Pass the parcel: Consumers to pay Rs63b for govt inefficiencies

Monthly payment to independent power producers and interest cost to ease circular debt to be paid by the masses.

ISLAMABAD:

Decisions taken by the government in the energy sector have been inefficient and piled up huge dues, to cover this huge backlog of funds the federal cabinet has decided to charge electricity consumers extra and collect Rs63 billion.

The government will use these funds to pay interest against debt instruments – a move taken to reduce the circular debt – and compensate independent power producers.

The decision was taken by the federal cabinet, headed by Prime Minister Yousaf Raza Gilani, on Wednesday. The cabinet allowed issuance of five-year Terms Finance Certificates – an instrument used to raise money - to raise Rs82 billion for easing the circular debt.  The government will pay Karachi Interbank Offered Rate (Kibor 12.5% plus 0.5%) that bring the interest rate payment to Rs10.7 billion per annum and Rs53.3 billion for five years. This amount will be recovered from electricity consumers.

As elections approach, experts argue that the government is desperate to resolve the energy crisis without addressing core issue.

The government has resorted to ad-hoc measures instead of taking on the root cause of circular debt, which is difference between cost of electricity generation and end consumer, currently Rs4.05 per unit, according to Finance Secretary Abdul Wajid Rana’s latest statement in a parliamentary committee.

The Finance Secretary had told the committee that the government will not bear the cost of TFCs. Rana said TFCs will be issued by Central Power Purchasing Agency and help release Rs300 billion in the system, largely to address the circular debt.

The PPP-led government has given Rs1.3 trillion in power subsidies in four years of its rule, a figure that is expected to reach Rs1.6 trillion by the end of this fiscal year, according to finance ministry estimates.

In another decision, the federal cabinet endorsed a decision of Economic Coordination Committee of the Cabinet in which it decided to recover Rs8.3 billion annually from electricity consumers through monthly utility bills for payments to independent power producers (IPPs) against their idle generation capacity because of non-availability of fuel.

The decision has been taken despite serious reservations shown by Secretary Finance Abdul Wajid Rana. Secretary Finance recorded his dissenting note in the decision, saying the financial impact of the decision was enormous and also feared that it could increase government’s subsidies if National Electric Power Regulatory Authority refuses to pass on this burden onto consumers.

The move was strongly backed by oil lobby representatives who have strong influence as many aides occupy top slots in Planning Commission, according to a source.

Experts fear that idle capacity payments to IPPs may end up like the Rental Power Plants scandal in which they made billions of rupees on account of idle capacity payments without producing a single unit in many cases.  According to the decision, Rs674 million will be paid monthly to IPPs against their idle capacity for 15 months. The idle capacity remains out of reach due to non-availability of fuel because of non-resolution of circular debt. The decision will take effect from September 2011.

According to the summary, in return of idle capacity payments the IPPs will not call sovereign guarantees. The government defaulted on Rs18.5 billon sovereign guarantees on May 9, for the first time in the country’s history, and the IPPs delayed legal proceedings after the government promised to get a favourable decision from the ECC.

Published in The Express Tribune, May 17^th, 2012.