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April 18, 2020

Inefficiency of power sector: Country sustains Rs4,802 bn loss due to circular debt in 13 years

National

April 18, 2020

ISLAMABAD: The menace of circular debt has already led the country to a total loss of Rs4,802 billion during the last 13 years because of the power sector’s inefficiencies, which also caused an annual loss of Rs370 billion. This was revealed in a report of nine-member committee on power sector audit, circular debt and way forward that was headed by ex-chairman SECP and it was submitted to the prime minister.

The report was based on five main sections, including i) review of private power producers (IIPs); ii) circular debt distribution inefficiencies, iii) future roadmap towards a competitive market structure; iv) implementation plan, and v) IPP wise reports.

The nine-member committee has also worked out the losses elaborating that the system was facing annual loss of Rs120 billion per annum because of inefficiency of recovery mechanism. It said for every 100 units that were purchased by the National Transmission & Despatch Company, (NTDC) during the FY-2019, around three units were lost during the transmission, while 17 units were lost during the transmission and distribution (T&D) due to inefficiencies of DISCOs.

It means that at the T&D level, only around 80 units are actually provided to consumers, and at the billing level, the system is further burdened with nine percent loss under inefficient recovery mechanism, while the NEPRA allows 15 units to DISCOs that becomes part of the tariff. It also means that the cost of only two units loss bearing by the DISCOs themselves, with total power purchase price of Rs1,344 billion during FY-2019, and the total cost of the units lost around Rs30 billion, whereas Rs120 billion is lost due to under-recovery, said the report.

The report also identified some three broad categories leading to circular debt as i) high cost of generation, ii) transmission and distribution efficiencies and iii) regulatory and fiscal inefficiencies. Within each category various sub categories were indicated, such as the cost of generation is caused by snowballing capacity payments; ii) net hydel profits; iii) transmission constraints, iv) minimum plant factors and government owned LNG plants; V) gas price anomalies, and VI) financing cost of circular debt, it said.

The report also highlighted that the cost of generation was exacerbated by PKR depreciation, high dependence on expensive oil in the past and charging less than the cost. It said between 2005 to 2010, the cost of generation in the country increased by 148 per cent and average tariff by 33 per cent on account of increased international oil prices, higher share of furnace oil in electricity generation and PKR depreciation. However, the circular debt started to emerge late 2000s, and the successive governments relied on heavy budgetary support and quasi-fiscal financing to eliminate it, however, the measures addressed the symptoms not the root causes.

The cumulative budgetary support to the power sector amounted to Rs3,202 billion during the fiscal years of 2007 to 2019 comprising; i) Rs2,860 billion as budgetary subsidies and ii) Rs342 billion as other liquidity injection, the report said. Yet, the circular debt stock has continued to grow and increased by Rs465 billion in 2019 to around Rs1,600 billion, leading to total financial loss to the country of Rs4,802 billion during the past 13 years causing annual loss of around Rs370 billion due to the power sector inefficiencies.

The committee further recommended, “This is alarming because with public indebtedness (public debt/GDP) increased up to 85 per cent in FY2019 from 52 per cent of FY2007 owing to which the government’s ability to provide support to the sector is now severely constrained.” The report also suggested to the government to introduce additional petroleum levy on POL products to meet the cost of circular debt and by taking the benefit of lower international oil prices with aggregate annual consumption of 20 billion litres of petrol and diesel, Rs5 per litre excess charge could generate Rs100 billion additional revenue per year.

The report also said a one-time absorption of circular debt stock into the public debt, assuring it was linked with the quantifiable KPIs and accountability mechanism whereby future savings due to reduced cost of generation and other measures outlined in the report were used to pay back this one-time payment. It has also been pinpointed that the circular debt flow was the marginal change in outstanding stock of circular debt, which was caused mainly because of high cost of generation, transmission, distribution, regulatory and fiscal inefficiencies.

It also recommended that snowballing capacity payments, net hydel profit, transmission constraints, minimum plant factor provision for RLNG based plants, gas price anomalies and financing cost of circular debt were also causing surge in tariff. About the capacity payments, it said, since FY2015 about 12,100 MW of net power generation capacities were added to the NTDC system, while another 12,400 MW would be added by FY2025. The total CPP amount has in fact increased up to Rs640 billion (Rs5.2 per unit in FY-2019 from Rs275 billion -- Rs2.7 per unit) in FY 2016.

The report has suggested that no new power plants should be established for the next few years with the exception of conversion of existing wind plants to hybrid wind or solar for system stability and to lowering the tariff. The plants in the pipeline should either be delayed or reconsidered and contract of plants reaching expiry should not be renewed. The report also said the retirement of older and inefficient GENCOs and IPPs, lowering spreads over KIBOR for late payment surcharge and reducing the spreads over KIBOR/LIBOR for the long-term project debts, and the combination of these

measures could immediately help reduce the annual capacity payment burden by Rs150-200 billion leading to reduction in the tariff by Rs1 per unit.

The report also recommended the privatization of commercial activities of DISCOS, breaking down DISCOs into smaller units, changes in governance, balance sheet restructuring and closing the loopholes permitting excess billing. The report also identified more factors that contributed significantly to the build-up of circular debt which included delay in tariff determinations and notifications due to legal challenges and political considerations. It also pinpointed another factor that the under budgeted tariff subsidy, slow disbursements and tax refund claims were also causing a surge in circular debt.