Circular debt dispute reaches cabinet today

Published March 10, 2020
Nepra and Power Division have different figures on size and rate of monthly accumulation of electricity data. — AFP/File
Nepra and Power Division have different figures on size and rate of monthly accumulation of electricity data. — AFP/File

ISLAMABAD: The disagreement between two major stakeholders — the power division and the regulator — over the size of circular debt and the rate of its monthly growth has reached the scheduled meeting of the federal cabinet on Tuesday.

The controversy had erupted about two weeks ago at a meeting presided over by Prime Minister Imran Khan when the chairman of National Electric Power Regulatory Authority (Nepra) challenged the power division’s data suggesting a drop in the circular debt. This put the political and bureaucratic leadership in the power sector in a hotspot.

The prime minister directed his cabinet colleagues to get to the bottom of the disputed numbers and ordered the power division and Nepra to reconcile the actual data. This was followed by a series of meetings presided over by Finance Adviser Dr Abdul Hafeez Shaikh, Planning Minister Asad Umar and Special Assistant to the Prime Minister on Petroleum Nadeem Babar but without a conclusive outcome.

Officials in the power division insist that their data presented at various forums about the recoveries was not only accurate but was also validated by third parties such as the World Bank and the International Monetary Fund (IMF). In private, they accused a mafia in the power companies of reporting incorrect numbers to Nepra after coming under pressure from the power division to check power theft and improve recoveries. The power division is also questioning the mandate of the power regulator over the circular debt.

Nepra and Power Division have different figures on size and rate of monthly accumulation of electricity data

Nepra officials, however, have a different view that raises a very serious question. They argue that the primary source of all sorts of financial data regarding the power sector was the power companies — distribution, generation, transmission and power purchasing agencies — and their managements and boards of managements were appointed by or through the power division.

Based on duly certified data from the power companies, the regulator had been determining the consumer tariff, generation tariff and wheeling tariff and all sorts of other regulatory functions in consultation with the power division in various forms. As such, if the power companies were misreporting to the regulator, the entire financial and commercial stream of the power sector becomes questionable. In that case, the third party validation from lending agencies would become equally doubtful, they said.

Informed sources said the power division would give a detailed power point presentation to the federal cabinet on ‘actual’ financial flows including receivables and payables to prove their stance that build up in circular debt at the rate of Rs38 billion in July 2018 had been scaled down to about Rs10-12bn per month now through increased recoveries, theft control and loss reduction.

Interestingly, the Water and Power Development Authority had also reported to the parliamentary panels a couple of months ago that about 6bn electricity units worth about Rs60bn from the Neelum-Jhelum Hydropower Project had been kept unaccounted for due to absence of a power purchase agreement.

Questioning the power division’s position, the regulator had reported to the Prime Minister that circular debt increased by about Rs492bn during fiscal year 2018-19 at a monthly average of about Rs41-42bn, as opposed to Rs10-12bn per month being advocated by the power division. As a result, it also asked the prime minister to declare a National Power Emergency (NPE) and take drastic steps for scaling down about Rs1.93 trillion circular debt that was significantly higher than reported by the power division.

In a press release two weeks ago, the power division had put the overall circular debt including fresh payables and old stock parked in Power Holding Company Limited (PHCL) at Rs1.782tr as of Dec 31, 2019. Later in a presentation to a Senate Special Committee, Pakistan Electric Power Company (Pepco) working under the power division reported total payables at Rs1.882tr as of January 31, 2020 including PHPL debts of Rs807bn.

In the presence of top power division leadership and representatives of the World Bank, Nepra chairman Tauseef H. Farooqui is reported to have told PM Khan that the regulator disagreed with the power division’s reports of circular debt reduction, bill collections and system improvements. The regulator report total circular debt as of Dec 31, 2019 at Rs1.856tr which increased to Rs1.926tr by end-January.

The regulator reported that Rs492bn circular build up included Rs325bn because of the inefficiencies of the power companies. This comprised Rs132bn under recoveries — 90pc instead of 100pc —, Rs150bn mark up on delayed payments, Rs33bn because of inability of the power companies to meet 15.7 per cent target for losses and instead faced 17.7pc actual losses and Rs10bn due to inefficient generation companies.

The regulator also reported that monthly circular debt touched the lowest ebb of Rs3.25bn in June 2016 and has since been increasing.

The average build up amounted to Rs10.8bn by June 2017, followed by Rs25.58bn by June 2018 and then Rs41bn a month by June 2019. It slightly reduced to Rs39.67bn by December 2019 and went up again to Rs42.4bn in January 2020.

The regulator had also suggested to the prime minister to ban labour unions for ensuring and enhancing recoveries for and from distribution companies and put a complete ban on imported fuel based projects.

It recommended that all the power companies should be switched to total regulatory compliance-based regime and their managements and boards of directors should be fixed on war footing to improve governance, focus on optimisation and closure of public sector generation companies.

Pepco put the total receivables of the power sector at Rs1.178tr at the end-January 2020. That meant with even 100pc recovery of power sector receivables, there would still be a gap of Rs704bn to be funded by the government through borrowing or increase in consumer tariffs.

The report said the public sector payables to Independent Power Producers (IPPs) amounted to more than Rs696bn at the end-January 2020, followed by Rs222bn to Wapda, Rs158bn to fuel suppliers and Rs807bn parked with the PHCL.

Published in Dawn, March 10th, 2020

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