Will Electric Cars Spark Pakistan’s Economy?

Pakistan and Debt, Inflation, IMF, an old love story. Taxes and Unemployment have affected the life of an average Pakistani.

There’s no sign of improvement, and difficulties are only increasing.

The little amount of electricity we use at home, we may have to cut down even more. First, we stopped using the AC; now, we might have to switch off the fans as well.

Meanwhile, there’s a heatwave across the country, making conditions quite harsh and unbearable.

So, amidst all of this, I thought, why not focus on a solution?

And there are, of course, various solutions to Pakistan’s problems.

If we talk about agriculture, it has its own solutions. If we discuss electricity, it has its solutions too. But I wanted to introduce an innovation that could show how even a small governmental intervention could potentially resolve many issues in a trickle-down manner.

And that’s why, today, we’ll discuss electric cars. Yes, cars that run on electricity.

You must have heard of Tesla. Currently, there’s a global race over who will dominate electric car manufacturing.

So, what if we start selling electric cars in Pakistan? This could not only revolutionize the Pakistani economy but also potentially solve many of our issues.

Let’s recognize the problem, then we’ll look for solutions. First, let’s discuss Pakistan’s economic challenges.

Discussing Pakistan’s Economic Problems

We know that Pakistan lacks sufficient jobs. Every year, 3.5 million kids turn 18, meaning they’re entering the job market, and Pakistan is only creating a very limited number of jobs for them.

And those jobs are also quite unremarkable.

For example, if someone is a property dealer selling property files, that doesn’t benefit the nation’s productivity. The farmer, who works hard to grow crops, is contributing more to productivity.

So, we don’t have enough jobs, and we also don’t have enough productive jobs.

This is crucial because if we have productivity, we’ll have growth; if we have growth, we’ll have development; and if we have development, our lives will improve.

Also Read: 5G vs 4G: Key Differences and Why It Matters?

Manufacturing in Job Creation

Now, when we talk about productive growth, a major component of it is the manufacturing industry, because the manufacturing industry is

particularly important for a developing country like Pakistan because it provides a lot of jobs for relatively unskilled labor.

In addition to that, it’s highly productive. We know that manufacturing in Pakistan has unfortunately been at a standstill. Back in the 1960s, we established a manufacturing base, but then we nationalized it.

Since then, instead of producing our own goods, we’ve been importing cheap products from China, and for some reason, we find it challenging to manufacture things in Pakistan.

So let’s examine why manufacturing isn’t thriving in Pakistan. Any manufacturing process generally requires three main components: raw materials, human capital, and energy.

For instance, if I want to make a table, I need wood; if I want to make a shirt, I need thread or cotton; if I want to make a car, I need steel, iron, or aluminum.

These raw materials are known as commodities, and they’re traded globally.

Of course, no single country can produce all commodities, so it sources some from other countries, like Indonesia or Dubai.

As a result, commodity prices are essentially the same worldwide. So if we’re making something, the Chinese are making it, or Americans are making it, the raw materials cost roughly the same for everyone.

This indicates that raw material costs are not a problem.

Next, let’s talk about human capital. We’re a poor country with a GDP per capita of around 1400–1500USD. If you compare that to

Europe, where the GDP per capita is 30,000–40,000 USD, or even to China, where it’s nearly 12,700 USD, it’s clear that…

China’s per capita GDP is roughly nine times higher than ours.

This means that in terms of human capital, our labor is cheaper. Our workers are ready to work at one-ninth of the cost compared to Chinese workers.

So, if we wanted to set up a manufacturing industry, where human effort is required.

As Pakistanis, we have an advantage.

Electricity Challenges

But then the third issue arises: energy, specifically electricity, where we face significant obstacles. In comparison to competing markets, electricity in Pakistan is three to four times more expensive.

So when you take raw cotton, run it through machines powered by electricity to make thread, then use more machines and electricity to turn that thread into fabric, and finally, more electricity to make a shirt, the cost of electricity in this entire process, if it’s three or four times higher, means that the cost of the finished product will also be high.

As a result, when you enter the global market and try to sell your product, it’s evident that if an Indian or Vietnamese competitor is producing at a lower cost, they can sell it cheaper.

And if they’re able to sell it cheaper, why would a buyer purchase from you? They’ll go to India, Vietnam, or Bangladesh. This is why

we haven’t been able to increase our exports, nor have we even managed to manufacture products for Pakistanis, because it’s always cheaper to bring things from China instead of making them in Pakistan.

We already know electricity is expensive, but now we’re hearing that the IMF is suggesting further price increases after the budget. Right now, electricity costs are around 70-72 rupees per unit, but it’s said that this may even cross 100 rupees per unit in the coming days.

You might think, “Fine, if we’re paying 100 rupees per unit, at least work is getting done, factories are running, no problem.” But this isn’t where the problem ends.

The government also faces trillions of rupees in circular debt, meaning that even after collecting money from us, it isn’t enough to pay the power plants.

So, if we view this from the consumer’s perspective, it seems that they may need to charge us even 200 rupees per unit to manage these debts.

When the debt continues to increase over 100 rupees per unit, the tax money we pay can’t be used for development. It can’t be used for hospitals, schools, or road construction; instead, it’s all being allocated to service these power sector debts.

So electricity is expensive, our standard of living is declining, our purchasing power is decreasing, and development isn’t happening even though we’re paying taxes.

This creates a strange “chicken and egg” problem. Should we make electricity cheaper to boost our industry, or should we grow our industry, which will then make electricity more affordable?

You might think that it’s clear: making electricity cheaper will lead to industrial growth. Cheaper electricity will reduce manufacturing costs, which will lead to lower production costs, allowing us to compete more effectively in the market.

Why is Electricity expensive?

But regarding your other point—that increasing industry will automatically make electricity cheaper—what does that mean? To understand this, we need to delve into why our electricity bills are so high. When we look at our electricity production, the factories producing electricity are also industries with their raw materials, human components, and outputs.

Like any other industry, these factories have a cost structure. They aren’t any different from similar plants in India or China. So why are our plants so unique that their electricity costs are three to four times higher?

One reason is that globally, we use a production mix of various energy sources. For example, hydropower (from water), nuclear power, and wind energy have low operating costs. Their production cost is primarily maintenance, which is relatively minimal.

However, the bulk of our production cost comes from fuel-based plants, specifically those using oil, gas, or imported coal, which are costlier to operate. Currently, we know that as our oil and gas plants are gradually decommissioned in the coming years, and as more hydropower, renewables, and local coal-based plants are commissioned, our production costs will decrease.

So, production cost is one factor, and it’s already high compared to global standards.

The next component is how the government structured electricity agreements. At the time, the government was the sole buyer, meaning

there was no free market for electricity where anyone could produce or buy it and then distribute it to consumers.

The government’s control meant that private sector investors feared that if they invested millions of dollars in electricity plants, the government might not buy the electricity in the future.

To reassure them, the government offered sovereign guarantees, promising to pay these companies capacity payments, regardless of whether they generated electricity or not.

For example, if a 1200 MW plant produces only 400 MW due to low demand, the government pays for the 400 MW generated and additional charges for the unused 800 MW under “capacity payments.”

So, the massive investment you made in that plant guarantees you full payment.

The 4 Major Charges

Now, considering this, when we calculate the electricity bill, we see four major charges.

1. The cost of production. It’s relatively standard globally, so there’s no issue with that.
2. The second is the capacity payment charge. Let me explain: for every unit you consume this month, 16 PKR is solely for the capacity payment charge. So, if the basic cost per unit of electricity is PKR 75, an extra PKR 16 is automatically added just to maintain the infrastructure.
3. Huge government Taxes. The government agenda work that I can’t take income tax directly, so they look for alternative routes or systems that work and hold people accountable.

For example, imagine a new plant just installed. Since it hasn’t started making a profit yet and hasn’t begun selling products, they’re only investing money into it. They already need to pay income tax, withholding tax, and various other taxes through electricity bills, even though they’re just starting out.

• The fourth major charge is the fuel price adjustment. Only God knows on what basis this is calculated.

Let’s say the gas and oil plants’ fluctuating prices justify the fuel price adjustment, but this reveals that the government is imposing very high taxes and also including capacity payment charges.

When all these are combined and the electricity bill is sent to you, it becomes so expensive that it’s unmanageable. You try to use it sparingly.

Naturally, you have a fixed salary with a limited budget that can be spent on electricity. As prices rise, your consumption must decrease even more. Of course, it becomes a death spiral.

Why don’t we have a solution?

All of them would have already stopped, and we would only be paying the charges for capacity payments. Or maybe we’re not even paying those, and the debt is just piling up on the government. This is such a huge issue that you can’t even begin to understand it at this point. It will destroy the entire economy and government; it will consume everything.

If you ask each political party claiming to bring change in Pakistan, none of them has any solution for this problem. They just come, make some moves here and there, and shift things around without having a particular plan.

Pakistan’s Total Car Usage

Let’s talk about cars.

In Pakistan, the total number of four-wheeler passenger cars, the ones parked in our homes, is 7.5 million, or 7.5 million cars. Each year, we add 200,000 new cars to that total.

Similarly, when we talk about motorbikes, we have approximately 155 million registered motorbikes. Each year, we buy and register about 2 million motorbikes in Pakistan.

Let’s build a hypothesis here.

With this high number of vehicles, let’s consider how it relates to other aspects of daily life, such as electricity.

The Electricity Dilemma: Pakistan is facing several critical issues with electricity, specifically:

1. High Taxes: The taxes on electricity are substantial, driving up costs for consumers.
2. Capacity Payments: We are paying large sums in capacity payments, which could be reduced if we addressed these high charges.

If these costs were lowered, it would have a ripple effect on the economy and daily life:

• Improved Standard of Living: Lower electricity prices would allow people to afford more electricity usage, making it easier to run ACs and appliances. This would contribute to a higher standard of living and allow people to focus on other aspects of their lives.
  • Global Competitiveness: Reduced electricity costs would also benefit manufacturing and industry, making Pakistan’s exports more competitive and helping address the ongoing dollar crisis.

Link to the Dollar Crisis: The high electricity costs are directly tied to Pakistan’s dollar crisis. I hypothesize that if we could fully utilize our installed capacity of 45,000 megawatts, the capacity payments could eventually drop to zero. This would mean every unit of electricity would be a direct cost-saving, helping alleviate the dollar crisis as well.

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Challenges to Increasing Electricity Consumption

However, there are significant barriers to increasing electricity consumption:

Government Fiscal Constraints: The government doesn’t have the fiscal capacity to lower electricity bills due to a high circular debt and a challenging economic situation.

High Inflation and Low Job Availability: People already face high inflation and limited job opportunities. With little disposable income, people cannot afford to consume more electricity at current rates.

1. Low Wages: Even if people want to consume more electricity, low wages make it difficult to do so, creating a vicious cycle of limited demand and high prices.

The Death Spiral

This death spiral is feeding into itself. For example, in 2022, our plants produced 144,000 gigawatt-hours of electricity, while this year, we’re producing 125,000 gigawatt-hours of electricity.

That means instead of increasing electricity production over the past two years, we’ve reduced it by 15,000 gigawatt-hours.

And what happened because of that? The capacity payments will increase, and when those capacity payments increase, next year, even more people will stop using so much electricity.

How Can We Increase Consumption?

“People won’t be able to afford expensive electricity, so it’s possible that production will reduce further, and capacity payments will increase even more. We need to figure out how to increase our electricity consumption with existing methods, and one surefire way to do this is Electric Cars. We already know that people in Pakistan use cars, and we know that we incur costs on these cars, whether for maintenance or fuel. We are already spending money monthly as individuals on fuel.”

Similarly, the government buys about $15 billion worth of petrol annually from the global market to fuel these cars. This money is already being spent every year.

It’s not new money from your pocket, it’s money you’re already spending for transportation as consumers and as the government.

So what if we converted all cars in Pakistan to electric? What difference would it make?

Let’s take a look.

On average, a car in Pakistan travels 10,000 km annually, and an average motorbike travels about 4,000 km per year.