In Part-I, we discussed the primary challenges of power sector and in there the most pressing issue of circular debt (CD). We noted that the Government should make immediate use of the recently-amended electricity law that allows determination of a uniform tariff across all DISCOs. This would effectively eliminate continuing accumulation of CD in the future. For some time the Government may continue to provide tariff differential subsidy (TDS) (to the extent of about 0.3% of GDP or Rs 120 billion).
Before we discuss the viability of the resulting tariff, let's reflect on the settlement of outstanding stock of CD, assuming no further accumulation. As we noted the stock of CD stands at Rs 1032 billion (Rs 499 billion, due for payment; Rs 533 billion, paid). For the unpaid portion, a schedule of settlement has to be announced, either by injection of fresh capital into DISCOs or by doing what has been done with the rest, i.e., borrowings from banks and parking in PHPL. The next task would be to shift the PHPL debt into individual DISCOs. This would be a complicated affair and past efforts have not been successful.
What should be the basis of apportioning debt across DISCOs? It is not surprising that DISCOs resist taking more debt than warranted by their contribution to losses, and deficient recoveries. However, if we go by this rule, the weak DISCOs would be overburdened by debts equivalent to their relative contribution. Accordingly, this matter cannot be left to the acceptability or otherwise of DISCOs. The Government of Pakistan is the single owner and should take a policy decision of distributing it across DISCOs. The more this is delayed the more complicated this adjustment would become. The key concern has to be continued viability of DISCOs after allocation of debts duly adjusted for whatever reprieve Government may think fit in the form of capital contribution. The capital contribution of 2013 has yet to be allocated as well, which may be lying somewhere in contra entries in the balance sheet of NTDC.
A fundamental problem in restructuring DISCOs is the absence of properly maintained financial statements. A great deal of ah hocism pervades Discos' working, since they were originally a part of a Government department and then corporatized. Asset titles, especially of real estate and rights of way, are routinely missing making it impossible for financial advisors to complete their due diligence and valuation. For more than a decade, revaluation of assets is also missing. The experience of FESCO and PTCL, where provincial governments (who had initially handed over real estates without much concern, thinking it was a Government department) started making unjustified claims for values of such assets, should enable policymakers to show the necessary urgency in this matter as without a clear identification of assets and liabilities it would be impossible to restructure, divest or transfer them in any form from Government ownership.
The loss of liquidity on account of sales tax on uncollected bills needs a solution also. One possibility, discussed many times in the past, is to make a special provision in Sales Tax Act that would allow a six-month period for recovery of unpaid bills and if not recovered then the DISCO should make an adjustment in the future sales tax liabilities. Of course, it should be mandatory that future flow of electricity to such a consumer would be discontinued and in case of eventual recovery the sales tax would be paid to the Government.
We now turn to the viability of electricity tariff. It is generally believed and accepted that Pakistan's electricity prices are outrageously high. Without going into a comparative analysis of how badly we are compared with others, let's accept that electricity prices are high. We have a number of observations to make in this regard:
First, more than the high tariff, we have a hugely distorted tariff setting regime. Although somewhat simplified, we have numerous categories of consumers and slabs within those categories. The need to simplify the regime has been underlined by experts for a long time. The most significant distortion is in the category of households. Suppose for a moment that the average tariff across all categories is Rs 12. Those consuming up to 50 units of electricity are charged only Rs 2 which is only 17% of the average or carrying an implicit subsidy of six times. Those consuming up to 100 units, are charged Rs 5.79, which is only 48% of the average. Those consuming 101-200 units are charged Rs 6.31, which is 53% of the tariff; those consuming 201-300 units are charged Rs 10.2, which is 85% of the average. These are about 70% of the total households in terms of household consumption, being provided subsidized electricity. Those consuming between 301-700 units are charged Rs 16, which is 1.33% of the average; those consuming more than 700 units are charged Rs 18, which is 150% of the average. Industry is also charged above average. Agriculture is charged below average at off-peak times (when they actually use). The cross subsidization regime may have been justified at some point in time in the past, but with higher prices, and elimination of inter-slab benefit, this scheme is perverse which is over-subsidizing households at the expense of those consuming more units. Rationalization of this pricing would bring all consumers closer to the average tariff, which is the cost of production.
Second, presence of tariff rationalization surcharge is an additional burden on electricity pricing. This is a charge on account of financial cost borne by PHPL on the debts parked there. As we have discussed in detail, CD is the result of excess losses relative to Nepra-approved level and less than full recovery of bills. There is a question of equity: those who have paid their bills, why should they be bearing the cost of financing. The earlier we resolve the CD issue the better it would be to bring down tariff on this account.
Third, in 2015-16, nearly 65% of the energy was produced through thermal sources. The remainder was obtained from hydel, nuclear, renewables and imports from Iran. The sensitivity of electricity pricing to oil prices is obvious. The new capacity being added - LNG and imported coal-based - would not be helpful in reducing the average tariff. If at all, going forward we would be facing a fairly challenging scenario as far as electricity prices are concerned. Changing the mix would not happen tomorrow, but its foundation must be laid today. The prices of renewable energy are declining rapidly and now is the time to focus exclusively on renewable energy. Indeed, some experts have shown that much of the old IPPs set up under 1994 and 2002 policies have left with very small capacity charges but rising energy charge because of rising oil prices. It is, therefore, asserted that the government would now find it economical to pay capacity charge to them and avoid taking dispatch as renewables can supply cheaper supply without fear of price escalation. Obviously, it would take some time before renewable capacity comes on line, but the time to initiate the process is now.
Fourth, there is no predictable cycle of tariff determination. The tariff that is currently in use is for the year 2015-16 and two fiscal years have since passed. Then there is also the issue of award by Nepra and significant delay in its final notification by the Ministry of Water & Power. For efficient working of the power sector, it is imperative that tariff determination cycle be made predictable and its final announcement should be made an exclusive authority of NEPRA. Finance Minister-designate Asad Umar has declared that the Government should not interfere with the determination of exchange rate which is the responsibility of SBP under the law. A similar approach should be adopted across all regulatory bodies: Ogra, Nepra and PTA.
[To be continued]
(The writer is former finance secretary)
waqarmkn@gmail.com
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