In the power market, the beast of circular debt keeps rising.
The overwhelming cause of the circular debt build-up that is officially expected to reach the Rs2.8 trillion mark by June 30 is poor governance. This is almost half of the country’s overall tax revenue of roughly Rs5.5tr this year.
According to a report submitted by the Power Division to the Cabinet Committee on Energy (CCOE) last week, this means an addition of Rs500 billion during the current fiscal year at an average rate of almost Rs42bn per month.
The study is based on real checked circular debt data as of 30 Nov 2020 and is forecast for the remaining 2020-21 period. It includes the circular debt breakdown in terms of operational/non-operational, comparison of the build-up of last and current year, and payment/unpaid and budgeted/unbudgeted subsidy payments.
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It is striking that the root cause of the debt build-up is the combination of lopsided decision-making, faulty estimates, bad management and ineffective activities, non-payment by the public sector and a handicapped regulatory system. Put clearly, the government is liable for the mess.
The circular debt will increase by Rs152bn in 2020-21 due to distribution losses (Rs35bn) and under-recoveries (Rs117bn)
The result, however, is the multiplying cost in the form of repeated tariff increases in different shapes and heads for the honest and paying customers, with another increase of about Rs3.34 per unit on the cards. In addition to the expense of poor governance and non-payments in the form of the borrowing cost surcharge, quarterly and monthly changes and taxes, the government legitimately empowers electricity producers through the regulatory mechanism to charge the price of a little over 15pc tariff losses.
With an average increase of Rs538bn or a monthly increase of Rs44.8bn, the last fiscal year ended with a circular debt of Rs2.15tr. The total circular debt increased to Rs2.3tr as of Nov 30, 2020, showing an increase of Rs156bn or Rs31.2bn per month in the first five months. The circular debt rose by Rs179bn at the rate of Rs35.8bn per month during the same five months last fiscal year.
Of the Rs2.3tr stock on 30 November 2020, Rs1.2tr is payable to independent power producers (IPPs), Rs996bn is parked in the Power Holding Private Ltd (PHPL) of the Power Division and Rs97bn is payable to fuel suppliers by generation firms. By the end of the current fiscal year, the payables to IPPs are expected to increase above Rs1.7tr, although two other elements will remain virtually unchanged, making the overall circular debt equivalent to Rs2.8tr.
This means that, from December to June (seven months), the Power Division projects an increase of Rs500bn in the circular debt at the rate of Rs71.4bn per month. At an average of almost Rs55bn per month, the overall increase in the full fiscal year will be around Rs655bn. This addition will be attributed to prior-year modifications, considering the recovery of Rs225bn. The debt addition would otherwise have been about Rs880bn.
The Power Division has projected, based on a template provided by the CCOE, that the circular debt will increase by Rs152bn in the current fiscal year due to distribution losses (Rs35bn) and under-recovery (Rs117bn). On the basis of existing tariffs, a total subsidy of Rs317bn was requested. But only Rs144bn was budgeted by the Ministry of Finance, leaving an unbudgeted subsidy gap of Rs177bn. Rs143bn, including Rs80bn additional mark-up to IPPs in 2020-21, is expected to be added to the interest charges on delayed payments to IPPs and PHPL mark-up.
In addition, the addition of Rs97bn would be due to non-payments by K-Electric and Rs313bn due to the pending cost of generation due to quarterly tariff changes and adjustments to fuel prices.
Contributive factors to the current Rs2.3tr circular debt are also clarified in the study. These include Rs212bn of non-payment by K-Electric (approximately 11pc), Rs144bn of unpaid sums by Azad Jammu and Kashmir (7pc), Rs306bn of non-payment by Quetta Electric Supply Company (15pc), Rs270bn of restrictions and delays in regulatory approvals (14pc), Rs66bn of interest paid on the power sector debt owned by PHPL (3.3pc), Rs260bn of non-payment of grants (14pc) and Rs260bn of non-payment of subsidies (14pc) (37.4pc).
The report noted that the circular debt was supposed to rise by Rs848bn during the last fiscal year, but included tariff changes of Rs309bn due to prior-year revisions, resulting in the accumulation of Rs538bn of debt. Related prior-year tariff changes already paid to customers would raise additional revenue of Rs225bn and help reduce the debt build-up to about Rs500bn during the current fiscal year.
The controversies over the settlement of unpaid debts with K-Electric along with the untouchable China-Pakistan Economic Corridor (CPEC)-related power projects, which should have been absorbed by a rising economy but have become a nightmare due to economic stagnation, remain some of the major problems in resolving the build-up of circular debt.
It is expected that the effects of renegotiated deals with IPPs, a decrease in the cost of return on equity of government-owned power plants and the closing of obsolete Gencos would bring some relief in the future, but the true effect will be felt in the coming fiscal year. Again, the majority of the breather would only accrue due to the parking of some of the deficits in other funds, such as the replacement of the ROE on Wapda hydropower plants with the federal budget.
By eliminating the AJK tariff difference for which a summary has already been transferred, the remaining sums of the Azad Jammu and Kashmir (AJK) are being discussed. Yet this, too, would cause the financial deficit to be filled in the budget. In the case of Quetta Electric, a similar arrangement would need to be set in place. It has yet to be seen to what degree the provincial government will foot the bill and therefore a substantial portion will fall back on the federal government.
The best way out to a small degree is the tariff rise for customers already agreed by the government to an extent of Rs2 per unit of about Rs200bn per annum. The tariff refund by the regulator to reduce the effect of the pause in tariff determinations and their overdue notices is a similar low-hanging fruit that occurs on the government radar. An addition to the Nepra Act to allow the PHPL debt to be funded by a consumer tariff is still awaiting parliamentary approval.
However, amid all these additional market pressures, the authorities involved also seem to reject technical measures aimed at reducing device disruptions and strengthening the recovery process. After November 2018, the Ministry of Information Technology has reported that a meter-less smart metering device successfully tested and demonstrated on the ground has been resisted by the authorities of the power sector.