Govt plans to cap circular debt

ISLAMABAD. The government has carved out a circular debt capping plan in power sector based on robbing Peter to pay Paul policy.
The stock of circular debt, under capping plan agreed upon by the IMF, of Rs303.137 billion in fiscal year 2015 is to be brought down to 204.417 billion in financial year 2018 by shifting to the compliant electricity consumers the whole burden of all government and electric power system inefficiencies including debt servicing of the loans that are the liabilities of electric power distribution companies (Discos) will now be paid off in five to seven years. In addition, the Power Holding Company Limited (PHCL) debt, under the plan, will be reduced from Rs335 billion to Rs140 billion by financial year 2018.
With a view to reducing the circular debt, the government will recover the full cost of electricity production and supply from consumers through bridging the gap between Nepra determined tariff and the government notified tariff. So far the gap has substantially been bridged through the surcharges levied on the electricity bills in the name of tariff rationalisation.
The top mandarins of the Ministry of Water and Power told The News that the compliant consumers have been punished by forcing them to pay all government and system inefficiencies amounting to Rs200 billion and in addition they will also be forced to pay Rs40 billion in the head of debt servicing. “So far the average Rs3 per unit in electricity tariff has been increased in the head of inefficiencies and debt servicing. On top of that the privatisation proceeds that the government will manage after the sales of Discos will be used in retiring the circular debt.”
They pinpointed that the electric power system is braving the annual damage of Rs50 billion because of distribution loss that hovers at over 18.2 percent. In addition the system also sustains mammoth loss of Rs130 billion in the wake of its failure to increase the recovery of bills. The sources said that receivables of the system have alarmingly increased up to Rs628 billion out of which the federal and provincial governments and their attached departments owe to pay Rs268 billion. However, Joint Secretary Power Zargham Khan says that receivables stand at Rs567 billion and payables hover at Rs281 billion, adding that the recoveries have imported up to 91.1 percent, but the distribution losses witnessed no improvement and stand at 18.2 percent.
Official sources denied that the plan would unnecessarily burden the consumers. They said the government would take care of the interests of the consumers.
According to the circular debt capping plan a copy of which is available with The News, the government under agreement with the IMF will bring down the circular debt to Rs248.980 billion in current financial year 2015-16 knowing the fact that circular debt stands at Rs281 billion even after the lapse of two months of the current fiscal. Under the plan, the government is bound to scale down the stock of circular debt to Rs218.311 billion in 2016-17 and Rs204.417 billion in 2017-18. To achieve the said targets mentioned in the plan, the government has also worked out the strategy under which year-on-year circular debt cash flows will also be brought down from Rs198.715 billion in 2014-15 to Rs18.865 billion in 2017-18. In the current fiscal 2015-16, the circular debt flow will be reduced to Rs53.662 billion that will further be plummeted to Rs29.798 billion in 2016-17 and Rs18.865 billion in 2017-18.
Under the plan, public sector power companies’ collections will be increased by 5 percent by fiscal 2018 and losses will be reduced by 1.5 percent and the said targets will be materialised through efficiency gains, privatisation, and private sector participation. Collection from government customers will be rationalised and subsidies will be on actual basis and paid according to schedule. The government will continue to take measures to rationalise the tariff which covers all cost including debt servicing and ensure sufficient budgetary provision of subsidies for Balochistan tube wells, Fata and AJK consumers.
The objective of the government as mentioned in the plan is to have a financially self-sustaining power sector to support economic growth which implies the elimination of the circular debt. And to this effect the government will pursue the strategies including the strategy for improving efficiency based on a gradual decrease in the losses and increase in the collections from consumers. Working on the same strategy, collections have seen an improvement in FY 2015 in the range of 89-91 percent as opposed to the previous rate of recoveries in FY 2014 of 87 percent. Losses were reduced by 0.5 percent in the same period. The plan for management of circular debt until the end of FY 2018 is based on the same strategy and principles.
Under the strategy, surcharges have been levied under Section 31(5) of the Regulation of Electricity Generation, Transmission and Distribution Act 1997 (the Nepra Act). Surcharges will be set at the level that will rationalise subsidies and allow recovery of full cost of supply such that the flow of CD is eliminated by FY 2018.
The working paper also mentions how and when the circular debt was emerged. It says that circular debt first emerged in fiscal 2007 as an outstanding overdue liability to power supply companies (Gencos, IPPS and their fuel suppliers). The tariffs determined by Nepra were increased while the government notified customer tariffs were not raised to the same level. Tariff differential subsidies, the difference between these two tariffs, were not paid in a timely manner exacerbating the financial situation of the power sector while the increasing dependence on imported fuel and its rising cost multiplied the effect. Since that time, circular debt has restricted utilisation of the power sector in Pakistan, suppressing utilisation of existing generation capacity as well as investment in new capacity. Issues related to litigation with power producers, and non-payment on several accounts to power generation companies are attributable to this phenomenon. Various governments have tackled or tried to tackle the issue of the menace. Most of these efforts were restricted to injection of cash into the sector to ease the liquidity crunch that was the result of circular debt. It also tells that this standalone approach of cash injection gave only a temporary relief, and the issue emerged again with larger impact. The reforms attempted did not have the full intended effect.
Mentioning the major contributors to circular debt, the plan says that the sector’s inefficiencies stem from Discos having higher levels of losses and lower levels of collections than those allowed by the regulator. Some Discos are at or close to the Nepra determined levels of losses and collections. Less well performing Discos experience levels of losses that are up to 5-10 percent worse than those allowed, and of collections that are up to 20-30 percent lower than the 100 percent recovery assumed by the regulator, as owner of these entities. In financial year 2014, sector inefficiencies added Rs88 billion to circular debt and accounted for Rs60 billion for fiscal 2015 up to March 2015. The plan also pinpoints disclosing that beside sector inefficiencies, tariffs do not capture the full cost of supply of electricity. Factors include delay in determinations, late payment surcharge and cost of debt servicing.
Highlighting the discrepancies in the tariff regime, the circular debt capping plan says leading up to 2008, Discos borrowed for operational costs which Nepra did not allow to be recovered through the tariff. This debt is now in the process of being transferred to Disco balance sheets. The loans have tenures ranging from five to seven years with reschedule and rollover options and interest payment rebates if payments are made promptly.
To arrest the flow of circular debt arising from servicing of the debt, the collection will be made through tariff. The plan also tells that late payment surcharge is another cost that is never considered by the regulator while determining the cost of service. The late payment interest (Kibor + 4 percent) is imposed by the IPPs as per their power purchase agreements. It becomes due if payments for capacity or energy components are below invoiced amounts. Since the sector recoveries are to the tune of 89-91 percent from consumers, IPPs have often received short payments. For FY 2015 the regulator has allowed the cost of late payment surcharges to be recovered from the consumer tariff which is estimated to off-set the amount of build-up on account of late payments to generators. Delays in the annual tariff determination for Discos stem from late submission of tariff petitions by Discos.
It is to be noted that when the government took charge in May 2013, the circular debt stood at Rs503 billion. Power sector entities were at the brink of financial collapse and the entire sector was touching levels of financial meltdown. Finance Minister Ishaq Dar had done away with the circular debt through a cash injection of Rs480 billion. Now, the stock of circular debt, however, emerged and continued to accumulate and had reached Rs244 billion by July 2014, an average monthly increase of Rs18 billion compared with the FY 2013 accumulation of Rs20 billion per month. In FY 2015 the stock had increased to Rs321 billion by November 2014, showing an average addition in the flow of Rs15 billion each month.