Petroleum products: Pakistan govt asked to impose additional levy

Audit committee on power recommendations aim to meet cost of circular debt

Zafar Bhutta April 19, 2020

ISLAMABAD: The audit committee on power has recommended the government to introduce additional petroleum levy on petroleum products in the wake of reduced global oil prices in a bid to generate Rs100 billion to meet cost of circular debt.

Taking advantage of lower international oil prices, with aggregate annual consumption of 20 billion litres of petrol and diesel, a charge of Rs5 per litre would generate Rs100 billion in additional revenues per year, the committee proposed the government.

Between financial year 2005 and 2010, the cost of generation in the country increased by 148% and average tariff by 33% on account of increased international oil price, higher share of furnace oil in electricity generation and rupee depreciation.

The circular debt started to emerge in the late 2000s. Successive governments relied on heavy budgetary support and quasi-fiscal financing to eliminate it, however, the measures addressed the symptoms and not the root causes, said the committee. It added that the cumulative budgetary support to the power sector amounted to Rs3,202 billion from FY07 to FY19 comprising; Rs2860 billion as budgetary subsidies and Rs342 billion as other liquidity injection.

Yet, the circular debt stock has continued to grow and increased by Rs465 billion in financial year 2019 to around Rs1,600 billion, leading to total financial loss of Rs4,802 billion to the country during the 13-year period, causing annual loss of around Rs370 billion due to the power sector inefficiencies, the committee observed.

Controlling circular debt

To counter these issues, the committee proposed that no new power plants be established for the next few years with the exception of conversion of existing wind plants to hybrid wind/solar for system stability and to lower tariff.

Plants in the pipeline should either be delayed or reconsidered, and contracts of plants reaching expiry date should not be renewed. Extending the debt repayment periods of power producers and re-adjusting their tariffs accordingly.

A combination of these measures can immediately help reduce the annual capacity payment burden by Rs150-200 billion leading to a reduction in tariff by Rs1/KWh. Moreover, in order to utilise excess capacity, the committee recommended incentivising industry to switch from captive power to grid electricity using competitive tariff offerings and rationalising gas pricing.

As per the official definition of the Economic Coordination Committee (ECC), the circular debt stock represents the overdue payables on CPPA-G’s books. However, for the purposes of this report, the circular debt stock includes the amount of aggregate overdue payables to power suppliers on CPPA-G’s balance sheet. The amount includes picked up from CPPA-G by Power Holding Private Limited (PHPL) by funding it through federal government guaranteed borrowing.

To reduce the stock level, the committee proposed that receivables of the distribution companies from the federal and provincial governments, Azad Jammu and Kashmir (AJK) and K-Electric, accounting for 26% of total distribution companies receivables, and these should be recovered and used towards reducing the outstanding circular debt stock parked in PHPL in order to reduce the mark-up payments to banks.

The amount recovered as a result of negotiated settlement with Independent Power Producers (IPPs) or their forensic audit can be adjusted towards circular debt stock. Circular debt flow is the marginal change in outstanding stock of circular debt. It is attributable to a high cost of generation, transmission and distribution inefficiencies and regulatory and fiscal inefficiencies.

The high cost of electricity generation is caused by a host of factors, including snowballing capacity payments, net hydel profit, transmission constraints, minimum plant factor provision for RLNG based plants, gas price anomalies, and financing cost of circular debt.

Historically, high fuel cost was the prime reason behind expensive electricity in Pakistan. Now, snowballing capacity payments are becoming a bigger problem. The Power Division gave no comments on the development.

Published in The Express Tribune, April 19th, 2020.

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