Government has allocated Rs 30 billion in the federal budget to clear dues to Federally Administrated Tribal Areas (Fata), Balochistan's agri-tubewells and AJ&K, official sources told Business Recorder. Ministry of Water and Power repeatedly made efforts to recover overdue amount from Fata, AJ&K and Balochistan agri-tubewells but they cited financial constraints and other issues as reasons for non-payment, the sources added.
Finance Ministry deliberated on deducting the overdue amount at source but that mechanism did not work either. However, Pakistan authorities informed the International Monetary Fund (IMF) that they have allocated 0.1 percent of GDP out of budgetary resources to clear part of the stock of arrears that accrued with respect to some regional and local governments.
Finance Ministry also gave assurance to the Fund that the government will continue to work with some regional and local governments to prevent further accumulation of arrears. In addition, the stock of arrears is expected to be significantly reduced over the next three years, supported by privatisation and limited budgetary support. The sources said IMF and Government of Pakistan had divergent views on the definition of payables.
According to the IMF, stock of power sector payables reached Rs 615 billion by end-March 2015. Payables comprise the circular debt (Rs 280 billion payable toward power sector entities) and the stock of arrears parked in the Power Sector Holding Company Limited (PHCL) (Rs 335 billion).
Officials maintain that the amount of circular debt is around Rs 270 billion as of now. However, the stock of Rs 335 billion loans availed by the Power Distribution Companies (Discos) is already parked in the books of Discos in accordance with their share in total debt.
The build-up of arrears is due to: (i) significant non-recoveries related to government and private consumers, (ii) accrued interest on PHCL debt, (iii) line losses that are not recognised in the tariff, (iv) delay in the refund of excess GST collected by the FBR, (v) late payment surcharges, and (vi) delays in tariff determinations.
The authorities plan to reduce the accumulation of payables by taking steps to improve collections and reduce operating costs and losses. According to the plan, the accumulation of payables will be reduced from an estimated Rs 175 billion in FY2014/15 to Rs 113 billion in FY2015/16, with a view toward further halving new arrears accumulation by FY2018/19. Key elements of the plans comprise capital expenditures and revenue-based load management to reduce losses and improve collections. Overall losses are expected to decline by 0.5 percent and collections are expected to improve by two percent per year.
According to the circular debt capping plan, GoP has planned to reduce circular debt (CD) from Rs 279 billion (as of end March 2015) to Rs 204 billion by financial year ending June 30, 2018 (FY2018) while keeping within the targets of 0.4 percent of GDP for subsidies to the power sector (about Rs 128 billion) and four percent fiscal deficit. At the end of each month, the CD will be maintained below the cap of Rs 280 billion.
The stock of CD, however, has continued to accumulate and had reached Rs 244 billion by July 2014, an average monthly increase of Rs 18 billion compared with FY 2013 accumulation of Rs 20 billion per month. In FY 2015 the stock had increased to Rs 321 billion by November 2014, showing an average addition in the flow of Rs 15 billion each month. Had this trend of a monthly Rs 15 billion increase continued, the CD at the end of March 2015 would have been Rs 382 billion.
The sector's inefficiencies stem from Discos having higher levels of losses and lower levels of collections than those allowed by the regulator. Some Discos are at or close to the Nepra determined levels of losses and collections. Less well performing Discos experience levels of losses that are up to 5-10 percent worse than those allowed, and of collections that are up to 20-30 percent lower than the 100 percent recovery assumed by the regulator, as owner of these entities. In FY 2014, sector inefficiencies added Rs 88 billion to CD and accounted for Rs 60 billion for FY 2015 up to March 2015.
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