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UNCLAS SECTION 01 OF 03 ISLAMABAD 000315 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958:  N/A 
TAGS: ENRG ECON EFIN PK
SUBJECT:  PAKISTAN'S ENERGY CRISIS - IMPROVING, BUT CHALLENGES 
REMAIN 
 
REFS: 
(A) 08 Karachi 0600 
(B) 08 Karachi 0587 
(C) 08 Islamabad 3647 
 
¶1. (SBU) Summary: The GOP is making some headway fulfilling 
President Zardari's January directive to clear up the "circular" 
debt situation that is wreaking havoc among power producers, but 
confidence varies that it will be paid off in its entirety any time 
soon.  Blackouts have been reduced from over eight hours per day to 
an average of four to six hours per day in Islamabad and to as 
little as two hours per day in Karachi, due primarily to lower 
winter demand and additional hydel generation.  But the GOP goal of 
eliminating blackouts altogether by year's end seems unlikely, in 
light of ongoing financial pressures, rising demand, and the complex 
system of subsidies and controls that creates bottlenecks in crucial 
fuel supplies.  The GOP says its plan to remove electricity 
subsidies by June 30 is in place, but another spike in world oil 
prices could easily derail it.  End Summary. 
 
GOP Coming to Grips With "Circular" Debt? 
-------------------------------------- 
 
¶2. (SBU) The GOP appears to be making honest efforts to get a handle 
on the perennial "circular debt" issue that has flared up in the 
wake of spiking oil prices.  Estimates vary widely, but the GOP's 
debt to Independent Power Producers (IPPs) is quoted as being well 
over $2 billion.  The IPPs, in turn, owe money to Pakistan State Oil 
Corporation (PSO) and others to pay for fuel.  This debt accumulated 
as a result of high oil prices, the GOP's unwillingness to do away 
with a network of unwieldy price controls and supports, and 
increasingly unaffordable subsidies in the run-up to national 
elections in February 2008.  Businesses and citizens alike protested 
Pakistan's increasingly unreliable electricity grid, and reacted 
strongly when the GOP raised electricity tariffs in September, a 
move which they then partially rescinded (refs B and C).  The 
situation finally reached crisis proportions in December 2008. 
Street protests and business shutdowns (Ref A) led President Zardari 
to convoke his economic team in January 2009, demanding they resolve 
the payment problems and come up with a plan for dealing with the 
nation's energy crisis.  Zardari instructed his team to resolve the 
GOP debt by June 2009 and end loadshedding altogether by the end of 
the calendar year. 
 
¶3.  (SBU) Pervais Khan, Chief Executive Officer of Uch Power, 
confirmed to the Ambassador February 6 that Uch had been paid its 
regular monthly fees in December and January, and that he believed 
these timely payments would continue.  Khan said he was confident 
the GOP would have paid Uch as much as half of the GOP's outstanding 
debt by the end of February, and that the balance would be paid in 
installments through July.  Chevron General Manager Irfan Qureshi 
confirmed February 10 that his oil marketing company had received 
all the money owed them ($25 million), but only after Embassy 
intervention.  Even American-owned AES, to whom the GOP owes some 
$227 million (of which $108 million is technically in default), 
acknowledged that the GOP had made current payments for the last two 
months.  AES, however, did not share Khan's confidence that past due 
amounts would be paid. 
 
Better News on Blackouts 
------------------------ 
 
¶4. (U) Blackouts persist around the country, including in Karachi 
(Ref A) but their duration and frequency have been reduced, due in 
large part to the release of some 25 million cubic meters of water 
to power Pakistan's hydro-electric generators and lower winter 
demand.  Ministry of Water and Power (MWP) Joint Secretary for Power 
Arshad Mehmood told Econoff February 11 Pakistan was generating 
11,200 MW against demand of 11,582 MW.  The 382 MW gap is a fraction 
of the 4,500 MW generating shortfall less than two months ago. 
Blackouts in Karachi now range from two to eight hours per day, down 
from four to more than 12 hours a day during the peak summer season. 
 KESC General Manager Naveed Ismail told Karachi CG January 27 that 
many of Karachi's longer blackouts can currently be attributed to 
 
ISLAMABAD 00000315  002.2 OF 003 
 
 
its decrepit transmission systems.  In Islamabad, rolling blackouts 
in February are averaging from four to six hours per day, down from 
over eight hours in November/December.  Mehmood expressed 
frustration with a rotating maintenance schedule that continued to 
take power offline in Islamabad in February, despite MWP success in 
reducing loadshedding in the capital. 
 
¶5. (SBU) Mehmood admitted however, that increased summer demand 
would again put the GOP behind the curve in providing power.  He 
predicted that the summer 2009 generating shortfall could climb as 
high as 5,000 MW, despite GOP plans to add additional power to the 
grid and make substantial investments in Karachi's decrepit 
transmission and distribution infrastructure. 
 
On Track for the SBA? 
--------------------- 
 
¶6. (SBU) MWP Additional Secretary Zarar Aslam expressed confidence 
that Pakistan was on track to meet the IMF's requirement to remove 
electricity subsidies by June 30, 2009.  According to Aslam, the GOP 
intends to raise tariffs by one percent each month from March 
through June.  By June, this four percent increase, along with lower 
oil prices and previous tariff increases in 2008 that Aslam claimed 
totaled 18 percent, will eliminate the GOP electricity subsidy and 
meet the IMF benchmark.  When asked what would happen to this 
hopeful scenario should oil prices again rise precipitously, MWP 
Joint Secretary Mehmood said that a new system of biweekly (vice 
monthly) adjustments to the price for oil products, biweekly 
payments to power companies, and monthly adjustments to the 
electricity tariff rate meant that the GOP would no longer fall 
victim of a pricing system that could not keep pace with market 
developments and left the GOP paying the bill. 
 
Finance Still a Challenge 
-------------------------- 
 
¶7. (U) In line with Pakistan's commitments to the International 
Monetary Fund (IMF), the State Bank of Pakistan announced February 6 
that it would phase out the use of Pakistan's precious foreign 
exchange reserves to pay for oil and fuel imports.  Kalim Siddiqui, 
Managing Director of the Pakistan State Oil Company (PSO) was quoted 
in the press February 10 as confidently predicting PSO's ability to 
finance its imports commercially, following reports that PSO was 
suspending a tender for gasoline because the Ministry of Finance was 
refusing to release the necessary funds. 
 
¶8. (SBU) PSO's bravado aside, the reality is that Pakistan's low 
credit rating means that suppliers remain reluctant to grant the GOP 
any terms but cash to pay for oil imports.  However, Kuwait February 
5 agreed to provide 60-day deferred financing to Pakistan for a 
second year.  Iran had already entered into a 90-day extended 
payment arrangement in January.  Pakistan's inability to finance its 
crude oil purchases reliably has caused ripple effects throughout 
the oil products sector, as domestic production of liquefied 
petroleum gas (LPG), heavy fuel or "furnace" oil, and other refined 
products drops in tandem with crude imports, and the GOP faces the 
same difficulty financing imports to replace them. 
 
¶9. (SBU) Comment: Our contacts at MWP claim that both the IMF and 
the World Bank are on board with their plan to eliminate electricity 
subsidies.  While the gradual approach seems sound (especially in 
light of negative public reaction to the GOP effort to impose an 
"all at once" 31 percent price increase in the fall), it hinges for 
the most part on continued lower oil prices.  The structural 
adjustments to the cumbersome GOP pricing system may help the GOP 
more readily pass on higher fuel and generating costs to the 
consumer, but a significant loophole remains.  The National Electric 
Power Regulating Authority (NEPRA) sets the price paid to 
electricity producers, but the GOP retains authority to set a lower 
price for consumers - leaving the door open for subsidies to 
reappear in future. 
 
¶10. (SBU) Comment continued: Aslam and Mehmood were proud that the 
payments are now current to Pakistan's power producers and our 
 
ISLAMABAD 00000315  003.2 OF 003 
 
 
conversations with several IPPs seem to bear out this assertion. 
The GOP plan to address the outstanding debts is still being 
developed, but the GOP seems determined and has tasked the Ministry 
of Finance to tackle the debt problem "as a priority."  Mehmood said 
the GOP is considering the sale of some (unspecified) WAPDA property 
or possibly issuing bonds ("term finance certificates") to raise 
funds to cover the debt.  Should these efforts not bear results, and 
with borrowing from the State Bank of Pakistan strictly limited 
under the IMF agreement, it is unclear where the needed funds will 
come from.