(Mis)managing the national grid: Govt paid Rs82b to IPPs in penalties for late payments

Auditor General reveals massive inefficiencies in governance and management.

ISLAMABAD:

The federal government has paid a whopping Rs82 billion in penalties to independent power producers (IPP) over the last five years after it failed to honour its contractual obligations, which shows a deterioration in governance and management, says Auditor General of Pakistan (AGP) Akhtar Buland Rana.

The auditor general’s disclosure is likely to augment perceptions of widespread corruption and mismanagement about the incumbent government, as highlighted by the National Accountability Bureau chairman who recently reported that Rs12 billion were lost by the exchequer daily due to the same inefficiencies.

The AGP had flagged the issue here in a meeting of the Public Accounts Committee (PAC), convened to discuss financial irregularities in the accounts of the Ministry of Water and Power and its attached departments. The auditors have framed an audit objection over the government’s inability to pay the cost of electricity to power producers.

Under an agreement with IPPs, the government is bound to clear power bills within 25 days of their receipt. Any delay results in the augmentation of penal surcharges that are calculated at 4% over and above the lending rates of domestic banks.

Highlighting the government’s indifference to this clause, the AGP pointed out that the situation was deteriorating with every passing year. He said that an amount of Rs2.8 billion was paid as penal surcharges to IPPs in 2007-08, which has grown exponentially over the years and totalled Rs24 billion in the last fiscal year. The highest surcharge paid in any year during those five years was in 2010-11, when Rs27 billion were paid to IPPs in penalties, said Rana.

However, the PAC did not seem very perturbed by the revelation. PAC Chairman Nadeem Afzal Chan only remarked that the audit objection was merely highlighting the problems the country was going through.

Special Secretary Water and Power Hamaytullah Khan remarked that due to the increase in share of thermal power generation in total electricity production, the cost of generation has significantly increased and the government is not fully passing this cost on to end users.

He said that the share of thermal power in the total energy mix has gone up to 70% from just 33% before. “Recoveries are not enough to pay off bills, and the debts were being accumulated as a result,” he added.

According to Water and Power Development Authority officials, the sector is facing serious financial problems and payments for power purchased could not be managed due to lower collections against billed amounts. They told the PAC that the government is not increasing electricity prices, but the cost of sales is constantly increasing meanwhile due to high inflationary trends in consumer and commercial markets.

The soaring penalties bill was not the consequence of any mismanagement, but due to inadequate tariffs, they claimed.

They said the matter has been taken up with the finance ministry to ensure timely payments to IPPS in order to avoid penal surcharges.

While the ministry claims inadequate tariffs, events over previous years suggests that the problem may be exactly where the AGP has so candidly pointed out. Since the PPP government came into power, tariffs have risen over 136%, according to officials. Even so, the circular debt shows no signs of easing: instead, over time, it has crippled the nation’s industries in its wake.

The finance ministry is of the view that the issue will never be resolved until the water and power ministry improves governance by controlling electricity theft and improving collections.

Published in The Express Tribune, January 10^th, 2013.