The Finance Ministry has termed the heavy line losses, incomplete corporatisation, weak governance, costly fuel mix and huge receivables of Pepco against public and private sector, as major factors behind accumulation of circular debt.
The "Year Book 2011-12' released by the Finance Division cited partial transfer of tariff as determined by National Electric Power Regulation Authority responsible for the problem of circular debt, but has not stated anything about the government's failure during the last four years to reform the power sector despite commitment with the donors.
The government is providing subsidy to the power sector to bridge the tariff gap determined by Nepra. The ministry further stated that power sector was provided subsidy of Rs 464 billion during the last fiscal year which included Res412 billion subsidy to Pepco to pick up inter-Disco tariff differential, Rs 7 billion subsidy on account of receivables from Fata, and Rs 45 billion tariff differential subsidy to KESC.
It was added that due to unprecedented upsurge in the prices of petroleum products in the international market and non-passing of full Nepra determined power tariff to consumers, power sector has been facing severe liquidity problem and has lost the capacity to liquidate its huge outstanding dues owed to IPPs and oil and gas companies.
The Pepco has, therefore, resorted either to huge borrowing from the banks or rely upon government support to meet its operational cash shortfall. Due to Pepco/KESC inability to pay their outstanding dues, all the public sector entities are trapped in the circular debt, which is severely affecting their cash flows. The debt swap of Rs 312.768 billion related to power sector was carried out during 2011-12 for creating fiscal space for power sector. With the approval of Cabinet, Rs 142 billion funds have been raised from banks in February 2012 and paid to IPPs by Pepco while Sukuk issue of Rs 14 billion is also in the process of elimination of circular debt. As per ECC decision, government guarantee for financing facility of Rs 82 billion is in process. This loan will be utilised for reducing power sector circular debt, the report continued.
The government provides financial support to Public Sector Enterprises (PSEs) in the shape of equity injections, advance loans for their working capital requirements and provision of subsidy to meet their operational cash shortfalls or incurring losses. Moreover, PSEs are also provided bank credit ceiling to meet their financial needs. The government policy decisions are implemented, relating to the issues for picking up the government guaranteed outstanding and non-performing loans extended by banks and financial institutions to PSEs and other financial losses sustained by them.
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