The government has failed to check the daily addition of billions of rupees to the inter-circular debt, further undermining the sustainability of the power sector. These factors are steep increase in receivables due to poor recovery against billing, low cost recovery through tariff, and massive theft in transmission and distribution network.
An official claimed on Wednesday that currently inter circular debt was around Rs 300 billion till December 2014 despite the fact that the government recently paid Rs 35 billion (Rs 25+10 billion) to Pakistan State Oil (PSO). This situation has put PSO in a serious financial crisis and its acting head is often found in Ministries of Petroleum and Finance, seeking funds.
According to the International Monetary Fund (IMF) circular debt arrears are two per cent of GDP and threaten the functioning of the power sector. The Fund in its fourth and fifth review under the Extended Fund Facility stated "any future government payoffs of circular debt should be strictly conditioned on accelerated energy sector reforms and on specific actions by firms and regulators to reverse arrears accumulations".
Power sector analysts maintain that the Minister of Water and Power Khawaja Asif and Minister of State Abid Sher Ali do not have the ability to deal with power sector issues and are engaged heavily in politicking. Finance Minister, Senator Ishaq Dar remains the final authority in power sector matters especially tariff.
Ministry of Water and Power has officially acknowledged power distribution companies are facing financial problems in repayment of long outstanding dues to Central Power Purchase Agency (CPPA) mainly due to high distribution losses, low revenue collections and lower applicable tariffs, which did not fully cover the cost of services delivered. The increase in thermal generation through furnace oil was also adding to cost of generation which was not being recovered through tariff. All these factors were affecting the cash flow of Distribution Companies (Discos), limiting their ability to settle their power purchase liability towards CPPA. Therefore, CPPA could not pay the power purchase cost to IPPs and GENCOs which ultimately led to a reduction in power generation/increase in load shedding.
Official sources claim that keeping in view acute power shortages in the country, the government was resolving this issue by taking short-term and long-term measures, ie, implementation of cost recovery tariff, a reduction in transmission and distribution losses, a visible improvement in recoveries and facilitating Discos to arrange loans from the local banks to improve their cash flows. Payments to Gencos/IPPs were made out of revenues generated by the distribution companies from consumers including Fuel Price Adjustment (FPA) and various subsidies from Ministry of Finance.
However, due to a limited fiscal space available for energy sector subsidies in the budget, Discos would have to arrange funds through borrowing from banks in order to discharge their liability towards CPPA. Therefore, the financing arrangement for distribution companies would help these entities fulfil their financial obligations towards CPPA which would ultimately help the GENCOs/IPPs to discharge their liabilities towards fuel suppliers.
The Finance Ministry arranged a loan of Rs 25 billion on behalf of Discos by Power Holding (Pvt) Limited (PHPL) through a syndicated term finance facility from consortium of local commercial banks. The amount has been transferred to CPPA on behalf of Discos which has been utilised for payment to Gencos /IPPs.
The tenure of the facility was five years with a two-year grace period. The terms and conditions for the loan have been approved by the Finance Division and the facility has been executed. Power Holding (Private) Limited was a public sector entity without assets and was responsible for arranging a loan amounting to Rs 25 billion for power sector companies.
The Ministry of Finance provided a government guarantee for repayment of loan as well as interest for the facility amounting to Rs 25 billion arranged through a consortium of local banks. Repayment of the loan would be the responsibility of the respective distribution company.