gas to the exporting industries at an estimated annual cost of Rs44 billion, increase their share from domestic gas supplies to 50 per cent from the existing 28pc (to reduce the subsidy burden on account of LNG use), and fix the weighted average cost of imported and local gas at $6.5mmbtu.
The new gas price was to be implemented from Sept 27.
The intention was to bring the cost of energy for Punjab’s exporters closer to what the export industries in Sindh and Khyber Pakhtunkhwa (where factories use only cheaper local gas for captive power and steam) pay. This would make them competitive internationally and boost exports, addressing the country’s balance-of-payments crisis.
However, the new notification excludes captive power from the list of beneficiaries, which will reduce the subsidised gas volume to a maximum of 204mmcfd and substantially decrease the original estimate of its cost for the government.
The reversal of the ECC decision is explained differently by stakeholders. The government argues that there is no need to subsidise captive power in view of the country’s surplus electricity generation capacity. Some businessmen think the bureaucracy is again out to sabotage the new government’s agenda.
Others believe that the government retracted from its promises in view of its ongoing discussions with the International Monetary Fund for a bailout package. Still others blame the ‘Karachi textile lobby’ for it. In either case, industrialists argue, the government has lost its credibility too soon, in its first 100 days in power.
“Believing that we will be charged new gas tariffs as approved by the ECC, we stopped using grid power and started operating our factories on gas. But now we have been given October bills on the basis of the old tariffs, causing a loss of Rs10 million to Rs20m per mill. How can we sustain this?” said Mr Khurram.
The All Pakistan Textile Mills Association (Aptma) disputed the government’s claim, saying the total gas requirement of currently operational textile exporters is 180mmcfd, 135mmcfd for captive generation, and 45mmcfd for steaming and other processes.
Almost a third of the textile manufacturing capacity in the province is claimed to have been shut down in the last five years because of energy shortages or unaffordable energy prices.
“If you take out captive power from the package, you will not actually be giving any subsidy to the largest earner of export revenue from Punjab,” Aptma Chairman Syed Ali Ahsan argued. “The government must help us become competitive or our rivals from India, Vietnam and elsewhere will take away our global share.”
At present, captive power produced from local gas costs factories Rs8.7 per unit and from imported gas Rs17.6 per unit. Those using electricity from the national grid are paying Rs12 per unit (excluding a subsidy of Rs3 per unit allowed by the previous government as part of a multi-billion-rupee export package given last year), according to Aptma officials. “This compares with less than Rs9 per unit paid by exporters from Karachi and KP who use local gas for captive power generation.”
“The weighted average cost of electricity produced using a mix of 28:72 local and imported gas in Punjab comes out to be nearly Rs15 per unit,” said Amir Sheikh, a spinner from Lahore.
“Therefore, most factory owners use electricity from the national grid during non-peak hours and use their share of local gas to produce captive power in the evening, when distribution companies charge a much higher peak price.
“We use LNG only in extreme conditions as the use of a combination of grid and captive power helps keeps down our average energy cost to around Rs11.30 per unit,” he continued.
“Owing to our higher energy costs we are much more expensive than our competitors from Karachi and KP. This means that we have to give at least 10pc discount on our product to foreign buyers to match the price offered for the same by an exporter from Karachi,” he added.
According to him, Punjab’s textile industry will become competitive even if the government implements its promise to reduce electricity price to $0.075 per unit.
“We will still be more expensive than exporters from Karachi but the gap will be narrower. Don’t give us cheap imported gas for captive power. We are ready to grid power as it will take care of 90pc of our problem. But the government has to move either way immediately to save the industry and exports.”
Published in Dawn, The Business and Finance Weekly, November 12th, 2018