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Thursday, March 14, 2024

Regionally Competitive Energy Tariffs: Policy Considerations

Pakistan has a large untapped potential in the global textile trade, presently representing just 2 (two) percent of an almost 900bilUSD market! Pakistan’s competitive advantage is embedded in ready-made garments and made-ups and exports have been increasing steadily over the last five years. This also highlights the need to improve the upstream ginning, spinning, weaving, and processing value chain efficiencies within Pakistan.

A study, on Regional Competitive Energy Tariffs and Textile Sector Competitiveness (Phase II) was conducted between April and July 2022, which analyzed the regional competitiveness of the textile industry in Pakistan from the perspective of energy and related issues faced by the Textile Sector through exhaustive desk research, field surveys, and analyses.

The focus of the fieldwork, in June 2022, was on the north and south regions of Punjab—Lahore, Faisalabad, Kasur, Sheikhupura and Multan—and on north Karachi and Lasbella in Sindh and Balochistan respectively. The survey covered all types of textile units in the value chain—spinning, weaving, processing, and composites. This policy note is based on the results of the field and desk study—highlighting the importance of continuing Regionally Competitive Energy Tariffs (RCET) to catalyze textile exports.

Read more: Effective Energy Allocation for Export Growth

Understanding the matter better

Pakistan has a large untapped potential in the global textile trade, presently representing just 2 (two) percent of an almost 900 bil USD market! Pakistan’s competitive advantage is embedded in ready-made garments and made-ups and exports have been increasing steadily over the last five years. This also highlights the need to improve the upstream ginning, spinning, weaving, and processing value chain efficiencies within Pakistan.

The processing sector consumes almost the entire local pre-processing outputsPakistan’s textile exports are concentrated in USA, China, and Europe; however, the knitwear exports are not only increasing but also heading towards diverse markets. Garments and composites have seen an increase in sales, abroad, post COVID-19—with a relatively higher increase to USA markets; primarily due to lesser Pakistani textile industry downtime during the pandemic.

A common misconception is the burden of industry on the electricity consumption in Pakistan—all industries combined use less electricity (only 26 (twenty-six) percent) than the households (more than 50 (fifty) percent)—in comparison Chinese and Vietnamese industries use 60 (sixty) and 53 (fifty-three) percent, respectively. Similarly, power and fertilizer consume more than 50 (fifty) percent of the national gas supply while the rest of the industry in Pakistan, including textiles, consumes less (19 (nineteen) percent) than the fertilizer industry alone.

Higher consumption of Energy in the Productive Sectors is a strong indicator of the strength and depth of an economy; Pakistan performs dismally on this count.

The share of the Captive Power Plants (CPP) used by Pakistan’s exported oriented Textiles industry has been decreasing over time due to these policies—82 (eighty-two) percent of the CCPs in Bangladesh is gas operated while the same percentage in Pakistan is 75 (seventy-five) percent. The story in India is very different—69 (sixty-nine) percent of similar CPPs are coal-fired, while 20 (twenty) percent use furnace oil and only 11 (eleven) percent use gas.

Read more: Pakistan single window: A digital revolution

Gas-based CPPs in the textile sector produce 1300MW of power. Pakistani Textile units have adopted waste heat retrieval technologies and have replaced old generators with latest ones, thermal and electrical efficiencies have improved and exceeded 50 (fifty) percent for most of the mills. These CPPs produce electricity with a generation efficiency capacity of 52 (fifty-two) –60 (sixty)percent. Energy cost as a share of revenue has decreased owing to the improved energy efficiencies achieved by the textile mills across Pakistan. Despite greater efficiencies, energy costs have a significant share in the final conversion costs of textile mills and these costs cannot be ignored for achieving competitiveness!

The Pakistani textiles industry consumes less than 9 percent of the overall national gas supply yet is the first to take the hit on any nationwide gas cuts. This adversely impacts the export sector of Pakistan, being heavily reliant on the textiles industry, as 75 (seventy-five) percent of the textile industry relies on gas-based electricity generation due to its inadequate supply from the national grid. The downstream textiles value chain—processing and composites—rely almost entirely (67 (sixty-seven) to 75 (seventy-five) percent) on gas for their electricity requirements—thus targeting gas cut towards the textiles industry is a direct curb on exports and foreign exchange gains.

Pakistan’s electricity and gas tariffs for the Textile industry remain the highest in the region—rendering firms uncompetitive—despite the RCET tariffs being in play. The general industrial tariff remains at 0.15USD/KWh, twice that in Vietnam and 1.5 times higher than Bangladesh and India. Likewise, Pakistan’s textile industry faces the highest gas/LNG tariff in the region. Pakistan’s textile industry is paying 9 USD/MMBtu, which is 3.5 times more than Uzbekistan, and 1.5 times Bangladesh’s industrial tariff.

Pakistan’s textile industry must price its power inputs at a tariff lower than the regional average tariff of 0.072USD/KWh, to stay regionally competitive. The current RCET for electricity (from the national grid) is higher than the regional average. RCET is an imperative across the whole value chain, not just for the value-added/exporting elements—if upstream such as spinning firms cannot produce yarn at a competitive rate, processing firms would lose their market competitiveness even with lower energy tariffs.

Read more: Economic growth amid political instability

RCET resultant additional investment generates additional employment in the local Textiles Industry. Implementation of RCET has resulted in 4 (four) percent increase in employment by textile firms since 2019—on average, each textile firm employs 2,077 workers—which is significant for a sector that is the second largest employer of the nearly 50mil strong overall workforce, after agriculture.

RCET benefits the firms, employees, and government

The additional investment, employment, and output are not simply benefit accruing to the mills, rather it impacts tax revenues directly for Pakistan as a whole! Increased production means higher revenue generation by the government as well.

Tax revenue is only one part of the fiscal equation for Pakistan’s government, for, a 1 (one) percent increase in investment by the textile firms is associated with a 7.3 percent rise in exports.

Linking this back to competitive gas tariffs provision by the government of Pakistan, for every 1 USD of LNG imported, the textile industry creates USD3 of new exports. Subsidy to the textile industry results in forex inflow at a significantly lower cost than borrowing forex through Euro and Sukuk bonds.

Uneven—no predictability and lack of availability—supply of grid electricity compounds the efforts to stay competitive! The Textiles value chain is a sophisticated and continuous process, any disruption results in the loss of an almost complete day of production. An hour of load shedding results in production losses equivalent to 0.76milPKR and 1.76milPKR for the spinning and the composite mills, respectively.

The 75 (seventy-five) percent of the Textiles mills which are operating primarily on gas based CPPs to compensate for the uneven electricity supply suffer due to gas shortages which get worse in the winter for the northern Textiles manufacturing

An estimated 150mil USD of LNG is consumed by the Textiles sector annually, in the Pakistan zone. Average foregone revenue losses amount to 21milPKR/d for spinning and 24mil PKR/d for the composite segment due to stoppages in gas supply—the HH sector is given priority in Pakistan so that people can cook ‘naan and roti’!

Read more: Pakistan: The economic focus

The Textiles Industry and its value chain have a diversified structure of energy demand and require multiple energy sources and efficiency options, all of which are being considered and implemented in Pakistan. The green or sustainable energy inputs paradigm too will require a phased approach given the nature of this demand. Pakistani Textile Industry has done well to start adapting and adding multiple fuels—such as biomass and solar—to certain parts of the value chain processes, however, a complete switch will require substantial additional investment and time.

This is only possible if RCET continues, and the industry continues additional investment. An important footnote here is that the Pakistan Textile Industry may already have a lesser ‘grid emission factor’ than the national electricity grid!

Pakistan’s Textile Industry is caught in the cotton-energy-forex triangle; though not alien to other Textiles producing countries, its impact is exacerbated by the mismanagement of the policies within this triangle by the government—often based on misperceptions. The diminishing quality and quantity of local cotton production, the uneven energy supply, and the unpredictable forex costs and availability, need aware management to enable Pakistan

A “grid emission factor” refers to a CO2 emission factor (tCO2/MWh) which will be associated with each unit of electricity provided by an electricity system. It is a parameter to determine the baseline emissions for CDM projects in the renewable energy sector (hydro, wind, solar PV, and geothermal power, etc.).

Read more: Why exports in Pakistan need special attention?

Textile Industry to retain a competitive edge in the global markets

Broad considerations for the government of Pakistan emerging from this RCET II study are as follows.

Entire value chain – The entire Textiles Industry value chain, and not just the direct exporting parts, are equally dependent on RCET, being interdependent and more so as the up-stream value chain has a higher energy demand.

Stable grid electricity – upgrading the existing grid infrastructure and ensuring even (available and predictable) supply to the Textile Industry is key to boosting exports, further investment, creating jobs, and improving productivity.

Restricting new gas and electricity connections– Deterring new entrants and expansion, continued upgrading and job creation and higher outputs for exports through non-provision of new electricity and gas connections directly retards the economic growth of Pakistan.

Output growth is the road to modernization—higher energy and process efficiencies and higher output – Correct policies by the government of Pakistan have shown that RCET and supporting policies to enable the Textiles Industry to stay competitive have led to significant growth in exports, revenues, output, employment, and investment. The path to further modernization and technological advancement and environmental sustainability of Pakistan’s Textiles.

Industry lies in supporting its regional competitiveness.

PKR devaluation is not a panacea–A devalued PKR while rendering small parts of the Textiles value chain competitive, renders most of it uncompetitive. Raw cotton in Pakistan is consistently degrading in quality, and its overall production is also declining, and the Textiles Industry must import cotton. A major part of the national energy, whether gas or electricity, is imported. Both form a substantial part of the input costs and are immediately impacted by PKR devaluation.

 

Written by Mr. Shahid Sattar and Amer Zafar Durrani

Mr. Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power.

Amer Zafar Durrani is the founder and President of Reenergia and Paidartwanai—an ex-World Bank professional, with over 36 years of experience spanning 26 countries.

The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.