The tangled knot of the power sector

Updated 13 Jul 2020

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THE power sector has been a major drag on Pakistan’s economy over the past couple of decades. High system losses, poor recoveries and the struggling governance structure have hampered critical investments for its turnaround, resulting in unaffordable tariffs and repeated injections from public money.

It is in this background that the Auditor General of Pakistan (AGP) in its latest audit report for 2018-19 has concluded that the power division has not been able to deliver on its medium-term goal of developing an efficient and consumer-centric generation system that could meet the needs of the population and boost the economy sustainably and affordably.

It has asked the government to move swiftly towards making the power market more competitive by providing an enabling environment, improving policymaking and enacting progressive laws and regulations to attract major international players. The AGP has concluded the performance of the power division has remained unsatisfactory in planning, effective implementation and optimum use of resources.

Recovery in Hyderabad, Quetta and Sukkur companies was 54.17pc, 18.92pc, and 38.54pc respectively only in 2018-19. Major policy interventions are needed to save these Discos from practical solvency

The AGP has pointed out the ad hoc mechanism in dealing with the power sector debt and payment of liabilities to the independent power producers (IPPs). These loans and its financial charges are an extra uncovered cost related to the purchase of financing worth Rs200 billion raised through the issuance of sukuk to partially settle the circular debt of the energy sector. About 70 properties of power companies were sold and leased back from Meezan Bank Ltd (head of a consortium of banks) along with the issuance of sukuk bonds. “This implies that power sector government properties could face a risk of en-masse sale/transfer out to private bodies on account of default in any principal re-payments”.

The energy mix is the most vital factor in the power sector that determines the cost of energy. As on June 30, 2019, the national installed energy capacity stood at 32,809MW and de-rated energy capacity was 29,763MW. “Only 25.20 per cent of energy was being produced from cheap hydel-resources and 5.46pc from renewable sources whereas the remaining 4.18pc from nuclear and 65.16pc was from other expensive thermal sources. This reflects that the energy mix is highly skewed towards expensive fuel constituents”.

The country’s top constitutional auditor noted that Pakistan now has at its disposal excess energy capacity significantly more than the current or short term expected demand. The available power generation capacity in 2018-19 stood at 31,986MW including 17,680MW of private power. On the other hand, peak demand remained at 20,795MW and 21,425MW during 2017-18 and 2018-19 respectively, implying that excessive capacity payments are being made to the IPPs as per binding agreements without the purchase of energy. Moreover, new IPPs with 7500MW capacity are due to be made part of the national grid in the coming 3-4 years.

Read: Self-created energy crises

The distribution companies (Discos) are facing revenue shortfalls. In 2018-19, about 93,887 million units worth Rs1.342 trillion were billed to consumers against which recovery of Rs1.061tr was made indicating a recovery percentage of 79.06pc. The shortfall resulted in less receipt of revenue by the Discos, showing “managerial inefficiencies and policy bottlenecks constraining the Central Power Purchasing Agency (CPPA) to pay-off its energy procurement liabilities.

Compared with the last financial year, there was an improvement of 1pc in revenue recovery. Still, the recovery shortfall of 21pc posed a significant operational challenge for Discos. Recovery in Hyderabad, Tribal, Quetta and Sukkur companies was 54.17pc, 18.92pc, 24.29pc and 38.54pc respectively only in 2018-19. Major policy interventions are needed to save these Discos from practical solvency.

Moreover, the Natio­nal Electric Power Regula­tory Authority (Nepra) has determined a certain percentage of admissible transmission and distribution (T&D) losses for Discos that are built in the tariff. Losses beyond the limit set by Nepra meant financial losses for the company as well as a cyclic increase in the CPPA receivable amounts pertaining to Discos. The rest of T&D losses in Discos and the financial impact thereof amounted to Rs37.5bn and Rs35.8bn in 2017-18 and 2018-19.

This implies that the performance of Discos in reducing T&D losses remained unsatisfactory. Moreover, it also shows that the development initiatives being made in these companies for enhancing the power transmission and distribution system are yet to make any appreciable impact.

Huge receivables from running and dead defaulters remained another major challenge. Over the years the volume of receivables from running and dead energy defaulters have increased significantly and it has become an important cause for power sector debt accumulation. As of June 2019, the total receivables from running and dead defaulters amounted to Rs572.179bn. Of this, Rs476.932bn pertained to running defaulters and Rs95.247bn to dead defaulters. Such a huge amount of receivables has added to the financial crunch in the power sector that demands immediate consideration and intervention.

Due to late payment of government subsidies like tariff differential subsidy, agricultural subsidy for tube-wells, other provincial government subsidies, subsidy to Azad Jammu and Kashmir government and outstanding payments from K-Electric, Rs.549.2bn were held up as of June 2019. These receivables are adding up into the overall circular debt of the power sector.

As on June 30, 2019, the total amount of circular debt stood at Rs.1.517tr including Power Holding Private Limited loans of Rs809.840bn from Rs1.160tr in 2017-18, registering an increase of Rs357.378bn or 31pc in the one financial year.

A major objective of foreign-funded projects had been the enhancement and strengthening of the power sector at both distribution and transmission levels. However, five Asian Development Bank Efficiency and Distribution Enhancement Investment Programmes were closed during 2018-19. The projects against these loans had been started for enhancement of transmission lines, construction of grids etc with total funding of $684.20m but despite revision of closing dates from June 30, 2018, to September 16, 2019, the $188m loan i.e. 27pc remained unutilised.

Published in Dawn, The Business and Finance Weekly, July 13th, 2020