Redemption of the power sector

A host of sectoral lacunas prevailing in the energy sector have yet to be tackled leave alone overcome and the question that is being asked by the public is whether the government has the capacity to resolve all issues that would ensure uninterrupted supply at a tariff that is affordable and comparable to the rate prevalent in regional and competing countries.

The loudest mantra that can be heard in the country today by the cabinet in general and the Power Minister in particular is that theft will be controlled through punitive action against all those who are guilty - the enablers and the enabled - irrespective of their political clout.

One would hope that this principle would be applied to not only individuals but all institutions, inclusive of all cabinet members and those represented in the apex committee of the Special Investment Facilitation Council (SIFC). The question, however, is if this focus is appropriate?

National Electric Power Regulatory Authority (Nepra) estimated 17 percent of electricity is pilfered, with the rate as high as 37.5 percent in some areas.

And Secretary Power Division while briefing the Standing Committee on Power last year provided the following data: electricity valued at 380 billion rupees was stolen in 2022-23 - 200 billion rupees worth was stolen through line tampering as a result of intruders bypassing meter connections (kundas) and 80 billion rupees from meters and other sources through manipulating the internal structure of the metering system. He projected a loss of 520 billion rupees in the current year.

On 7 September 2023 all stakeholders launched a massive anti-theft drive with recoveries claimed to be around 89.5 billion rupees, which was clarified recently as 5 billion rupees from the anti-theft drive while the rest was generated from arm-twisting of those consumers with arrears.

This figure is disturbing as it indicates that the flow of pilferage has not been significantly curtailed, though perhaps the stock of accumulated dues from pilferage may have declined.

A Business Recorder exclusive noted that the current stock of receivables is a high of 1.074 trillion rupees against a circular debt of 2.6 trillion rupees - 70 billion rupees against government entities/organisations - with five distribution companies’ total receivables as of 28 February 2024 at 976 billion rupees that include: Peshawar Electric Supply Company 120 billion rupees, Tribal Electric Supply Company 54 billion rupees, Hyderabad Electric Supply Company 141 billion rupees, Sukkur Electric Power Company 165 billion rupees and Quetta Electric Supply Company 496 billion rupees.

This disturbing data no doubt prompted the newly appointed Power Minister to equate power theft to economic terrorism, as he pointed out that the total stock of receivables was 1.9 trillion rupees as of 28 February 2024.

The BR report also noted that 1.074 trillion rupees included 165 billion rupee receivables from permanently disconnected consumers (with 500 rupees or a 1000 added on to maintain their status of a running defaulter which many argue is not appropriate) and many running defaulters are challenging their dues by maintaining that they are being massively overbilled. One only has to recall the July and August 2023 bills and the resulting public pandemonium to conclude that distribution companies do engage in excessive, inflated and inaccurate bills.

While ending the scourge of receivables will reduce the intractable circular debt, yet the question is whether it would be able to reduce the tariffs that are currently extremely high and comprise: (i) the cost of fuel imports which fluctuate not only due to the international price of fuel but also the rupee dollar parity at the time of imports, (ii) cost of producing a unit of electricity, which is seasonally adjusted given that in the winter months hydel power plants, producing electricity more cheaply than from more expensive imported fuel sources, undergo routine maintenance, (iii) interest payments on borrowings by the sector to generate the necessary liquidity to continue to run operations, (iii) massive taxes and surcharges, which are not dedicated to the power sector but are used for meeting the government’s profligate current expenditure, and (iv) the capacity payments which are not expected to become less till the end of life of the power plants that were signed under the China Pakistan Economic Corridor umbrella, even if all generation does shift to renewables and hydel generation. As consumption has declined due to high tariffs, the more well-to-do are shifting to installation of solar panels, which is simply driving up the capacity payments for the government.

The question is if theft and arrears shrink the circular debt by half a billion dollars, a rather ambitious target based on recent experience, would that satisfy the multilaterals? The staff-level agreement (SLA) reached on 15 December 2024 and the final documents uploaded on the IMF website in January 2024 noted the following: “Power sector payment arrears are defined as power sector payables in arrears that arise from: (i) non-recoveries from supply to Azad Jammu and Kashmir (AJ&K), industrial support package, other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells; (ii) accrued markup from the servicing of Power Holding Private Limited (in which some of the circular debt is parked); (iii) line losses and non-collections that are not recognised by Nepra; (iv) GST non-refunds; (iv) late payment surcharges; (v) delays in subsidy payments; and (vi) delays in tariff determinations.”

It is noteworthy that non-recoveries from AJ&K remain, as do 300 billion rupee dues from Balochistan tube wells, delays in subsidies and GST refunds persist due to resource constraints as do the very high line losses and non-collections.

In other words, the response to whether anti-theft measures alone would be sufficient to either appease donors or indeed reduce the high tariffs is a resounding no, and, as stated, in the same IMF document the emphasis must be on “accelerating cost reducing reforms including through improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management,” and last though not least is “undertaking effective anti-theft efforts.”

The IMF in its press release dated 29 April 2024 stated that “The authorities have stabilized the energy sector’s circular debt over the course of the SBA through timely tariff adjustments and enhanced collection efforts.

While these actions need to continue, it is also critical that the authorities undertake cost-side reforms to address the sector’s underlying issues and viability.“ If the former is the preferred way forward, as has been in the past, then consumption will continue to decline with capacity payments rising and hence the need is to address the underlying issues.

It is relevant to note that there are no defaults against five distribution companies notably Islamabad Electric Supply Company, Gujranwala Electric Power Company, Lahore Electric Supply Company, Faisalabad Electric Supply Company and Multan Electric Power Company. Or to conclude these five discos can be the trailblazers; however, the government’s subsidisation policy to equalize tariff makes little sense after the dismantling of Wapda and must be abandoned which in itself would save the exchequer in general and the power sector debt in particular around 400 billion rupees per annum, if last year’s revised figures are taken into account.

Copyright Business Recorder, 2024