Drastic measures proposed to contain circular debt

Updated 30 Sep 2020

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Prime Minister Imran Khan chairs a meeting of the federal cabinet on Tuesday. — APP
Prime Minister Imran Khan chairs a meeting of the federal cabinet on Tuesday. — APP

ISLAMABAD: The Power Division on Tuesday took the Federal Cabinet in confidence over a string of measures to contain pace of increase in the circular debt and suggested some unpopular proposals for curtailing capacity payments to independent power producers (IPPs).

The cabinet meeting chaired by Prime Minister Imran Khan took a special briefing from Planning and Development Minister Asad Umar and Special Assistant on Power Shahzad Qasim over the rising capacity payments to IPPs, which is one of major cause of circular debt.

The proposed plan includes seven or eight drastic measures that is believed would bring down the circular debt from the projected Rs1.3 trillion by 2023 to Rs620bn.

However, this projection depends on the health of national economy as well as acceptance from the international donors — IMF and the World Bank.

In case the IMF and World Bank want Islamabad to bring down the circular debt to zero level in addition to other measures, the government will have to increase power tariff by Rs6 per unit during these years. However, the final decision to increase tariff or not depends whether government can sustain the pressure from the international lenders and can sustain a certain level of circular debt.

The cabinet was informed that until next year 10,000 megawatts of capacity will be added to the system. Over the past few years, the addition to the system has led to increase in the capacity payments to IPPs.

The Capacity Payment Mechanism is a fixed revenue stream for an IPP offering generation capacity and availability.

A cabinet member told Dawn that the cabinet was informed that the capacity payment will increase to Rs1tr by 2023 compared with the year 2018. He said the circular debt in 2020 is projected to be Rs538bn in spite of several measures taken in the past years.

As a result of this, the circular debt will jump to Rs1.3tr in case government did not take any corrective measures. “We are working on seven or eight measures to bring down this increase to Rs620bn,” he said, adding it is not possible to bring down it to zero.

At the same time, it has also been under consideration to stagger new power projects to curtail the rising capacity payment issues.

The proposed measures shared with the cabinet include power sector reforms, the re-negotiations with the IPPs and closing down of inefficient IPPs. Until next year, 1,800MW IPPs will be closed down and the total projection is 4,000MW until 2023.

The cabinet was also informed to bring reforms within the government-owned power producing plants and Wapda plants to improve its efficiency and reduce costs. It has also been under consideration to convert the agriculture tube wells in Balochistan to solar in collaboration with the provincial government to reduce the cost.

The cabinet was also apprised to take measures to resolve the payment issue of K-Electric. The non-payment to National Transmission and Despatch Company was also adding to the circular debt.

The Power Division informed the cabinet that in case government did not take these steps than tariff will have to be increased by Rs13 per unit.

It was briefed that circular debt had recorded a reduction of over Rs300bn in total debt of Rs853bn due to effective measures taken during the current year. It was noted that in the wake of renegotiations with the IPPs and rationalising return on equity cover, the benefit of Rs620bn is expected in circular debt.

The meeting was told that losses in transmission and distributions are continuously decreasing.

Debt servicing

The cabinet was also briefed that the government inherited a debt of Rs30tr hence it had to borrow $24bn to pay off instalments of these loans and to prevent country from bankruptcy.

The meeting was informed the government is paying $10bn per year in debt servicing instead of $5bn as was practice in past governments.

It was informed that an increase of Rs7.7tr was recorded in government loans last year owing to the restoration of original value of Pakistani currency, whereas coronavirus pandemic cause an income loss of Rs1tr.

The meeting was apprised that primary deficit has been reduced from Rs1.5tr to Rs1tr in the current year. Primary surplus of Rs0.2tr was recorded in March this year for the first time in last 12 years.

Published in Dawn, September 30th, 2020