Debt continues to plague Pakistan's energy chain

It will help slow down debt flow, improve bill recoveries, reduce losses

ISLAMABAD: Energy prices are rising consistently, so is the cost of doing business, which ultimately dents competitiveness of Pakistan. At the same time, the high prices are not enough to slash the growing circular debt in the energy chain.

Though the government has taken measures to tackle the circular debt by curtailing losses of energy companies and checking power theft along with improved bill recoveries, the debt continues to plague the entire energy chain.

The elimination of circular debt requires politically unpopular moves such as strict action against power theft and defaulters along with tariff rationalisation. The government has launched the Circular Debt Management Plan 2019 designed to slow down the pace of increase in the debt and float Rs300 billion worth of Sukuk to reduce the outstanding debt stock.

Critics point out on the one hand the government offers a subsidy of Rs216 billion to power consumers but on the other hand electricity tariffs are also jacked up. They, however, claim that benefits of the subsidy are not reaching the consumers.

They are of the view that the surging utility prices are likely to undermine government’s efforts to stabilise the fragile economy. They suggest the government should upgrade the power transmission system in a bid to sustain the growing electricity production capacity. The Power Division, however, argues the fuel cost adjustment in power tariffs is linked with international fuel prices over which the government has no control.

Pointing to the subsidy of Rs216 billion, the Power Division calls it a tariff differential subsidy aimed at keeping tariffs uniform for all the power distribution companies. It has assured the government of protecting lifeline consumers who account for 75% of the total consumers.

According to the Power Division, tremendous headway has been made in curtailing overbilling, theft and corruption. In order to ease the burden of capacity payments, an incentive package for electricity supply at the flat rate of Rs11.97 per unit has been announced.

The package will be applicable in winter (November-February) and will help industries boost their production by increasing work shifts and providing more jobs. However, the incentive will remain ineffective at a time of sluggish economic growth.

The Circular Debt Management Plan 2019, designed to ensure effective implementation of the National Energy Policy 2019, will help reduce the annual addition of Rs465 billion to the debt level to less than Rs75 billion while keeping the annual subsidy target at 0.4% of gross domestic product (GDP).

The debt plan, prepared by the Power Division and endorsed by the International Monetary Fund (IMF), will remain in place for a four-year period from 2019-20 to 2022-2023.

As part of the plan, selected public-sector companies will make efforts to push up electricity bill collection by 5% from FY20 and push down the average loss to 16% from the existing 17.7% through efficiency gains.

Apart from these, bill collection from government customers will be rationalised and subsidies will be paid according to the schedule. The government will continue to take measures to rationalise tariffs in order to cover all costs including debt servicing, and ensure the provision of subsidies.

Reduction in circular debt through borrowing will be reflected as borrowing in books of Power Holding Private Limited and the cost of borrowed capital will be brought down.

Improvement in collections by selected power distribution companies will slash the flow of circular debt by Rs215 billion over the four-year period.

Five distribution companies will be given the target to make 100% bill collection over the period. Losses of the power companies will be reduced by 1% per annum, which will provide a fiscal space of Rs87 billion over the period.

Under the plan, annual power generation and sales are projected at 136 gigawatt-hours (GWh) and 111 GWh respectively by financial year 2022-23.

However, circular debt has emerged in a new area due to liquefied natural gas (LNG) imports. Pakistan State Oil (PSO) and Pakistan LNG Limited have contracts for 800 million cubic feet of gas per day (mmcfd) on “take or pay” basis. At present, Sui Northern Gas Pipelines Limited (SNGPL) has to pay Rs71 billion to PSO on account of LNG supply.

The situation has been aggravated by the government decision to amend the gas supply agreement with LNG-based power plants, which earlier made it binding for them to receive 66% of LNG supplies. The amendment has been done on the assumption that other sectors will consume the expensive LNG.

On the other hand, the power sector is doing well. The best choice for the government is to include LNG price in the weighted average price of domestic gas used in the industrial and power sectors.

This will not only reduce the flow of circular debt but will enhance gas supply which will feed different sectors that have been so far reluctant due to high LNG prices.

The writer is a staff correspondent.

 

 

Published in The Express Tribune, December 23^rd, 2019.

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