Power sector circular debt

Once again, the power sector is piling up huge amounts of circular debt. It had
dropped down to almost zero when oil prices touched historic lows,
government introduced reforms in bill collection, and system losses were
controlled.

According to a senior government source, ECC (Economic Coordination

Committee) was briefed about the issue. They were told that recoveries have
improved, reaching 93 percent in both fiscal years (2015 and 2016). In 2014,
these recoveries were lower, at around 88-89 percent.

Despite those measures, the circular debt is expected to surpass Rs. 800
billion mark.

Improvement in 2015 and 2016

Losses in both technical and distribution departments were 19% in 2014 but
they went down to 17.8% during the last two years.

During a recently held briefing, Water and Power Secretary, Yousaf Naseem
Khokhar, said that such reforms resulted in a cash flow of Rs 116 billion in
2015-16. He also told that the power sector got optimistic improvements
during the two-year period.

Losses of power generation companies reached an alarming level of Rs 7.78

billion in 2013-14. However, with better management, the damage was
controlled and they started earning profits worth Rs 5.77bn in 2015-16.

All these achievements as well as a historic drop in oil prices helped keep the
power sectors circular debt within the range of Rs 320-330 billion from
December 2014 to June 2016, ECC was told.

According to Yousaf Naseem Khokhar, during the whole decade, 2015-16

were the only years when federal budget was not burdened with any losses
with Rs 200bn annually saved reducing the burden from 2.4% of GDP to
0.7%.

PEPCO Secretly Charged the Consumers

However, there was a grave issue related to all these improvements which
was not revealed at the meeting. During these two years, an extra amount of
Rs 6 per unit (almost the same as unit price) had been charged from the
consumers without permission from National Electric Power Regulatory
Authority (NEPRA).

This extra cost included about Rs 4.50 per unit in the form of surcharges, such
as tariff rationalizations and financing costs. Another Rs 1.50 per unit amount
included withholding notifications that were added during 2015-16 and are still
added by the power companies.

Increasing Circular Debt

Pakistan Electric Power Company (PEPCO) officials told the meeting that
Circular debt, once again, had jumped to the dangerous level of more than Rs
800billion. It was Rs 685 billion about seven to eight months ago. This debt
sits equally in Power Holding Ltd and accounts of distribution companies.

At the end of meeting, it was known that this huge amount included old and
new accumulations. Although the figure hasnt crossed a crucial level but the
arrears have reached Rs 400bn.

There are still amounts which are not settled and hence not part of the
balance sheet. But officials were of the view that these amounts should not be
considered as circular debt. In their opinion, such big gaps are a routine
matter in an annual business of over Rs 1.2 trillion.

IMFs Take
International Monetary Fund (IMF) released its report last month which also
mentioned the same issue. It said that during 2015-16, the arrears in power
sector had gone to nearly zero because of low oil prices and some structural
reforms but they have bulged again.

IMF suggested the government to swiftly address the resumption in the

accumulation of arrears to ensure a financially viable and growth-supporting
power sector. It also observed that during the first half of financial year 2016-
17, Rs 53bn had been added to the stock which reached to Rs 374bn.

According to IMF, this increase in operational deficit is because of hesitation

in passing higher generation tariffs to the consumers and neglect in collection
of bills by distribution companies. It has weakened the positive impact of
reduction in distribution losses and low oil prices.

According to sources, after recent adjustments, the arrears that have been
parked in Power Holding Ltd and financed through bonds, term finance
certificates and loans, have gone beyond Rs 400bn.

Officials claimed that such financial burden on power sector was minimized
after ECC gave approval on July 25 for financing arrangement of Rs 193bn.