Energy policy: Power sector complacency to cost Rs332b

Most of the ‘cost of doing nothing’ is due to the inefficiency at state-owned firms.

ISLAMABAD:

Every month that the government fails to change the status quo in the energy sector, it costs almost Rs24 billion to the national exchequer.

A failure to implement structural reforms in the power sector may cost the nation Rs332 billion, far more than the amount allocated for electricity subsidies, according to sources familiar with the deliberations of the five-member committee delegated the task of trying to resolve the chronic power crisis.

For the third day in a row, the cabinet committee continued to look at various aspects of the problem. On Thursday, the committee’s assessments revealed that less than one third of the financial problems in the power sector can be attributed to the difference between cost of production and what the government allows power companies to charge consumers (the latter is a lower figure).

(Read: Govt mulls monthly tariff adjustments)

The remaining two-thirds of the problem can be attributed to inefficiency on the part of state-owned power distribution companies and bad policies.

For instance, power companies are allowed to claim line losses as part of their expenses, yet most of them claim fewer losses than they actually face. According to a finance ministry source, the power companies report average line losses of only 16%, compared to the real average of 19%.

Independent power producers and banks levy punitive charges on the government and state-owned power companies for delays in payment. Sources say these punitive charges and interest costs come to Rs26 billion, though this figure is unaudited.

Power companies are also unable to collect about 12% of all outstanding bills, yet end up paying sales tax on the full 100% that they bill. In addition, there are severe distortions in pricing and billing in Azad Jammu and Kashmir as well as Balochistan.

All of these inefficiencies collectively add up to an expected Rs332 billion cost for the current fiscal year and does not include the amount of inter-corporate circular debt from previous years that is still outstanding. This amount is 126% more than the Rs147 billion that had been allocated by the government this year for subsidies and even larger than the federal development budget.

(Read: Circular debt resolution linked to power sector reforms)

The government has decided to increase tariffs to cover at least Rs100 billion of this amount – a figure that corresponds closely to the amount that tariffs would need to rise by in order to be equal to production costs. Average tariffs are expected to go up by 14%.

Officials said that if the decision to raise tariffs is not taken soon, they would have to be raised by an even higher amount to compensate for the costs of the delay.

The monthly cost of ‘business as usual’ comes to between Rs20 billion and Rs23.5 billion, according to one finance ministry official, who added that the difference between production costs and prices charged to consumers only comes to between Rs6.5 billion and Rs8 billion.

Sources said that the finance ministry appears adamant at not making the government pay for the inefficiency of state-owned companies without creating a permanent solution to the problem.

The cabinet committee has vowed to undertake several tough measures to solve the problem, motivated by the finance ministry’s apparent single-minded focus to keep the budget deficit under control. But these are also likely to be politically unpopular.

Among the measures being considered are an increase in power tariffs, improving law enforcement in areas where the government is almost completely unable to collect electricity bills, and withdrawing the free electricity facility currently available to employees of the Water and Power Development Authority (Wapda).

The committee constituted two sub-committees. The first, led by Water and Power Minister Naveed Qamar, will take a look at the circular debt issue. The committee includes former FBR chairman Abdullah Yusuf and Finance Secretary Waqar Masood.

The second committee was constituted under Petroleum Minister Asim Hussain to discuss the IPPs’ problems and other related issues. Private power producers testified before the committee on Thursday about the issues they face in providing power to the national grid.

A finance ministry handout at the end of the meeting laid out the problems faced by the sector in only the most general terms.


Published in The Express Tribune, August 12^th, 2011.