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WB censures power sector
July 06, 2020
MUSHTAQ GHUMMAN
ISLAMABAD: Pakistan’s power sector has swallowed Rs 5 trillion ($ 45 billion) of national exchequer due to poor performance of Discos and other factors during the last ten years (FY 10-FY 19)
This was observed by the World Bank in one of its report which is only for official use. Power sector incurs annual losses of approximately 2.2 per cent of GDP on account of ;(i) high costs of power generation;(ii) losses accumulated from unfunded public policy mandates and lack of timely revision of tariffs ; and (iii) poor performance of electricity Distribution Companies (Discos).
Almost half of the annual deficit in the sector is covered by federal budgetary subsidies. The remaining deficit accumulates as circular debt to power generators and to fuel importers. The circular debt is now hovering around Rs 2.2 trillion.
According to the World Bank, the cost of generation in Pakistan is 25 per cent higher than the regional average due to expensive Power Purchase Agreements (PPAs).
There are three direct contributing factors to the generation of circular debt flow. These include (i) difference between tariffs and cost of supply due to government policies and not covered by the budgeted subsidies which result in Discos not being able to cover costs, a liability which is transferred to PHPL which then booked with the commercial banks to make up for the loss;(ii) Discos high technical and commercial losses and ;(iii) additional burden that include penalty payments to IPPs in case the government does not pay on time and debt serving by PHPL. The heavy dependence on imported fossil fuels increases the generation cost more so if there are delays in tariff notifications. For example, tariffs were not increased between 2015-18 and during this period generation costs increased by 25 per cent. As a result, during that period, PHPL debts were increased by Rs 180 billion and Discos’ financing requirement went up by Rs 2.25/ kWh. All PHPL debt is held by private commercial banks and is more expensive (up to 350 basis points higher) than comparable maturity government debt. A Financial Component Surcharge (FCS) of Paisa 43/kWh to be collected from consumers was introduced in October 2014 to help service debts. However, FCS, has not been enough to even cover the interest payments. For example, in FY 20 debt service is projected to be Rs 120 billion while FCS collection is estimated to be approximately Rs 40 billion indicating a shortfall of Rs 80 billion which will be added to the circular debt. There are indications that the government may double the FCS to ensure payment of interest loans obtained from different commercial banks.
Recently, the government made Rs 136.7 billion of PHPL expensive loans part of national debt in the federal budget as per agreement with the World Bank.
According to the World Bank inefficiencies in Discos are also a major cause of circular debt and high electricity prices. These inefficiencies include high system losses (including theft), misbilling and under collections. In FY 19, the average system losses of Discos were 17.7 per cent while Nepra had allowed 15.5 per cent losses to be passed on to the consumers. The differential contributed Rs 37 billion to the circular debt. Another Rs 116 billion was added to the circular debt as Discos collected only 91 per cent of billed amounts.
The Covid-19 pandemic has temporarily disrupted the government’s program to reduce the flow of circular debt. The CDMP had the goal of reducing the circular debt flow to US$ 0.8 billion in FY20. However, the Covid-19 pandemic is expected to add $ 1.6 billion in flows because of the delayed tariff increase, the reduced demand (by 75 and by 60 percent respectively for commercial and industrial users), and lower than expected recovery of receivables. In addition, there will always be a minimal flow because of a billing-payment mismatch across fiscal years.
World Bank is of the view that to ensure that the flow does not turn into arrears, the government includes in its annual budget an allocation to clear this so that no arrears accumulate. After the Covid-19 abates, the annual flow accumulation should decline to $0.5 billion by FY22/23, thanks to the planned tariff adjustments in the CDMP plus the additional measures to improve Disco efficiency and bill collections.
In this regard, the Federal Cabinet decided in April 2020 to reduce the cost of generation by independent power producers to complement tariff adjustments, reducing distribution losses, increase transparency and improve collection. The first round of talks between the government and power producers took place between April 15th-20th, 2020. A Special Committee has been assigned to continue discussions. These measures will be supported by the proposed PACE.
The policy reforms in the power sector are expected to set the path to reduce the flow of the circular debt FY22 onwards and eliminate the stock by FY29. It will also help with better management of tariffs and subsidies, the monitoring of sector performance, and avoidance of discretionary policy decisions that have a negative financial impact on sector cash flows. These actions will also contribute to improve the targeting of power sector subsidies and enhance budgetary transparency and accountability.
July 06, 2020
MUSHTAQ GHUMMAN
ISLAMABAD: Pakistan’s power sector has swallowed Rs 5 trillion ($ 45 billion) of national exchequer due to poor performance of Discos and other factors during the last ten years (FY 10-FY 19)
This was observed by the World Bank in one of its report which is only for official use. Power sector incurs annual losses of approximately 2.2 per cent of GDP on account of ;(i) high costs of power generation;(ii) losses accumulated from unfunded public policy mandates and lack of timely revision of tariffs ; and (iii) poor performance of electricity Distribution Companies (Discos).
Almost half of the annual deficit in the sector is covered by federal budgetary subsidies. The remaining deficit accumulates as circular debt to power generators and to fuel importers. The circular debt is now hovering around Rs 2.2 trillion.
According to the World Bank, the cost of generation in Pakistan is 25 per cent higher than the regional average due to expensive Power Purchase Agreements (PPAs).
There are three direct contributing factors to the generation of circular debt flow. These include (i) difference between tariffs and cost of supply due to government policies and not covered by the budgeted subsidies which result in Discos not being able to cover costs, a liability which is transferred to PHPL which then booked with the commercial banks to make up for the loss;(ii) Discos high technical and commercial losses and ;(iii) additional burden that include penalty payments to IPPs in case the government does not pay on time and debt serving by PHPL. The heavy dependence on imported fossil fuels increases the generation cost more so if there are delays in tariff notifications. For example, tariffs were not increased between 2015-18 and during this period generation costs increased by 25 per cent. As a result, during that period, PHPL debts were increased by Rs 180 billion and Discos’ financing requirement went up by Rs 2.25/ kWh. All PHPL debt is held by private commercial banks and is more expensive (up to 350 basis points higher) than comparable maturity government debt. A Financial Component Surcharge (FCS) of Paisa 43/kWh to be collected from consumers was introduced in October 2014 to help service debts. However, FCS, has not been enough to even cover the interest payments. For example, in FY 20 debt service is projected to be Rs 120 billion while FCS collection is estimated to be approximately Rs 40 billion indicating a shortfall of Rs 80 billion which will be added to the circular debt. There are indications that the government may double the FCS to ensure payment of interest loans obtained from different commercial banks.
Recently, the government made Rs 136.7 billion of PHPL expensive loans part of national debt in the federal budget as per agreement with the World Bank.
According to the World Bank inefficiencies in Discos are also a major cause of circular debt and high electricity prices. These inefficiencies include high system losses (including theft), misbilling and under collections. In FY 19, the average system losses of Discos were 17.7 per cent while Nepra had allowed 15.5 per cent losses to be passed on to the consumers. The differential contributed Rs 37 billion to the circular debt. Another Rs 116 billion was added to the circular debt as Discos collected only 91 per cent of billed amounts.
The Covid-19 pandemic has temporarily disrupted the government’s program to reduce the flow of circular debt. The CDMP had the goal of reducing the circular debt flow to US$ 0.8 billion in FY20. However, the Covid-19 pandemic is expected to add $ 1.6 billion in flows because of the delayed tariff increase, the reduced demand (by 75 and by 60 percent respectively for commercial and industrial users), and lower than expected recovery of receivables. In addition, there will always be a minimal flow because of a billing-payment mismatch across fiscal years.
World Bank is of the view that to ensure that the flow does not turn into arrears, the government includes in its annual budget an allocation to clear this so that no arrears accumulate. After the Covid-19 abates, the annual flow accumulation should decline to $0.5 billion by FY22/23, thanks to the planned tariff adjustments in the CDMP plus the additional measures to improve Disco efficiency and bill collections.
In this regard, the Federal Cabinet decided in April 2020 to reduce the cost of generation by independent power producers to complement tariff adjustments, reducing distribution losses, increase transparency and improve collection. The first round of talks between the government and power producers took place between April 15th-20th, 2020. A Special Committee has been assigned to continue discussions. These measures will be supported by the proposed PACE.
The policy reforms in the power sector are expected to set the path to reduce the flow of the circular debt FY22 onwards and eliminate the stock by FY29. It will also help with better management of tariffs and subsidies, the monitoring of sector performance, and avoidance of discretionary policy decisions that have a negative financial impact on sector cash flows. These actions will also contribute to improve the targeting of power sector subsidies and enhance budgetary transparency and accountability.
