Rs1,275bn power sector loan: Consumers to pay Rs3.23 per unit debt surcharge for 6 more years

ISLAMABAD: The much-discussed Debt Service Surcharge (DSS) of Rs3.23 per unit is already being charged to electricity consumers through their monthly bills, meaning there will be no additional financial burden on them under the current arrangement.

However, consumers will continue to pay this surcharge for the next six years to help repay a Rs1,275 billion loan — along with interest — secured by the state-owned Central Power Purchase Agency (CPPA) from 18 commercial banks. The loan was taken as part of a long-term strategy to eliminate the persistent circular debt in the power sector once and for all, according to a senior Power Division official involved in negotiations with the banks. He said the term sheet between the CPPA and commercial banks has been finalised, and a summary has been forwarded to the federal cabinet for approval. The decision is expected shortly after Prime Minister Shehbaz Sharif returns from his official visit to the UAE.

In response to a question, the official said that the Rs3.23/unit surcharge had reached its 10pc cap and the government did not plan to raise it. However, under pressure from the International Monetary Fund (IMF), the cap has now been removed, as it was considered a structural benchmark. “This initiative — raising Rs1.275 trillion from commercial banks — will likely be operationalised in the third or fourth week of June,” he said. “The circular debt currently stands at Rs2.381 trillion and will be reduced by Rs1.275 trillion through the loan.”

The remainder of the circular debt will be addressed through multiple avenues, including gains from lower discount rates, renegotiated power purchase agreements with Independent Power Producers (IPPs), and the termination of six IPP contracts. The government expects the circular debt to drop to just Rs300 billion, which it plans to eliminate through operational efficiencies.

Under the finalised term sheet, commercial banks will provide a fresh loan of Rs617 billion at a markup of 10.50–11pc, calculated as KIBOR minus 0.90 basis points. This amount will be repaid by electricity consumers over six years via the DSS already embedded in their bills.

Banks will deduct the DSS amount at source when consumers pay their electricity bills, a mechanism expected to enhance the credit risk profile for lenders.

The official noted that the IMF has allowed banks to extend credit directly to CPPA without requiring a government guarantee. This latest tranche of Rs617 billion adds to an earlier Rs658 billion loan provided to the power sector through Power Holding Limited (PHL), which was backed by a sovereign guarantee. Together, the two loans comprise the Rs1.275 trillion figure being used to tackle the sector’s financial woes.