Man­ag­ing the stub­born cir­cu­lar debt

The Pak Banker - - 4EDITORIAL - Khaleeq Kiani

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.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.