The visiting International Monetary Fund (IMF) on Tuesday discussed progress in energy sector reforms, circular debt and power tariff fixation mechanism along with other issues which are part of the programme.
There are indications that the Fund is urging the government to further adjust tariff to achieve full cost recovery for at least five power Distribution Companies (Discos). The demand of further adjustment from the Fund is at a time when the export-oriented industry is making a hue and cry on the imposition of financial cost surcharge, taxes, fixed charges, surcharges and positive fuel adjustment. The Fund's technical team, sources said, was unhappy with the performance of power sector as many commitments have not been met. Well-informed sources told Business Recorder that in the "defunct" Pakistan Electric Power Company (Pepco) energy sector circular debt was hovering at over Rs 1.9 trillion by December 31, 2019 of which Rs 1.1 trillion is circular debt whereas Rs 850 is parked in Power Holding Private Limited (PHPL). Of this amount about Rs 600 billion has been added by the PTI government of which Rs 500 billion is sourced to inefficiencies of Discos in terms of poor recovery from consumers. Power Division through an advertisement in the print media has sought quotations from Islamic banks for Sukuk of Rs 200 billion to retire a part of the circular debt through competitive bidding.
The Power Division had to upload circular debt retirement plan on its website by January 31, 2020 as per commitment with the IMF but this condition has not yet been implemented. The circular debt is expected to be over 5 per cent of GDP by end December 2019. Over the years, circular debt has stripped the sector of working capital, constraining investment and capacity utilization, leading to unreliable supply that hinders economic growth.
Circular debt refers to the cash flow shortfall incurred in the power sector from non-payment of obligations by consumers, distribution companies, and the government.
The plan, prepared in consultation with international partners and IMF staff, aims to reduce the annual flow of circular debt from the current level to around Rs 50-75 billion by FY 2023 through improving collection and reducing losses, streamlining tariff updates, and rationalizing subsidies. Monitoring of the plan will take place through implementation reports published by the Ministry of Energy. Key measures of the plan include: (i) timely updating tariffs, including the Q2 FY 2020 adjustment for capacity payments to take place by end-January (new end-January 2020 SB); (ii) streamlining of tariff procedures and reintroducing surcharges via amendments to the Nepra Act to be submitted to Parliament by end-December (modified end-December 2019 SB); (iii) improving efficiency and collection; and (iv) rightsizing of subsidies.
The Power Division has prepared circular debt strategy which includes: (i) issuance of new government guarantees in the amount of Rs 200 billion to transfer costly system arrears into PHPL; (ii) absorption of PHPL into the general government, which will lower debt servicing costs; and (iii) reduction in the stock of outstanding payables through the use of power assets privatization proceeds, recoveries from the outstanding stock of receivables, the existing debt servicing surcharge, and the rightsizing of sector-related subsidies. Staff stressed that progress in the stock strategy must be linked to timely and measurable progress in the implementation of the circular debt reduction plan and be consistent with the fiscal envelope.
The government had to submit circular debt retirement plan by September 2019 but the condition was not met and the plan was shared in November 2019.
The government also had to submit to parliament amendments to Nepra Act to ensure full automaticity of the quarterly tariff adjustments and eliminate end-December 2019 the gap between the regular annual tariff determination and notification by the government - this too remains unmet.