ISLAMABAD: With power sector defaults exceeding Rs824 billion, a Senate committee led by the Pakistan Tehreek-i-Insaf (PTI) members has urged the government to inject up to Rs400bn into the system to avoid closure of power plants and ease the problem of circular debt that now stands at about Rs1.55 trillion.

The Special Senate Committee on Circular Debt led by PTI’s Shibli Faraz has mentioned these short-term measures in its report about steps that could be taken to deal with the crisis. The committee stands dissolved after submitting its final report about resolution of the circular debt issue.

The report has proposed drastic measures, including a review of the fuel supply agreements of the power projects based on Regasified Liquefied Natural Gas (RLNG), to bring them on a normal plane instead of their “must pay status” under which they must be compensated even if they do not produce electricity.

Report suggests measures to deal with circular debt

According to the report, the role of two key regulators — the Oil and Gas Regulatory Authority and National Electric Power Regulatory Authority (Nepra) — should also be reviewed and they should be merged if needed.

Some of its suggestions are already known, like reducing reliance on imported fuels and increasing local resources like hydropower and other renewable sources because 63 per cent of the electricity is being produced from fossil fuels and 55pc from imported ones.

The committee has recommended privatisation of power companies, private sector participation in electricity supply operations and handing over of distribution companies to the provincial governments with recovery shortfalls settled from the NFC award.

It recommended that enforcement of the renewable energy policy 2006 be extended for two years because a sudden break in December 2017 had blocked investments in the sector.

The committee also called for reversing some of the amendments made to the Nepra Act by the PML-N government in its last few months in office because they had “compromised the independence and professional standing of the regulator by reducing the status of its four members and the chairman to a rubber stamp.

The report noted that it was simply impossible for a business to be profitable when about 25pc of its production was going to waste — known in the power sector as aggregate technical and commercial losses.

It explained that the system (transmission and distribution) losses in the power sector officially stood at 18.3pc and another 8-10pc of the billed amount remained unrecovered, resulting in a Rs295bn gap that is to be re-charged to the consumer or picked up by the government and funded through taxpayers’ money. Ironically, a major part of Rs175bn is re-charged or re-circulated to the consumers in monthly bills and around Rs120bn annually remains stuck with the government and transformed into circular debt.

The report said the total circular debt or funding gap amounted to Rs1.557 trillion in the fiscal year ending in June 2018. This included Rs245bn receivables from the government and related entities, Rs500bn running defaults and disconnections, Rs187bn system losses of five years, R338bn tariff delays and another Rs300bn as tax refunds and instalments of bills.

The committee regretted that even though such a major issue was challenging the fundamentals of the country’s economy there was neither an effort at consolidation of power sector entities nor reconciliation of the balances available on their financial statements.

So much so that even the principal loan amounts reported by the Discos, Central Power Purchasing Agency, Power Holding Company and the power division do not match. On top of that there is no consolidated financial model in place that could project the financial position, performance and results of the sector based on key assumptions such as price sensitivities, changes in prices of imported fuels and currency devaluation.

The Senate committee deplored that 8,000MW of capacity addition in recent years was based on RLNG alone, having currency and oil market sensitivities. The report advised the government to settle an outstanding tariff confusion of the Azad Kashmir government which was getting a fixed rate under the Mangla Dam agreement and resulting in a Rs100bn gap.

The report criticised the previous governments for a system under which the Federal Board of Revenue charged taxes on total billing of the distribution companies even through a significant part was never paid by the consumers. About Rs100bn was stuck on this count alone, limiting the cash flows of distribution networks.

It was ironic that cumulative receivables as of June 2018 surged to Rs824.3bn, up from Rs670bn a year before, said the report. There were more than 5.3 million non-paying electricity connections and 1.3 million disconnected ones, having Rs405bn and Rs95bn outstanding against them.

The committee concluded that the government should inject at least Rs300bn into the sector to avoid plant closures. The money could be raised through commercial loans with repayments in five years and involvement of provincial interior ministers in operations of the distribution companies to increase recoveries and reduce losses and theft.

It said there should be task forces of law enforcement personnel at the provincial level for making recoveries. Any shortfall in recoveries or theft should be linked to a financial adjustment formula between the federal and provincial governments through the national pool to ensure delivery on targets.

Published in Dawn, October 8th, 2018