Inaction may double circular debt, says PM’s aide

LAHORE: The PTI government’s strategy to cap the flow — or the addition of new stock — of the power sector’s circular debt in the next two years has ‘too many variables and moving parts’, which need to be implemented concurrently for the success of the proposed plan.

The government has formulated the Circular Debt Management Plan with the assistance of the World Bank as a prior action for the resumption of the IMF’s $6 billion facility. But the plan has not yet been shared with the public even though some details were leaked to the media weeks ago.

According to Tabish Gau­har, Special Assistant to the Prime Minister on Power and Petroleum, the circular debt stock was likely to double from the existing Rs2.3 trillion to Rs4.6tr in two years to 2023 in case no mea­sures were taken to plug its flow.

The stock has already more than doubled in two and a half years of the PTI rule from Rs1.1tr.

“This is not an acceptable situation,” Mr Gauhar told Dawn in a telephonic interview from Islamabad. “This scenario anticipates a consistent increase in the consumer power price without controlling system losses (on account of distribution losses, theft, etc), improving recoveries and jacking up subsidies.”

The constant increase in the capacity charge of generation companies is primarily blamed for the inc­rease in the pace of growth in circular debt in recent years as the previous government of PML-N had added around 14,000 megawatts to the system in its five-year term in power. The size of capacity payments to the generators has already shot up to Rs900bn and is likely to rise by Rs600bn to Rs1.5tn in 2023 unless something is done to bring the sit­uation under control. The re­c­ent revisions in the pow­er purchasing agreem­ents (PPAs) with 47 independent power producers (IPPs) will help curtail the rise in the size of capacity payments by Rs150bn in two years.

The circular debt management plan proposes to attack the issue from all sides and concurrently, according to Mr Gauhar.

The debt reduction strategy seeks to make the electricity distribution companies (Discos) efficient through capital investment in their supply infrastructure to bring down distribution losses by almost 2.5 per cent from the existing 17.8pc to 15.3pc and improvement in bill recovery from the current 90pc to 95pc by June 2023. These changes will be brought about by giving the Discos under private management in the public private partnership (PPP) mode since it will not be easy to sell these companies in their present shape.

Besides, the government already has revised agreements with IPPs, which will get their unpaid bills once the agreements are cleared by the National Accountability Bureau (NAB). The tariffs of public-sector generation companies have also been revised down and 1,700 megawatts of old, inefficient Gencos already decommissioned while the remaining 1,800MW will be retired by September 2022.

Additionally, the government has agreed to double electricity subsidy from next fiscal year and K-Electric has been intimated the desire to alter their present arrangement with the Central Power Purchasing Agency (CPPA) for purchase of electricity from the national grid. Now the KE will be required to pay cash for all megawatts it buys from the grid instead of getting its payable to CPPA settled through the amount of subsidy government owed it.

“The measures together will reduce debt flow by a third or around Rs80bn in two years,” the SAPM said.

The most contentious part of the plan concerns increase of Rs4.50 per unit in the electricity prices over the next two years with average tariff rising from Rs16.50 per unit to Rs21. With new, amended Nepra Act in force through a presidential ordinance, the government will not be able to interfere to stop or delay the notification passing on the price increase to consumers.

“If we hadn’t closed agreements with the IPPs, the potential tariff increase would have been Rs5.50 per unit,” Mr Gauhar claimed. He said the power tariff increase was necessitated by increasing capacity and lower, stagnant demand. “The prime minister doesn’t want the increase in tariffs and hence we are trying to come up with alternate proposals to avoid the electricity price increase,” the SAPM said.

One proposal is to eliminate or reduce sales tax on electricity. Another option is to somehow get the debt of Chinese IPPs under the CPEC initiative restructured over a longer tenure than the current 10 years.

In the next three years, the principal debt repayment of IPPs under CPEC is going to be Rs435bn apart from interest cost and return on equity. Then, the government is considering option of buying out 3,000MW of furnace oil based IPPs, with capacity utilisation of just 5pc. “This will save consumers Rs60bn in capacity payments to the plants,” he was confident that the government would find some solution to the tariff issue going forward.

What happens if the strategy does not work out as planned. We have to implement all the planks of the proposed strategy concurrently. Failure is not an option here,” Mr Gauhar concluded.

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