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Sunday, November 12, 2017

How Sugar industry can help ease Pakistan's energy crisis

Taking too much sugar may be bad for your health, but not for your country. Sugar industry can help ease the energy crisis faced by Pakistan for more than a decade.

The energy shortage is growing with ever increasing population and rising domestic consumption.  The production gap can be met by mobilizing sugar mills to produce electricity. The bagasse produced by sugar mills can be used to produce thermal energy for onsite use as well as production of electricity.

In many countries of the world sugar mills are earning more from selling electricity than they earn from selling sugar. Sugar industry is second largest, with 89 mills; agro based industry of Pakistan after textile and therefore offers tremendous potential to fill the energy gap.

A sugar mill crushing 2000 tons cane can produce 9 MW of electricity after meeting its own requirement. The total estimated power potential of Pakistan’s sugar industry is 2000MW. The cost of producing electricity is very low as the fuel (bagasse) is available at no cost. The raw material need not to be transported so considerable savings can be made on transportation head. Transportation losses can also be reduced as bagasse power plants are decentralized. Moreover, there is zero carbon dioxide emission as bagasse is a biomass. During combustion biomass re-releases carbon dioxide into the air.

Most of the sugar mills in Pakistan use bagasse to heat inefficient boilers of 26bar. The Indian sugar industry is using 50bar boilers, which uses half as much bagasse as used by 26bar boiler to produce the same megawatts of energy.

The high pressure boiler (80-100bar) available in Pakistan cost from 700 million rupees to 1 billion rupees. The high investment involves make it unfeasible for using these boilers only for 120 days, the cane crushing season. For the rest part of the year sugar industry wants to utilize coal and other biomass fuels like rice bran, corn cobs.

Wednesday, November 1, 2017

Problem of public debt and its solution

Nawaz Sharif’s Govt. over his four year tenure added 35 billion $ to Pakistan’s debt pile. The maximum number of loans – amounting to $10.1 billion, the highest taken out in any single year during the country’s history – was obtained during the last year of Nawaz’s government.

Starting from July 2013, with every passing year, the external debt pile kept growing due to the government’s inability to implement policies that could have ensured sufficient non-debt creating inflows.

PML(N) Government earlier diluted Fiscal Responsibility And Debt Limitation Act 2005. PPP Govt. was not different either. The external debt, from 2007 to 2012, grew by 20billion $. The lack of necessary oversight led successive Governments to be irresponsible regarding receiving loans and the loan terms. It seems that Governments have no incentive to be concerned about the repayments of these loans. According to World Bank, average grace period, since 2007, of new external debt commitment is 6.6 years. Pakistan has political cycle of 5 years; less than average grace period, therefore elected Governments don’t have sufficient incentive to worry about the repayment of these debts.  

Moreover, another unnoticed fact is that democracy is inherently consumption oriented. Political parties have to face pressure from masses to meet their basic needs. This pressure is severe in countries having huge poverty. Political parties in order to woo these poor masses try to spend as much public money as possible. Resultantly Benazir income support programme, sasti roti scheme and other such schemes are initiated.

Such schemes are funded by using tax money or borrowed money but don’t generate any returns. Successive Governments have to borrow in order to pay these loans. Hence, the country is struck in debt trap.

Moreover, Democratic Governments are elected to rule for a limited time period before next elections. Their short term tenure forces them to borrow long-term funds, which are costly as compared to short-term loans. On the investment side these Government spend on projects which have short gestation periods. These short-run projects generate low returns. Resultantly the debt burden began to accumulate and multiply. The precarious position on exchange rate front further aggravate the matter as the weakening of domestic currency increases the external debt stock in domestic currency. 

To pay back Govt. is left with two option either tax masses, which are its voters, or borrow more to return the previous loans. The elected Government go for the second option.

The solution to the above issue is having strong checks and balances on elected Government. Some of the checks and balances are mentioned below.
1.    Central bank’s freedom should be ensured.
2.    Civil Servants should be given constitutional guarantee (regarding job security, tenure security).
3.    Chancellor for public works should be appointed who would check Govt. from initiating useless public works.
4.    The most important step which may need constitutional amendment is election of deputy prime minister, who would be responsible for economics and finance, from senate.

The above mentioned steps though difficult but can be implemented.  A step by step approach can be adopted. Furthermore the date from which such legislation would be implementable should have necessary time lag so, that Government doesn’t become adversary of its own decision.

Saturday, October 28, 2017

One more Asian billionaire every other day: UBS study finds

According to a study by UBS and PwC a billionaire in Asia is created every other day. Total billionaires in Asia are 637 as compared to 563 in U.S. The study further says that a 17% surge in billionaire wealth is supported by new billionaires born in Asia as well as an uptick in growth in materials, industrial, financial and technology sectors.

The total billionaire wealth has increased from USD 5.1 trillion to USD 6 trillion in 2016.

Billionaires from United States owns 2.8 trillion USD, an increase of .4 trillion dollars. Combined wealth of Asian billionaires grew from 1.5 trillion dollars to 2 trillion USD. Combined total wealth of 342 European billionaires was 1.3 trillion USD.

The study also mentioned that if the current trend continued, it is likely that Asian billionaires would overtake U.S. billionaires in wealth in four years. The surge in billionaires’ population in Asia can be attributed to growth in China and India, which have 318 and 100 billionaires respectively.

The report further points to increasing role of networks in raising capital outside financial markets which is no surprise, given the increasing role of Asian businesses which feels comfortable going to family rather than capital markets for funds.

Europe, the report says, in 2016 was the story of multigenerational wealth preservation. The number of billionaires in Europe was 342, by the end of the year.

The business controlled by these billionaire employees 27.7 million people, which is roughly the size of U.K. workforce.

Wednesday, October 11, 2017

Provident funds and Gratuity funds

According to Pakistani law provident fund and gratuity funds are two distinct things.  Provident funds are paid to regular employees and gratuity payments are made to contract employees. Gratuity is a tip for good services and therefore its payment is contingent on successful completion of contract. Employees who are removed on disciplinary basis are not entitled to gratuity payments.

Permanent employees are to be paid provident fund at the end of service irrespective of quality of their services. Hence, removal of permanent employee from employment on disciplinary basis doesn’t disqualify him/her for receiving provident fund.

How these funds work

Employer makes regular payment to these funds and these funds are then invested in variety of securities. The returns generated on these funds are reinvested and generally paid to employees at the end of their term.
Employers register these funds as trusts and appoint the trustee who oversee and invest these funds for the ultimate benefit of beneficiaries.

Tax treatment
These funds are exempt from taxes provided they are registered. Any unregistered fund is to be taxed at reduced rate.

Where these funds are invested
These funds are invested in variety of securities. Generally Govt. securities are preferred for the investment as these are secure and there is smaller risk of default. A small portion of fund can also be invested in equity to generate increased return. The problem faced by the managers of the fund is to strike a balance between return and risk.

Federal Govt provident fund

Federal Govt maintains provident fund for its employees. Finance Ministry has notified new rates for minimum subscription to GP fund. Employees in grade 1 has to pay at least 3% of their average salaries in the fund. From BPS 2 to BPS 11 employees has to subscribe atleasat 5% of their mean salaries into the fund whereas BPS 12 and above will have to contribute on minimum 8% of their mean salaries to the fund.

Govt. pays 11.30 % per annum mark up on the fund to civilian employees serving under ministries other than defense and railway ministry.

Challenges for provident funds/gratuity funds
These funds must earn huge returns to pay off the accruing liabilities. This present a challenge to fund manager (trustee), who has to invest these funds in venues where returns outweigh the risk. With one wrong decision, the fund manager risks millions of workers’ hard earned money. To find a right balance between risk and reward a manager employees the services of financial analysts. These professionals make sure that workers’ hard earned money doesn’t wipe away in market crashes.