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Source: Reuters

FEATURE-Frail power sector holds Pakistani economy hostage

Published: 22 Jul 2009 00:29:57 PST

* Frequent power cuts a top concern of industry, households

* Lack of electricity dims growth outlook

* Low tariffs, "circular debt" exacerbate capacity shortfall

* Oil-burning plants to be brought online to fill gap

* For a factbox, click on [ID:nISL486213]

ISLAMABAD, July 22 - Looking from the outside Islamist militancy is the big worry, but if you're a Pakistani with no electricity to run fans or drive water pumps at home, and no job because your factory's on short time, think again.

Anger over constant power cuts boiled over in central Punjab province on Tuesday as angry mobs torched vehicles, including three railway carriages.

"The power crisis is adding to this crisis which is already taking place in the manufacturing and textile sector," said Maria Kuusisto, an analyst and Pakistan expert with consultancy Eurasia Group in London.

"That's going to mean that companies are really going to struggle and people are going to become unemployed," she said.

Though no election is due before 2013, power price hikes and electricity shortages have the potential to unbalance an already fragile political and social order.

The government aims to build over 4,000 MW in additional generating capacity by the end of 2010, but many analysts doubt they will be finished so quickly, as political infighting and financial woes slow progress.

A past lack of investment has left Pakistan 3,000 MW to 3,500 MW short of power generation capacity to start with.

Add the fact that financial problems force many power producers to operate at well below capacity, plus transmission line losses upwards of 30 percent, and the result is crippling.

OUTPUT FELL 8 PERCENT

Some 53 percent of Pakistanis go without power for at least eight hours a day, according to a recent Gallup Pakistan poll, leading to frequent, often violent, protests.

Manufacturing output fell by an annual 8 percent in the first 10 months of the fiscal year that ended June 30, largely because of factory shutdowns forced by power outages, said Sayem Ali, an economist with Standard Chartered in Karachi.

Textile makers must either face frequent unscheduled cuts or shell out for their own expensive generating units.

That adds to an already heavy blow from the drop in global demand for textiles, which account for over half of Pakistan's exports, and the erosion in investor confidence from militancy.

The economy has fallen into a virtual recession as a result, forcing the government to tap into a $7.6 billion bailout from the International Monetary Fund (IMF) last November.

The IMF, the World Bank and Asian Development Bank are now working with Pakistan to tackle the root causes of the problem -- artificially low end-user prices and a mountain of "circular debt" suffocating the sector.

Estimates vary, but somewhere between $1.25 billion and $2.5 billion in debt is sloshing around, stemming from grid companies' inability to collect large amounts of receivables, including some of the government subsidies meant to fill the gap between low power tariffs and the higher prices they must pay producers.

This means transmission companies have trouble paying power producers, rendering them short of cash for their bills with refiners, and ultimately undermining oil importers' creditworthiness in international markets.

An agreement between the government and multilateral lenders last week on gradually raising prices by more than 20 percent goes some way towards turning the sector around, analysts say. [ID:nISL93676]

"Pricing is the hardest issue," said Ali. "If they can resolve it, then obviously it'll bring more investment into the sector, once you know what the returns on your investment are."

Aninda Mitra, senior sovereign analyst for Pakistan with Moody's in Singapore, said that, to the extent that progress on pricing boosts growth, it would support the sovereign rating and could help improve the outlook as reforms gain traction.

That is key, analysts say, because an unpredictable policy framework, largely due to the uncertainty over how long governments would last, has deterred international investment in the power sector.

FUEL OIL RELIANCE TO GROW?

With few other short term alternatives most of the new capacity will be oil-fired, and Pakistan's reliance on fuel oil imports will grow, said Praveen Kumar, head of the South Asia oil and gas team for FACTS Global Energy in Singapore.

Kumar sees fuel oil demand for power generation going from 155,000 barrels per day in 2008 to 177,000 bpd in 2012, while imports are likely to increase from 80,000 bpd to 115,000 bpd.

Pakistan produced 48 percent of its power from gas-fired plants and 34 percent from hydropower in 2008, but increasing either significantly in the near term will be tough, he said.

Domestic gas production is on the decline.

Pakistan reached a deal in May to import gas from Iran, but the pipeline will take about five years to come online.

A plan to start importing liquefied natural gas (LNG) from Qatar by year-end, using floating terminals, will be difficult also given Pakistan's lack of infrastructure, Kumar said.

"At least until about 2014, we see Pakistan being heavily reliant on fuel oil imports," Kumar said. from Qatar by year-end, using floating terminals, will be difficult also given Pakistan's lack of infrastructure, Kumar said.

"At least until about 2014, we see Pakistan being heavily reliant on fuel oil imports," Kumar said. (Editing by Simon Cameron-Moore and Bill Tarrant

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