Worried over subsidy, US calls for privatising power companies

Subsidy feared to cross Rs396b this year, restraining GDP growth.

ISLAMABAD:

The United States has expressed concern over unending circular debt and subsidy in Pakistan’s power sector that appear to have drained government resources as it is expected that the subsidy will cross Rs396 billion in the current financial year ending June 30, says a government official.

“Latest estimates suggest that power subsidy may exceed Rs396 billion which includes Rs320 billion for consumers of distribution companies (DISCOs) and Rs76 billion for the Karachi Electric Supply Company (KESC),” a senior official of the Ministry of Water and Power said.

In September last year, the cabinet committee on energy projected a subsidy payment of Rs337 billion to power companies this fiscal year.

The government paid Rs114 billion in subsidy in 2007-08, Rs391 billion in 2008-09, Rs147 billion in 2009-10 and Rs346 billion in 2010-11.

“The circular debt and subsidy are a drain on government resources as a huge subsidy of over Rs1 trillion has been released in the last four years,” the official said.

US officials, who voiced concern after a government presentation on the condition of power sector, have advocated privatisation of power companies in order to do away with the burden of circular debt and subsidy.

The US government is cooperating with Pakistan in improving energy supply and as part of that it is working on improving energy efficiency, especially in the agricultural sector where old tube wells are being replaced with new ones with high efficiency.

Every month, over Rs30 billion is added to the circular debt on account of bad transmission and distribution system and cash flow issues including lower collection, late payment surcharge to independent power producers (IPPs), loss of fuel adjustment surcharge and high non-technical transmission and distribution losses.

The financial problems have been compounded by below-cost power tariffs. “For the power sector, average base tariff is Rs7.80 per kilowatt hour (kwh), which is 20% less than the cost. Additionally, around Rs2 per kwh is being charged as fuel adjustment surcharge,” the water and power ministry official said.

Current tariff mechanism had also failed to cover the huge non-technical transmission and distribution losses, including theft, defective meters and supply without meters, which were estimated to be around 10-12% of the cost of power production, he said.

According to the official, the gross domestic product (GDP) is expected to lose 3-4% as a result of the power shortage. In September last year, the cabinet committee on energy had projected 2-3% GDP loss. Around 10% of the workforce is either unemployed or has been laid off due to the shortage.

“Though it is believed that the main cause of circular debt is bad performance of power companies, this is not the case,” the official stressed.

Only Rs7 billion (23%) was added to the liabilities every month due to bad company performance while Rs23.5 billion (77%) was added because of structural issues which were not related to the company performance, he said.

“Even if the performance of power companies was up to required standards, the circular debt will swell by Rs23.5 billion every month,” the official said.

He was of the view that power cost had increased due to a gradual shift from hydro to thermal generation (share of hydropower has fallen from 70% in the 1980s to 30%) and the recent shift from natural gas to furnace oil because of gas shortages.

Published in The Express Tribune, April 7^th, 2012.