Once again, the power sector is piling up huge amounts of circular debt. It had dropped down to almost zero when oil prices touched historic lows, government introduced reforms in bill collection, and system losses were controlled.
According to a senior government source, ECC (Economic Coordination Committee) was briefed about the issue. They were told that recoveries have improved, reaching 93 percent in both fiscal years (2015 and 2016). In 2014, these recoveries were lower, at around 88-89 percent.
Despite those measures, the circular debt is expected to surpass Rs. 800 billion mark.
Improvement in 2015 and 2016
Losses in both technical and distribution departments were 19% in 2014 but they went down to 17.8% during the last two years.
During a recently held briefing, Water and Power Secretary, Yousaf Naseem Khokhar, said that such reforms resulted in a cash flow of Rs 116 billion in 2015-16. He also told that the power sector got optimistic improvements during the two-year period.
Losses of power generation companies reached an alarming level of Rs 7.78 billion in 2013-14. However, with better management, the damage was controlled and they started earning profits worth Rs 5.77bn in 2015-16.
“All these achievements as well as a historic drop in oil prices helped keep the power sector’s circular debt within the range of Rs 320-330 billion from December 2014 to June 2016,” ECC was told.
According to Yousaf Naseem Khokhar, during the whole decade, 2015-16 were the only years when federal budget was not burdened with any losses – with Rs 200bn annually saved – reducing the burden from 2.4% of GDP to 0.7%.
PEPCO Secretly Charged the Consumers
However, there was a grave issue related to all these improvements which was not revealed at the meeting. During these two years, an extra amount of Rs 6 per unit (almost the same as unit price) had been charged from the consumers without permission from National Electric Power Regulatory Authority (NEPRA).
This extra cost included about Rs 4.50 per unit in the form of surcharges, such as tariff rationalizations and financing costs. Another Rs 1.50 per unit amount included withholding notifications that were added during 2015-16 and are still added by the power companies.
Increasing Circular Debt
Pakistan Electric Power Company (PEPCO) officials told the meeting that Circular debt, once again, had jumped to the dangerous level of more than Rs 800billion. It was Rs 685 billion about seven to eight months ago. This debt sits equally in Power Holding Ltd and accounts of distribution companies.
At the end of meeting, it was known that this huge amount included old and new accumulations. Although the figure hasn’t crossed a crucial level but the arrears have reached Rs 400bn.
There are still amounts which are not settled and hence not part of the balance sheet. But officials were of the view that these amounts should not be considered as circular debt. In their opinion, such big gaps are a routine matter in an annual business of over Rs 1.2 trillion.
International Monetary Fund (IMF) released its report last month which also mentioned the same issue. It said that during 2015-16, the arrears in power sector had gone to nearly zero because of low oil prices and some structural reforms but they have bulged again.
IMF suggested the government to “swiftly address the resumption in the accumulation of arrears to ensure a financially viable and growth-supporting power sector.” It also observed that during the first half of financial year 2016-17, Rs 53bn had been added to the stock which reached to Rs 374bn.
According to IMF, this increase in operational deficit is because of hesitation in passing higher generation tariffs to the consumers and neglect in collection of bills by distribution companies. It has weakened the positive impact of reduction in distribution losses and low oil prices.
According to sources, after recent adjustments, the arrears that have been parked in Power Holding Ltd and financed through bonds, term finance certificates and loans, have gone beyond Rs 400bn.
Officials claimed that such financial burden on power sector was minimized after ECC gave approval on July 25 for financing arrangement of Rs 193bn.