IMF Drives Pakistan to Coal in Bid to End Subsidies

ICI Pakistan Ltd.’s polyester business is losing money because it doesn’t get enough power. The company’s solution is to end its dependence on gas, whose supplies are dwindling, and switch to coal.

“If today we had gas seven days a week or had converted to coal already then we wouldn’t be losing money,” said Chief Executive Officer Asif Jooma. The unit didn’t receive gas for 131 days last year.

ICI is part of a bigger change in Pakistan that has long depended on gas supplies to power its economy. The government of Prime Minister Nawaz Sharif is embracing coal as it seeks to end power cuts, curb subsidies and comply with aid conditions set by the International Monetary Fund. Global investors and local companies including Engro Corp., Lucky Cement Ltd. and K-Electric Ltd. may spend about $15 billion to set up more than 10,000 megawatts of coal-fired power in the next five years.

“The IMF is this continuous force that is pushing Pakistan toward energy reform,” said Muzzammil Aslam, managing director at Karachi-based Emerging Economics Research. “It gave the push and urgency needed for the government to solve the crisis.”

Pakistan and the IMF agreed in July last year on a loan that has since risen to $6.6 billion to boost the nation’s depleted currency reserves and help stabilize its struggling economy. Fixing its energy sector was a key IMF condition for the loan. The country paid 1.5 trillion rupees ($15.7 billion) to keep power tariffs low in the five years ended June 2013, according to data compiled by Bloomberg.

The phasing out of the electricity power subsidy is part of government policy to improve the financial aspect, and is not directly related to the longer-term issue of shifting the fuel mix to a more balanced one, which is needed to reduce the cost of electricity supply in Pakistan, said Mansoor Dailami, the IMF’s resident representative in Islamabad.

Depleting Reserves

Pakistan makes most of its power from gas supplies that have been falling for the past five years because of depleting reserves. The country’s natural gas output dropped 6.2 percent to 38.6 billion cubic meters in 2013, the lowest since 2009, according to BP Plc data. China was Asia’s biggest producer of the fuel at 117.1 billion cubic meters, while Pakistan was South Asia’s largest, according to the data. India produced 33.7 billion cubic meters last year.

As a result, areas such as the Punjab province experience outages that last as long as 18 hours a day and at its peak the summer power deficit reached 6,000 megawatts last year. Blackouts have sparked violent street protests, shut factories and were a key reason for former president Asif Ali Zardari’s party losing last year’s election.

Cheapest Fuel

The panacea is coal, the cheapest fuel to generate power, albeit one of the most polluting. Pakistan’s government plans to set up at least a dozen coal-based power plants across the country for which it has invited bids from private investors. The country will use coal imported from South Africa and Indonesia before it develops and starts to use locally-mined lignite.

It helps that coal prices are falling.

“Coal prices are so low, everyone naturally gets an opportunity to switch,” said David Radclyffe, a Sydney-based analyst at CLSA Asia-Pacific Markets.

Weekly power station coal price at Australia’s Newcastle port, considered an Asian benchmark, reached a five-year low of $68.15 a ton as of week ended July 18, according to data compiled by Bloomberg. The lower prices reflect a supply glut caused by elevated stocks in China, the biggest consumer.

The Asian Development Bank is lending $900 million for a state-owned 600 megawatt coal-fired power generation unit in Pakistan. China’s Sinohydro Resources Ltd. and Al Mirqab Capital SPC, a company controlled by Qatar’s royal family, is building a 1,320 megawatt generator at Port Qasim in Karachi.

Pakistan International Bulk Terminal Ltd. tripled its capacity to handle coal after the government announced plans to increase power generation from the fuel.

Pollution Fallout

Pakistan also plans to set up 10 power projects to produce a combined 6,600 megawatts at Gaddani, 23 miles (37 kilometers) from Karachi.

The thirst for power is causing Pakistan to ignore the pollution fallout from burning coal.

Pakistan’s commercial hub Karachi has the world’s fifth highest levels of municipal air pollution, according to a May World Health Organization survey, followed by Peshawar and Rawalpindi.

“Our wish is that we make electricity from gas but we don’t have it and there is no choice other than coal,” said Asif Ali Abro, director, projects at the state-owned Private Power and Infrastructure Board, which seeks to promote private participation in the nation’s energy industry.

Energy Mix

The addition of coal power will change Pakistan’s energy mix to as much as 40 percent from the fuel in five years from 0.1 percent at present, according to Nauman Khan, research head at Karachi-based Shajar Capital Pakistan Pvt. The country has 22,812 megawatts of installed capacity currently of which 65 percent is generated from gas and furnace oil.

“They’re getting cheaper, but many developing countries aren’t waiting for these tools to become affordable,” billionaire philanthropist Bill Gates said in a June blog post, referring to the cost of clean-energy technologies in poor countries. “They’re building large numbers of coal plants and other fossil-fuel infrastructure now. That’s very unfortunate, but it’s understandable.”

(An earlier version of this story corrected the dateline to Aug. 8.)

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