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RUEHNE/AMEMBASSY NEW DELHI 3389
RUEHLO/AMEMBASSY LONDON 8092
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RUEHLH/AMCONSUL LAHORE 5630
RUEHPW/AMCONSUL PESHAWAR 4376

UNCLAS SECTION 01 OF 02 ISLAMABAD 002108 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958:  N/A 
TAGS: ECON EFIN ETRD EAGR ENRG PREL PGOV PK
SUBJECT: PAKISTAN'S 2008-09 BUDGET: NO MONEY SLOTTED FOR ENERGY 
INFRASTRUCTURE UPGRADES, PART TWO OF THREE 
 
¶1. (SBU) Summary: On June 10, Finance Minister Naveed Qamar 
delivered the Government of Pakistan's (GOP) proposed budget for 
fiscal year 2008-2009 which must still be approved by the National 
Assembly.  Despite acknowledging that the shortage of energy and 
prolonged nationwide blackouts were the worst in Pakistan's history, 
the Finance Minister did not propose any budget allocations for 
energy infrastructure upgrades or new construction.  He acknowledged 
that the GOP is paying USD 554 million per month for current 
subsidies on petroleum and will attempt to reduce these subsidies in 
the coming fiscal year.  Calling for increased private investment, 
Qamar unveiled a proposed budget which fell short of addressing the 
nation's current energy crisis.  Other proposed energy incentives 
include the duty free import of energy efficient light bulbs and 
generators. End Summary. 
 
SUBSIDIES: WORSE THAN PREVIOUSLY DISCLOSED 
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¶2. (U) The 2007-2008 federal budget provided 114 billion rupees 
(USD 1.68 billion), accounting for 1.1 percent of total GDP, for 
subsidies which were split among petroleum, electricity, wheat, 
textiles and fertilizers.  However as world prices increased, the 
subsidies swelled out of control and became unsustainable resulting 
in a ballooning federal deficit.  Qamar acknowledged that the total 
expenditures on these subsidies in the 2007-2008 fiscal year totaled 
407.5 billion rupees (USD 5.99 billion), accounting for 3.9 percent 
of total GDP, with the bulk spent on petroleum at Rs. 175 billion 
(USD 2.59 billion); electricity Rs. 133 billion (USD 1.97 billion); 
wheat Rs. 40 billion (USD 591 million), and textiles and fertilizers 
Rs. 48 billion (USD 709.5 million). For petroleum alone, Qamar 
disclosed that the GOP paid Rs 37.5 billion per month (USD 554.4 
million), or Rs 1.25 billion per day (USD 18.48 million). 
 
¶3. (U) Qamar stated that the new budget proposes to reduce the 
volume of total subsidies by 27.5 percent to Rs 295 billion (USD 4.4 
billion) to account for only 2.4 percent of GDP.  He specifically 
cited three subsidies for energy providers.  First, a Rs 74.612 
billion (USD 1.1 billion) subsidy is planned for the Water and Power 
Development Authority (WAPDA) to compensate for the varying tariffs 
rates applied by the distribution companies operating in different 
regions of the country.  A special provincial allocation of 12.5 
percent is provided for Balochistan to ensure the continued function 
of electricity providers and the agricultural irrigation 
"tubewells."  Qamar noted that in the 2007-08 budget, the government 
had estimated Rs 52.893 billion (USD 781.9 million) for this 
purpose, which was increased to Rs 113.658 billion (USD 1.68 
billion).  Second, a continued but reduced subsidy for Pakistan's 
largest power provider, the Karachi Electric Supply Corporation 
(KESC) from Rs 19.6 billion (USD 289.7 million) in 2007-2008 to Rs 
13.8 billion (USD 203.9 million) for 2008-09.  Third, a reduced Rs 
140 billion (USD 2.1 billion) allocation, compared to Rs 175 billion 
(USD 2.59 billion) in 2007-08, to pay subsidies to the oil marketing 
companies. 
 
PRIVATE SECTOR INVESTMENT TO THE RESCUE? 
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¶4. (U) Qamar called upon the private sector, "both from indigenous 
sources as well as from outside," to increase investment in key 
infrastructure projects.  He scolded the previous government for not 
supporting the rising growth rates with infrastructure upgrades in 
either the public or private sectors.  Qamar noted that Pakistan is 
currently facing the most severe energy shortages and blackouts in 
its history with a peak demand-supply gap recorded at 4500 mega 
watts.  He also stated that increased exploration for natural gas is 
necessary to bridge the rising demand-supply gap of nearly 1.5 bcf 
and noted that this gap must be addressed through "imports and cross 
border pipelines." Calling the current independent power providers 
(IPPs) "our saviors," Qamar implied mistreatment by the previous 
government towards the IPPs stating they "were unjustifiably 
maligned and castigated."  However, the proposed budget falls short 
of providing incentives or promoting measures to attract private 
sector investors in the energy field. 
 
 
ISLAMABAD 00002108  002 OF 002 
 
 
ENERGY SAVING INCENTIVES 
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¶5. (U) As part of the budget speech, Qamar also highlighted several 
measures aimed at addressing the current energy crisis in Pakistan. 
All energy saver lamps will be exempted from sales tax in order to 
promote their use. The GOP optimistically states that this incentive 
will save 1000 mega-watts of electricity.  Further "Energy Saving 
Incentives" include the elimination of customs import duties on 
energy saver light bulbs, generators, and "deep cycle batteries" 
which are exclusively used in solar energy equipment.  The GOP also 
proposed a temporary duty reduction, from five percent to zero, on 
the importation of power generation plants for the Water and Power 
Distribution Authority (WAPDA) and the generation companies 
(GENCOs). 
 
COMMENT 
- - - - 
 
¶6. (SBU) The proposed 2008-2009 GOP budget fails to address the 
serious energy crisis currently facing Pakistan. Upcoming debate in 
the National Assembly will likely not provide any noticeable 
increased in energy budgets.  While the proposed subsidies for 
energy in the 2008-2009 budget reflect significant reductions, they 
have not yet been substantiated with either increased prices at the 
pump for consumers or increased electricity charges.  Such shocks 
will certainly be met with rage and disdain among average Pakistanis 
who cannot afford the current subsidized prices.  Cabinet level 
meetings have reportedly discussed phasing out the petroleum 
subsidies by the end of the current calendar year which is simply 
not feasible given that the current world price of USD 132 per 
barrel and the price currently passed onto the Pakistani public is 
approximately USD 76 per barrel.  GOP continues to falter in its 
energy planning and has failed to address the critical energy 
shortfall threat facing the nation in this proposed budget. End 
Comment. 
 
PATTERSON