If inefficiencies continue: Circular debt to swell to Rs4,000 bn by 2025

ISLAMABAD: The circular debt in the power sector currently standing at Rs2,219 billion is to swell up to Rs4,000 billion in 2025 that will have a catastrophic impact on the economy.

The power tariff in 2025 will surge by Rs5.1 per unit, driven mostly by the CPP (Capacity Purchase Price), unfolds a study titled “Fixing Pakistan’s Power Sector” prepared by Engro Corporation, a multinational conglomerate company with subsidiaries involved in production of fertilizers, foods, chemicals, energy and petrochemicals.

“Electricity prices in Pakistan are the highest if compared to benchmark countries such as Vietnam, Sri Lanka, Bangladesh, India, Malaysia, Thailand and South Korea.

“Electricity prices of country’s residential consumers are 28 percent higher than the domestic consumers’ tariffs of the said seven countries and likewise the industrial tariff in Pakistan is 26 higher if compared with the industrial tariffs of the said seven countries,” it said.

The study highlights five imminent challenges in Pakistan’s power sector, which include circular debt, excess capacity, low demand, high cost, and FOREX drain with the solutions of the said issues. However, it pinpoints that circular debt grows because offour root causes, the most critical of which is DISCOs inefficiency.

The study mentions that the government is heavily involved in the power sector starting from provision of fuel, electric power generation, transmitting electricity up to purchasing it and then distributing it to the end censurers.

In addition, circular debt is on the rise on account of inefficiencies in the entities such as PSO, PLL, GENCOs, NTDC, CPPA, DISCOs in the power sector being run by the government. The circular debt as of June 30, 2018 was at Rs1,153 billion which has increased by 100 percent to Rs2,219 billion as of June 10, 2020.

Moreover, if DISCOs operations are not improved, the inefficiencies will add a further Rs1.5 trillion to the circular debt by 2025, which could increase to Rs4 trillion.

The study warns of decision-making authorities of the country saying that capacity payments would be hovering in the range of Rs1,500 to 1,700 billion by 2025 and to reduce consumer tariff. It recommends the re-structuring of IPP debt, and moving to competitive bidding for future projects. It asks for restructuring IPP debt from 10 to 20 years with negotiation for reduction of IPP interest rates. It also asks authorities to reallocate gas from non-process captive plants to RLNG based IPPs.

The study says that the DISCOs inefficiencies contributed 60% (Rs678 billion) of the stock of circular debt by June 30, 2018. And DISCOs added another Rs171 billion in 2018-19. By June 30, 2018, DISCOs failed to recover Rs506 billion from the permanent and running defaulters and Rs247 billion receivables from the federal government.

The DISCOs were also facing damages of Rs189 billion till June 2018 in the head of transmission and distribution losses, Rs109 billion loss in the wake of time-lag in tariff adjustments and Rs101 billion on account of non-payment of tax refunds by FBR.

The four DISCOs that include QESCO (Quetta Electric Supply Company), PESCO (Peshawar Electric Supply Company), SEPCO (Sukkur Electric Power Company) & HESCO (Hyderabad Electric Supply Company) account for 87% of total defaults in the sector.

In the jurisdiction of QESCO, 75% of electricity demand is from agriculture customers, most of which do not pay. PESCO defaults result from poor law and order, and lack of support from the provincial government.

The SEPCO receivables largely stem from non-payment of private sector. The receivables are growing by Rs. 8-10 billion per annum.

The study asks for the most critical step to improve circular debt is to improve DISCO operations, which can be done by involving provinces in their ownership and management. It also recommends that the worst performing DISCOs should be prioritized for reform on an urgent basis.

The study asks for handing over DISCO ownership and management to provinces and provincial governments control law and order, which is a critical requirement for turnaround of DISCOs.

It also emphasizes streamlining tariff adjustment procedures and eliminating or fully funding customer price subsidies and exploring avenues to optimize interest costs by refinancing high cost debt.

The study also mentions that adequate supply capacity is available until at least 2025. However, 5 months of the year, it says that electricity demand is 30-40%, which is lower than the annual peak demand.

It recommends saying that there is a need to create, empower and track performance of an independent power planner in line with NTDC integrated generation plan and stresses the government not to approve new generation projects above those already committed, as they would increase the burden of CPP (Capacity purchase price) on the power sector.

The study also recommends that in future power plants should be installed based on take and pay contracts and the government should move towards a competitive power market. “The future power generation capacity should be based on Thar Coal, other indigenous fuel and renewable energy only to reduce the FOREX drain,” the study concludes.