Rs800bn Of Circular Debt Stock To Be Shifted To Public Debt

ISLAMABAD: Estimating power sector losses rising by four per cent since the financial year 2016 to 29pc, the Asian Development Bank (ADB) and the government have agreed to raise about Rs469 billion revenues through consumer tariff during the current fiscal year and shift about Rs800bn of the circular debt stock to public debt in three years.

This is part of the Energy Sector Reforms and Financial Sustainability Programme under which the Manila-based lending agency disbursed $300million loan to Pakistan last week for 25 years including five years of grace period at 2pc interest rate.

“The plan will include (i) using the sales proceeds of some generation assets (ii) divesting power subsector transmission and distribution of SOEs (iii) rolling tariff subsidies preferably into a social assistance programme targeting the poorest households and (iv) converting portions of Power Holding Private Limited debt stock into public debt,” Adviser to the PM on Finance and Revenue Dr Abdul Hafeez Shaikh wrote to the ADB president.

The two sides have also agreed under the programme to notify electricity tariffs for all distribution companies in advance, before the beginning of every fiscal year, on estimated revenue requirements to ensure full cost recoveries in line with $6bn International Monetary Fund (IMF) programme.

As a prior action, the government has notified quarterly adjustments for all the four quarters of FY2019, “adjusting tariffs for Rs469bn of backlog”, the ADB said. The government is required that “FY2021 tariff is notified before July 2020, correcting the annual tariff notification cycle” to control accumulation of circular debt.

The government has, in consultation with the lenders, updated the circular debt reduction plan to curtail accumulated payables and loans on PHPL. The new accumulation of circular debt has to be kept below Rs124bn for FY2020 and PHPL debt will be reduced and assumed as public debt. This accumulation would further be reduced to Rs74bn in FY2021.

The government has also committed to ensure that the Nepra amendment act that includes automatic quarterly tariff adjustment and institution of surcharges as is the current practice for automatic fuel price adjustment is submitted to parliament for approval. The two sides have estimated that successful implementation of the plan would lead to the circular debt coming down to Rs50bn by 2024 instead of Rs450bn in FY2019 and weighted average cost of power generation to about Rs11 (about $0.070) from Rs15 ($0.097) per unit.

The government has also given an undertaking to have at least one female board member in all the distribution, generation and transmission companies and privatisation of two LNG power plants.

The ADB said distribution companies (Discos) estimated 18.3pc transmission and distribution loss and 10pc of non-recovery of the billed amount, leading to almost 29pc of revenue loss that was 4pc higher than FY2016 levels. “This puts Discos in a negative spiral of limited investments and increasingly poor efficiency, making system losses a recurring cause of circular debt,” the ADB said.

The lending agency appreciated the strong commitment of the government to reform the sector and taking “a series of tariff notifications in 2019, adjusted a backlog of Rs469bn”. It also noted that the tariffs were now based on the new uniform tariff mechanism under Nepra Act amendments which incorporate budgeted subsidies and cross-subsidisation among various companies to help control deficits.

“A new circular debt reduction plan based on these tariff mechanisms, a historic level of system efficiency improvements and an antitheft programme that has recovered Rs89bn since November 2018, among others, was developed to monitor quarterly targets and progress”.

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