EDITORIAL: Energy circular debt was the biggest problem this government inherited and that has continued to exacerbate at an accelerated pace in the past two years. The resolution of this debt is imperative to move forward with the stalled IMF programme. The build-up of circular debt and rising energy prices are hindering a much-needed investment in the manufacturing sector. The size of circular debt at present is a whopping Rs2.1-2.2 trillion, with Rs30-40 billion being added to it every month. There are higher costs in generation through guaranteed return structure (in USD) with power producers and inefficiencies in the transmission and distribution (T&D) network. The gaps between costs and tariffs, and missing recovery of bills are adding to the circular debt. Then there are payments (interests and delay surcharges) on the existing debt. Tackling the piled-up debt can eliminate the interest payments and surcharges. Negotiations with Independent Power Producers (IPPs), government-owned power projects and eventually with China Pakistan Economic Corridor (CPEC) projects with regard to return on equity, operation and maintenance (O&M) charges, and on increasing the tenor of debt will help reduce the capacity charges and the need for tariff increase.
Transmission and distribution (T&D) and recovery losses of discos constitute the bigger issue. Here, governance is an issue which is almost impossible to be tackled in the current setup of government being the sole buyer of electricity from National Transmission and Dispatch Company (NTDC) system through Central Power Purchasing Agency (CPPA-G) on the behalf of discos. With all the risk of losses assumed by the federal government, there is no incentive for anyone in the chain to bring about improvement and efficiencies in the operations. The control of human resource of discos is in hands of an additional secretary-level officer in the ministry of energy that renders the board of directors of discos ineffective. The discos (and gas distribution companies) have no incentive for expanding the pie. The levellized tariff of NTDC system is around Rs14/Kwh and the proposed tariff to plug in the build-up and to reduce the piled-up debt is at Rs17/kwh. The government does not want to do it. As it is, the electricity cost in Pakistan is the highest in the region while inflation is already eroding the purchasing power of consumers. A further hike in electricity prices will only exacerbate the problem. But, without it, the circular debt growth will keep growing and continue to plague the economy. The government is required to clear the existing circular debt through issuance of bonds or by taking direct fiscal measures. The negotiation with IPPs is contingent upon clearance of receivables due to them or else, the MoUs signed will be null and void in six months from the signing date. And moving from 'take or pay' to 'take and pay' is contingent upon development of a multi-buyer energy market.
Out of Rs2.1-2.2 trillion circular debt, around Rs700-800 billion is parked with The Power Holding Company (PHL) and the rest is on the balance sheet of CPPA-G. The payment from discos to power producers is routed through CPPA-G whose inability to pay is hindering payments to the power producers who in turn are unable to pay the fuel supplier (PSO, etc) and fuel producers (OGDC, etc) and refineries (Parco, etc) that continues to bloat this circular debt. The government needs to resolve Rs1.3-1.4 trillion on the books of CPPA-G. This will eliminate the growth of circular debt through interest and other financial charges. But the difference between the cost of generation and payment received through distributors will keep on churning fresh debt. Negotiations with IPPs and other power producers will resolve the smaller part. The bigger problem is T&D losses and short recovery of amount billed for electricity supply to the consumers. Last year, around Rs1400 billion worth of electricity (100 billion kwh) was sold by NTDC to CPPA-G. Add to it 1.5 percent distributors' margin, the total recovery should have been around Rs1550 billion. The T&D losses were around 18 percent, although NEPRA had allowed not more than 15 percent to be built in the tariff. Rs 45 billion per year is being added through higher than permissible transmission losses. There is no allowance of distribution losses and the recovery is around 90 percent. This gap adds around Rs150 billion per year to circular debt. Thus, T&D losses add roughly Rs200 billion a year or Rs16-17 billion a month to circular debt.
This has to be fixed. Lowering transmission losses is an easier task. This will require additional investment at NTDC and discos' grids. There is funding available from Asian Development Bank (ADB) and this is likely to be availed soon. The issue is of non-recovery. For that, distribution companies are required to be unbundled, corporatized and privatized. The first element is to replace CPPA-G by traders (like brokers in stock exchange) and a private sector market operator (like NCPPL in stock exchange). Once government is out, the clearing and settlement risk will be out of its books. The distribution function should be passed on to entities that are supplying electricity and collecting bills from the consumers. There should be numerous players operating in small pockets. These can do sale- purchase agreements directly through power generators (bulk buying), traders or market operators.
The role of discos should be confined to transmission and that should be NTDC's role as well. 500Kv and 220Kv lines should be under NTDC and the rest under discos. These functions should remain in the hands of the government as wire is generally a monopoly and if that business goes in private hands, then the government may face a problem - a case in point is KE where all the functions of generation, transmission and distribution are in hands of one private company. The government needs to learn from the privatization experience of KE and should do this right for the rest of the country. If the government embarks on this strategy today, it will take 2-3 years to have the systems in place and markets to develop. It should increase the tariffs reasonably. It can issue bonds or raise money through other ways to pay at least half of the amount which is due to IPPs and others. And make an agreeable plan for raising money in the future and paying it to the generation companies. The idea is to bring debt on CPPA-G books to zero and develop a multi-buyer market before the end of the term of the incumbent administration. If accomplished, this could very well be the biggest achievement of the PTI government.
Copyright Business Recorder, 2020
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