The power sector’s chronic circular debt is beginning to rise again — after stabilising for more than half a year — despite higher losses built into the tariff and a set of surcharges imposed on paying consumers.

The ministry of finance had reported payables at Rs326bn for first quarter ending September 30, 2015 and then claimed credit for keeping this flow stable exactly at the same level as in the second quarter ending December 31, 2015. The three-year circular debt capping plan put in place more than a year ago with the support of the trio of international lending institutions — the World Bank, the Asian Development Bank and the International Monetary Fund — is slipping out of hand.

The plan promised trimming the flow of this debt from Rs280bn at the time (July 2015) to Rs204bn in three years i.e. by mid 2018. Despite the slippage evident from the payables rising to Rs331.5bn, the effort has nevertheless established the circular debt reduction is doable with concerted focus albeit with unfair burden on paying consumers in an environment of low oil prices. Also despite a rise, the flow was lower than the quarterly target for end-March of Rs341bn.

The government is in the process of re-doing the capping plan under a commitment with the lending agencies in the light of the latest ground realities

In fact, the government is currently in the process of re-doing the capping plan under a commitment with the lending agencies in the light of the latest ground realities. Various options are currently under consideration to absorb Rs145bn in the existing tariff or impose new surcharge. The increase in payable stems now mostly from non/low recoveries by distribution companies (Discos) and penalties levied on past non-payments, transmission and distribution losses not recognised by the regulator and debt arising out of the court stay order on surcharges and unpaid subsidy claims of discos or under-budgeting of subsidy.

Finance minister Ishaq Dar said the government had significantly over-performed the end-March 2016 target in containing the flow of accumulation of power sector arrears, helped by the impact of lower oil prices, further loss reduction by better monitoring and management of Discos, and better mobilisation of receivables, including of some arrears at the provincial level.

Under the yet-to-be updated capping plan, the government is planning to contain the short-term accumulation of new arrears by fixing higher loss and recovery benchmarking in tariff that have been rejected thrice by the regulator despite reconsideration requests by the companies and the government early this month.

It is already in the process of stopping the build-up of arrears on account of differences between the Nepra-determined Azad Jammu and Kashmir (AJK) tariff and the tariff agreed with AJK under the Mangla raising agreement. Also, the government would continue to follow the Turkish model while taking advantage of low oil prices to maintain stable consumer tariff instead of allowing it to fall and at the same time ‘strengthen efforts to improve Discos’ performance — including by further reducing losses and improving collection rates’

The finance minister said the government will continue to reduce losses and improve collections through capital expenditures to strengthen infrastructure and revenue-based load management. Towards this end, the government is taking in hand Rs37bn financing for advanced metering infrastructure (AMI) and modern billing system in Islamabad and Lahore electric supply companies.

Under the Rs17bn project Islamabad Electric Supply Company’s 2.36m consumers would be subject to new smart metres having in-house displays linked with GPRS (Global Positioning Radio Service) and DSL (digital subscriber link). The liaison between the management information system and meter data management system (MDMS) software will help undertake all analysis of data retrieved from the meters for necessary response actions. It is estimated the project could contain losses by about two per cent.

The government would now go for revenue-based load management although it has been criticising the K-Electric for the same practice. It also plans to engage more proactively with the provincial governments to increase provincial recoveries.

The disciplinary actions against non-performing managements of distribution companies have started yielding results with the support of their boards of directors and more than half of companies delivered or exceeded their targets off late. However, the draft new Electricity bill for modernising governance and submitted to the Council of Common Interest secretariat last year is yet to go through the consultative process for building consensus with provinces.

Wary of recent labour tensions coupled with political difficulties, the government has already made a strategic retreat by shelving plans for strategic privatisation of Discos and instead of deciding to focus more on initial public offerings (IPOs) for sales of minority shareholding in order to utilise proceeds for reducing the stock of outstanding circular debt.

Published in Dawn, Business & Finance weekly, July 25th, 2016