Managing the stubborn circular debt
AFTER joint urgings by three multilateral lenders, the government is working on legislation to ensure the automatic implementation of power tariffs as a standard practice, unhampered by litigation.
The move will ensure that the tariff determined by the regulator or notified by the government will remain unaffected until the conclusion of the litigation, instead of being blocked at the initial stage through stay orders.
This is important given a recent case in which the government had to absorb an additional burden of over Rs17bn in the budget after the courts upheld the tariff increases for two power companies - KElectric and Pesco - but it was politically difficult to recover past dues from the consumers in the case of stay orders.
In the first phase, Nepra will determine and notify a multi-year tariff for the first three discos on the privatisation list - those of Lahore, Islamabad and Faisalabad - by the end of this November
Under the ongoing IMF loan facility, the World Bank and the Asian Development Bank are working with the government to introduce measures to cap and then partially cut the circular debt in three years from now, i.e. by the end of FY18. But even the plan prepared by the water and power ministry acknowledges that the three-year effort will only reduce the circular debt from Rs280bn to Rs204bn. To facilitate the transition, all the distribution companies (discos) will be required to submit three-year investment plans to the National Electric Power Regulatory Authority (Nepra).
In the first phase, Nepra will determine and notify a multi-year tariff for the first three discos on the privatisation list - those of Lahore, Islamabad and Faisalabad - by the end of this November, according to a statement by Finance Minister Ishaq Dar. This has now been made a structural benchmark under the IMF programme. The remaining discos would follow suit on a rolling basis.
The government has agreed with the IMF that it will reduce power subsidies by 0.4pc of GDP during this fiscal. The overall plan, if finally implemented, aims to improve collection and reduce operating costs, along with privatising power sector entities and use their proceeds to cut the circular debt.
A further cut in the circular debt is likely to come from the sale of power sector entities to keep the power sector subsidy within the target of 0.4pc of GDP (Rs128bn) and the fiscal deficit to 4pc for 2018. Simultaneously, the Rs335bn debt parked against the Power Holding Company Limited would be reduced to Rs140bn by 2018.
The previous PPP government reportedly spent around Rs1.4trn on power sector subsidies during its five-year tenure. In FY11, the government had taken the over Rs391bn circular debt into the budget. But the PML-N government had to pay off another Rs480bn in May-July 2013. The total circular debt, according to the IMF, now stands at around Rs620bn, including the Rs335bn that is parked against the Power Holding Company Ltd. The ministries of water and power and finance would like to describe the circular debt management plan 'realistic,' but in view of the fact that they target a 5pc increase in the bill recovery rate and a loss reduction of 1.5pc through efficiency gains, privatisation and private sector participation shows a defeatist strategy to begin with.
The government claims that the circular debt flow (increase) hovers around Rs200bn now and emanates in the shape of Rs23.6bn in ex-losses (not recognised by Nepra), Rs32.2bn from tube-wells in KP and Balochistan, Rs42bn in private receivables, Rs18bn in late payment surcharge to private firms, Rs12bn in debt servicing, Rs11bn in late determinations, Rs14bn for sales to AJK, Rs24bn in nonrefunded GST, and Rs22bn in other official receivables. These will be brought down to Rs54bn in FY16, Rs30bn in 2017 and Rs19bn in 2018.
Simultaneously, the circular debt stock - at Rs302bn in FY15 - would be scaled down to Rs250bn by 2016, Rs218bn by 2017 and Rs204bn by 2018.
The government has assured the three lenders that it will continue to use surcharges in tariffs under Section 31 (5) of the Regulation of Electricity Generation, Transmission and Distribution Act 1997 to rationalise subsidies and allow the recovery of the full cost of power supply.
The government claims that the actual losses of its distribution companies are at 18.5pc, but Nepra would not allow more than 15.13pc of these to be recovered through consumer tariffs; the losses would cut at the rate of 0.5pc every year to reduce the flow of circular debt from Rs31bn a year to Rs13bn by 2018 through 'innovative means' by justifying partial recoveries through fresh studies.
Nepra's determinations require discos to conduct a study on their technical losses to justify the need for tariff increases and to set out future loss-reduction initiatives; these are to be conducted by independent consultants.