Power tariff hike
The purpose of the Circular Debt Management Plan is to cap the flow or addition of new debt to the power sector's existing debt stock of over Rs2.3tr by June 2023. The suggested revision in this plan seeks to avoid or at least delay an increase in electricity prices that has been agreed with the IMF for resumption of the Fund's $6bn programme.
The proposed increase of Rs4.50 per unit in the price will raise average power tariffs from Rs16.50 to Rs21. Since the amended Nepra Act has stripped the government of its powers to stop or delay notification passing on price increases to consumers, there is a new strategy in the revised plan to keep electricity rates at their current level, at least for now, to dodge the political fallout of such a massive spike. Yet, it will not be possible for it to entirely avoid the tariff increase in spite of the planned rationalisation of sales tax on electricity sales and the fuel component of generation, as well as enhancement in the amount of consumer subsidy from the next fiscal year.
The power sector debt management strategy has many planks: the negotiated purchase of old, inefficient private generation plants, the closure of rundown public-sector generation, fresh capital investments in the distribution infrastructure etc. Besides, according to the sketchy details made public, the government intends to renegotiate the contracts with sponsors of the generation plants built or being built by Chinese investors for restructuring their project debt tenures over a longer period than the existing 10 years. It has already renegotiated deals with sponsors of IPPs set up under various preCPEC power policies since 1990 for reduction in their tariffs. The return on equity for the new public power companies has also been slashed. Once implemented, the proposed plan is expected to significantly cut system losses, improve bill recoveries and reduce the burden of capacity payments, ultimately capping the debt flow in addition to minimising the need for hiking electricity tariffs. The government estimates the existing circular debt stock to double to Rs4.6tr in two years in case no action is taken. It is claimed that the renegotiated power purchasing contracts with the non-Chinese IPPs have already saved consumers Rs1 per unit in tariffs.
Prima facie, the strategy, which the government should share with the people for the sake of transparency and debate, seems alright on paper. But it has "many variables and moving parts" that need to be implemented concurrently in order to deliver the desired results. Does the government have the ability to execute these measures considering it has already defaulted on its commitment to paying its first instalment of unpaid bills to the IPPs under revised deals with them because of NAB's uncalled for intervention? Reneging on its promises will further dent the government's credibility - trust is a prerequisite for seamlessly implementing the plan.