Circular debt to be Rs50-60 billion by July 2020

[Dubious]

A good article.

I request the mods to pin this thread in order to track the energy policy for the next five years.

@Dubious @waz

While he has mentioned PHPL where the previous governments parked the short term receivables so that it can pay it off in next 6 years but he did not mention the total amount. It was around 500 B last time I checked.

This amount needs to be paid in next 6 years.

That is billions of dollars of capital that could have been invested by the banks in revenue generating businesses rather than filling fiscal revenue gap.

The person being interviewed talks about furnace oil.

I attended a talk in 2009 where country head of Total Pakistan (a foreigner) was speaking. He said that you guys are paying a lot less for the energy and this needs to change. We are seeing the results now as circular debt is increasing due to revenue gap and energy theft.

He also said that pakistan needs to switch from furnace oil as refinery technology in the world is changing.

I have made it sticky.

 

[Zulfiqar]

I have made it sticky.

Thank you, will add to this thread over time starting with PHPL next week.

 

[maithil]

Basically plan is to make electricity costly for people . More cost leads to less demand and thus lesser circular debt. What could go wrong with such brilliant planning.

 

[Zulfiqar]

Basically plan is to make electricity costly for people . More cost leads to less demand and thus lesser circular debt. What could go wrong with such brilliant planning.

The plan is to increase the tariff to actual required level in order to reach the breakeven and above point so that the following happens:

• Increase in circular debt is reduced.
  
• Overall Present outstanding circular debt is reduced.
• PHPL debt is paid off (Currently over PKR 500 B plus).

In the longer run the plan is to reduce the weighted average production cost by cycling off from high cost generation units.

 

[Zulfiqar]

Industry review (Power sector)

The Power Sector of Pakistan comes under the ambit of Ministry of Water and Power, which is mainly responsible for formulating Pakistani Energy Policy and to ensure that the country’s energy needs are met. The constituent entities involved in the regulation and supervision of the sector include NEPRA, PEPCO, PPIB, AEDB, PAEC and the Provincial / AJK I&P departments. All of these entities are working under the umbrella of the Ministry, and each has been designated a specific role. Apart from the entities identified, the Power Sector also constitutes of certain power generation entities, such as WAPDA, GENCOs, Nuclear Power Plants and IPPs and other entities which are involved in the transmission and distribution of electricity across Pakistan, and include NTDC, KESC and the DISCOs. A graphical depiction of the overall structure of the power sector has been provided in the following illustration.

Current Installed capacity (will update it later on and compare it with 2017 report)

Installed power generation capacity of Pakistan as of 30th June, 2017 stands at 28,399 MW of which 26,186 MW is connected with NTDC system whereas 2,213 MW is connected with K-Electric Limited (KEL) system. Since 2013 till date, more than 7,000 MW has been added to the generation facilities connected to NTDC system. Based on recent information by NTDC, and analysis by NEPRA, generation capacity additions in NTDC system over a period up to the FY 2024-25 are as shown in the following table. However, the final installed capacity of more than 62,000 MW may not be achieved timely as some of the power projects including hydro-based projects indicated to be inducted from 2022 to 2025 requires extensive technical and financial prerequisites to commence operation.

Generation capacity and demand:

The generation capability of generation facilities connected with NTDC system will be less than the installed capacity as shown in the above table due to various factors like auxiliary consumption, impact of site reference conditions and seasonality effects on the renewables and large hydropower plants. The generation capability is effectively the capacity for meeting the electricity demand in NTDC system. The data about generation capability and future demand as reported by NTDC is shown in the following table.

Capacity mix:

The Government of Pakistan has been pursuing broad objectives for the power generation development including, renewable energy, moving to environmental friendly fuels and reduced dependence on imported fuels. Also diversification of fuel resources and security of fuel supply were among its priorities. The addition of different new generation technologies shown above will change the power mix of the sector from Furnace Oil-based to Coal, RLNG and Renewables as no major addition has been planned on Furnace Oil. The following table shows changes in installed capacity mix over three representative periods.

Clear trends may be noted in respect of different fuels. In the FY 2016-17 about 9,000 MW is based on Gas/RLNG, which will increase to 12,626 MW by the FY 2020-21, however no further addition is foreseen till the FY 2024-25. Oil based power generation plants have not been planned throughout the period and share of oil based generation capacity declines from 25.91% in the FY 2016-17 to 10.91% in the FY 2024-25. Share of coal-based generation increases from 3.09% in the FY 2016- 17 to 19.56% in the FY 2024-25 mainly on Thar Coal based projects. Hydro-based generation capacity also increases from about 7,000 MW in the FY 2016-17 to 20,676 MW in the FY 2024-25 representing a share of more than 33% in the overall installed generation capacity.

Fuel consumption in Power sector:

The share of installed capacity of thermal power plants using oil, natural gas and coal to the total installed capacity in the country, during 2016-17, was about 63.40% while the electricity produced by the thermal power plants, during 2015-16, to the total electricity generated in the country during same period was about 64.57%. The statistics of different fuel used and their percentage share to the total fuel used for thermal electricity generation of the country from 2011-12 to 2015-16 are as follows:

IPP review:

The IPP is an entity, which is not a public utility, but that owns facilities to generate electric power for sale to utilities end users. The electricity market was opened to IPPs in 1990. Subsequently around 40 IPPs have been awarded tariff by NEPRA.


For several years afterwards, the IPP program remained stagnant, only to be revived as a huge power shortage hit the country in 2006-07. In a regional context, Pakistan offers a relatively sophisticated operational and regulatory framework for the IPPs.


Independent Power producers contribute significantly in electricity generation in Pakistan but unfortunately, IPPs are producing below capacity as a result of working capital shortage caused due to outstanding amount of receivables from PEPCO/NTDC.


Like most other countries, here, IPPs face single buyer market. Water and Power Development Authority is the key buyer of IPP power. IPPs negotiate a tariff with the regulatory authority, NEPRA, under a transparent competitive bidding process. Investors are generally insulated from underlying economic risks through tightly written, long-term PPAs with underlying take-or-pay contracts, supported by explicit government guarantees and credit enhancements.


The fundamental principle underlying the contractual framework is to limit, as far as possible, the risks borne by the Project Company. A fundamental assumption is that all parties abide by the terms of their contracts.

The IPP Electricity Tariff:


The tariff charged to WAPDA by IPPs is not a number, rather it is computed from a formula. The formula includes in it the components of the fixed and variable costs. The total tariff is the sum of the Capacity Purchase Price (CPP) which is the fixed component and the Energy Purchase Price (EPP) which is the variable cost.

The CPP comprises:

• Project Debt payments (inclusive of interest principal).
• Return on Equity (Real Rate of Return over the project life)
• Fixed element of the operating and maintenance cost.
• Insurance cost for the plant.
• Foreign Exchange Differential cost in order to cover FX variation during foreign loan payment.

The EPP comprises:

• Fuel Cost which is set by the Government and above the world oil prices by an amount of a surcharge.
• Variable element of the operating and maintenance cost.

The tariff paid also depends on the total hours purchased or the Installed capacity utilized.


The government has to pay CPP i.e fixed cost even if they don't purchase electricity from the IPP. This is one of the reasons of mounting revenue expense gap resulting in circular debt.

Issues prevalent in the Power Sector


The overall power sector can be classified into 3 categories namely (i) generation, (ii) transmission & distribution and (iii) collection.

Generation

• Poor energy mix (dependence on oil for electricity generation)
• Delay in receivables leading to reduction in generation of Independent Power Producers (“IPPs”) owing to lower ability to purchase fuel stock

Transmission & Distribution (“T&D”)

• T&D losses due to obsolete infrastructure.
• Tariff subsidies/delay in capacity payments.

Collections

• Low collections due to pilferage/theft/law & order. In FY 2016-2017 the collection rate was 92.65% for all the DISCOS in the country. The collection rates vary significantly across geography.

Corrective Measures for resolution of prevalent issues:

• Aggressive Fuel price adjustment in the consumer tariff allowing for robust pricing and reduction in subsidies.
• Provision of new explorations licenses and induction of indigenous fuel in order to reduce dependence on imported fuel.
• Investment in small hydropower plants for long term sustainability.
• Floating of utility bonds for upgradation of transmission lines and grid infrastructure.
• Special focus by DISCOs on high loss feeders for reduction in revenue loss.
• Encouragement of capex in order to enhance local manufacturing of major equipment in generation, transmission and distribution sector (Hint Turbines e.t.c)

 

[Max Pain]

First of all I was born in Uganda and consider Uganda to be second country after the UK. I have no great love of India or Pakistan. I do not hold a Indian passport nor have a desire to have one.
As for Hindutwa the last time I attended a temple was many years ago only as a social necessity since I had the intelligence at age 13 that ALL RELIGIONS consist of dupes and charlatans that prey on the semi-intelligent of this world.
Your debt problems are very real and no amount of deceit and self deception is going to cure it

what do you think should be done to cure this situation?

 

[maithil]

With ROI on Chinese plants guaranteed in Dollars, wonder how will controlling circular debt work ? With every devaluation, debt increases for each such plants.

 

[ziaulislam]

With ROI on Chinese plants guaranteed in Dollars, wonder how will controlling debt work ? With every devaluation, debt increases for each such plants.

Debt has nothing to do with devaluation ? Did u go to school ?

 

[maithil]

Debt has nothing to do with devaluation ? Did u go to school ?

Sure.

 

[ajpirzada]

the important thing to note is that the govt is still to pass on the increase in energy prices from previous years. if the govt had done this all at one, we would be seeing a much higher inflation. instead the govt has decided to do this in phases. This means that circular debt will stay with us for longer time but at the cost of lower inflation.

the amount of mess the previous govt created is almost criminal!

 

[VCheng]

the important thing to note is that the govt is still to pass on the increase in energy prices from previous years. if the govt had done this all at one, we would be seeing a much higher inflation. instead the govt has decided to do this in phases. This means that circular debt will stay with us for longer time but at the cost of lower inflation.

the amount of mess the previous govt created is almost criminal!

That may well be true, but there comes a time when blaming the previous government for an inherited mess stops working as an excuse. Results matter in the here and now.

 

[Zulfiqar]

That may well be true, but there comes a time when blaming the previous government for an inherited mess stops working as an excuse. Results matter in the here and now.

Results require clearing past debt/receivables of 1400 billion plus PKR or roughly 10 bill USD and not generating any further of this mess.This amount includes PHPL debt.

We have to clear 10 bill USD of dues and loans because of past govt subsidies and inefficient working of the utility sector.

The dept in an FI that I work for has nearly 30 B of the 500 B plus PHPL debt and we are stuck with it for next 5-6 years and our ratios have been affected by it. We had to pass on financing some interesting projects that required long term loans because we financed PHPL with same maturity loans.

That is a lot of liquidity stuck to plug a deficit hole.

Currently the government has launched sukuks of 10 years with a markup rate of relevant KIBOR+0.8%. This will clear up around 400 B of short term dues and spread it over ten years.

However, we cannot sustain this cycle.

Subsidies have to be removed, tariff needs to be increased, coal power plants and other cheaper sources of electricity have to be included more in the energy mix. Line losses also need to be reduced.

Only then will we be able to pay off this behemoth credit card bill.

With ROI on Chinese plants guaranteed in Dollars, wonder how will controlling circular debt work ? With every devaluation, debt increases for each such plants.

There is no workable way around. You will have to pay the foreign debt in FC (either prepayment now or on maturity). In both cases you require FC. If you issue very long term FC bonds, even then you will have to book exchange loss over time till maturity of bond as our currency/economy is weaker than theirs due to which it will depreciate.

The only hypothetical solution is billions of dollars of donations from expats abroad. Considering the latest figures in dam fund, I don't think that will be achievable any time soon.

We need to increase exports in order to hedge our FC exposure.

 

[VCheng]

Subsidies have to be removed, tariff needs to be increased, coal power plants and other cheaper sources of electricity have to be included more in the energy mix. Line losses also need to be reduced.

Let us see if the present government is able to take any or all of these steps in a meaningful way.

 

[Ahmet Pasha]

Sood ki la'anat.

 

[ajpirzada]

That may well be true, but there comes a time when blaming the previous government for an inherited mess stops working as an excuse. Results matter in the here and now.

yes but that time is surely not 8 months... especially when the previous govt leaves the economy at the verge of collapse: the economy first collapses before recovering