Asif Ali Abro
Ask anyone in Pakistan, ‘what is the single biggest issue of power sector?’ He or she will reply, ‘circular debt’, which is moving gradually and surely towards crossing the Rs. 1.5 trillion mark. The term ‘circular debt’ is being used for the outstanding amount payable by one group of stakeholders in the power sector of Pakistan towards the other; who in turn is already indebted to the next in the long chain of debtors. The payables gap start with the electricity consumers towards the distribution companies (DISCOs), to transmission company i.e. National Transmission & Dispatch Company (NTDC), to power purchaser i.e. Central Power Procuring Agency (CPPA), to power generating companies i.e. Independent Power Producers (IPPs) in private sector and Generation Companies (GENCOs) in public sector, to fuel suppliers (PSO, SNGPL, SSGC, OGDCL) and working-capital lenders, to fuel transporters, shippers, refineries, exploration and production (E&P) companies, insurers, so on and so forth. All of them stand behind each other like dominos: one fall down and the rest is anybody’s guess. Every successive government pays due attention to the issue of circular debt. However the steps taken by the concerned managers may not be described more aptly without using the word ‘dismal’.
Till now, the successive governments’efforts seem to wrestle with the symptoms instead of curing the disease itself or the reasons behind the disease. The best (or the worst) which the successive governments till now have been able to do is to borrow loans with expectation that by doing so the power purchaser (CPPA) would be able to pay off the liabilities towards the IPPs and GENCOs; who in turn would pay off their working-capital loans as well as liabilities towards fuel marketing companies; who in turn would pay off their liabilities towards refineries (and subsequently E&P companies), external fuel suppliers, transporters and other debtors. In 2003, Rs. 480 billion were disbursed in a hope of cleaning the slate once for all, and believing that circular debt would never resurface. Nevertheless, it was never recognized that by treating the symptom without curing the disease, the malady would worsen.
The debts raised to retire the previous liabilities, in fact, become yet another source of piling up the circulardebt. Parking that debt in Power Holding (Pvt) Ltd (PHPL) could neitherearn laurels for anyone, nor trick anyone: everyone knew that dirt of circular debt has been swept up under the carpet, but it does exist laying there. Everyone knows that the one-trillion-plus-rupees circular debt also includes Rs. 582 billion that wereparked in PHPL. But learning anything from past, the government is once again considering raising Rs 200 billion for PHPL by issuing Sukuk Bonds!
Besides numerous minor attributing factors, major sources that contribute to the disease of circular debt are (i) unreasonably high losses in DISCOs, (ii) relentless reliance on IPPs& planning failures, and (iii) unrealistic subsidies. The losses of DISCOs are inclusive of technical losses, theft by consumers, as well ascorruption and incompetence of staff & officials. Whereas technical losses may be tangibly reduced through the use of newer technology and investments in infrastructure, the resolve to do so seems completely missing on part of concerned officials. The regulator could have played a strong proactive role in pushing the DISCOs to control the losses. But its efforts are also very feeble in this regard. Controlling theft and improvement in revenue collection also need support of administrative machinery as well as law enforcing agencies of federal and provincial governments; but in most cases the biggest defaulters are the government institutions themselves. On top, the governance itself is also an issue to be dealt seriously. People often ask as to who manages the affairs of DISCOs! Is it theDISCOs’governing boards- of-directors, or the bureaucrats / technocrats sitting in Islamabad, who manage the affairs of DISCOs? The continual shuffling, firing, replacements of executives of these entities and the unending meetings on petty agenda items in Islamabad suggest that someone needs docile yes-men at the helm of DISCOs’ affairs instead of competent professionals.
Since late nineteen nineties, IPPs have been the main stay of power sector of Pakistan. However, the policies that attracted the IPPs have always been controversial. There is no denying the fact that the power policies have effectively blocked transformation of Pakistan’s power sector from single-buyer market to wholesale competitive electricity market. Also one may argue that the tariff given to IPPs is exorbitant, but the biggest disquietude for the sector comes from ‘ill-planning’. One example is that of recently inducted RLNG based IPPs.
These IPPs were not listed in any forecasted plans of power generation projects. However, they were bulleted into the system with much fanfare and tall claims, but without realization that they are going to create supply glut resulting in idle capacity payments. Yet another example of rather ill planned induction of IPPs is that of an imported coal project in central Punjab. Not only the additional cost of coal transportation to central Punjab is onerous, but the environmental cost of locating it in the midst of the most fertile agricultural land of Pakistan is too high; which the future generations of this country will ultimately pay. On top, however, in the list of ‘ill-planning’ is failure to reliably expand the transmission and distribution networks. The impact of this ill-planning will be soon noticeable when in summer of 2019 people will experiencenoticeable power cuts despite tall claims of having surplus power capacity in the country.
Whereas everyone would have noticed many lobbies obstructing new projects based on Thar coal, and discouraging the renewable projects in the country on the pretext of surplus power in the country, they would have also seen their reluctance to retire the most inefficient power generation projects of GENCOs; most of whom have long finished their useful life. People also ask with awe that if there is surplus power in the country and the power purchaser is paying idle fixed cost capacity payments then why it is still sticking with the negative marketing tactics of using time of day(TOD) meters with discouragingly expensive power consumption rates during peak hours, and the higher tariff slabs for more consumption of electricity. Such marketing tactics suits the power purchaser only when there is shortage on supply side! In all probability, the answer is ‘unrealistic subsidies’ on tariff.
The subsidyis meant to be injected to artificially lower the consumers’ tariff. Whereas the financial, economic and social impacts need to be analyzed for (i) the subsidies for each consumer group, (ii) the division of slabs for different classes of domestic consumers, (iii) cross subsidies between different consumers such as industrial, commercial, agriculture etc, and (iv) unification of tariffs for all DISCOs irrespective of losses which various DISCOs concede, the level of subsidy which the government desired to be made part of the tariff is simply unaffordable.
The consumer tariff notified in January 2019 promises a subsidized electricity tariff which is going to create a financial gap of Rs. 371.5 billion that mayeither be bridged by direct subsidies or by defaulting on / deferring the payables. Since federal budget of 2018-19 only provides for a total amount of Rs. 150 billion for power sector subsidies, the deferment of major portion of payables is what one can expect.
Under the current economic scenario it is expected that finance division would not be even able to release the Rs. 150 billion budgeted subsidy, let alone Rs. 371.5 billion. Invariably the revenue requirements of DISCOs could not be met with. Hence the easiest heads for default or deferment would be looked for. Apparently the first item would be deferring the payments to provinces on account of ‘net hydel profit’, and then there is a long list which however would ultimately swell the tally of circular debt. But who cares: someone would be happy to propose new spree of borrowing from the banks or issuance of bonds or term certificates.
The author is Member Advisory Board CGSS and has 28 years’ experience of
working in power sector. He can be accessed for feedback and comments on
asifabro@hotmail.com.
