Energy crisis is worsening due to mounting circular debt. Thermal power plants are operating at 40 to 50 percent capacity, which is expected to drop further due to non-payment of dues. As on February 15, 2017, the total overdue amounts to the power sector, including GENCOs stood at Rs414 billion.
Approximately Rs160 billion out of this relates to overdue payments from CPPA-G owed to GENCOs and NTDC while the balance is for IPPs. These are amounts verified and audited by the relevant departments for electricity already supplied to the system, and are past the payment due dates.
The current unpaid power sector bills had piled up to Rs414 billion by the middle of last month in spite of a substantial decline of around 50 percent in global oil prices over the last three years.
Even the high electricity prices and enforce blackouts for up to eight hours a day and “minimize system losses and theft to slow down accumulation of the debt appears to have failed to work.”
With the power purchaser showing no sign of making the overdue payments, at least 13 IPPs were said to have started the process of invoking sovereign guarantees for their bills recovery.
According to the Central Power Purchasing Agency’s own record, the government owed Rs253.60 billion to IPPs, including Hubco and Kapco, and Rs160.80 billion to public sector Gencos by February 17. These numbers do not include payments owed to Wapda for hydel generation and power producers’ billing of around Rs20 billion for January.
The power sector debt mainly consists of unpaid capacity payments and late payment on interest (LPI) owed to producers in addition to the cost of the fuel used by them to produce electricity.
“The size of the power sector’s unpaid bills would have exceeded Rs500 billion if global oil prices had remained at the May 2013 level,” argued the CEO of a private power company. “For every 10 units billed, the distribution companies are able to recover the cost of only seven units. The remaining three units are lost in the system during transmission, or stolen.”
Consequent to the government’s failure to check losses and theft, three profitable distribution companies Lesco, Fesco and Mepco have also started incurring losses, delaying their privatization.
The government’s failure to pay bills on time and its strategy of enforcing blackouts has significantly affected the financial performance of listed private power companies. The unaudited half-yearly results of several IPPs show that their profits before tax had decreased substantially, mainly because of reduction in load factor.
This is mostly on account of enforced blackouts but also because of addition of new generation to the grid, shifting of large-scale industry on captive power after induction of LNG into the system and increase in their running costs.
In case of Nishat Power Limited, for example, the power producer saw its turnover declining by almost a fifth from Rs8.49 billion to Rs6.89 billion, pre-tax profit by 17.5 percent from Rs1.66 billion to Rs1.37 billion and earnings per share from Rs4.70 to Rs3.89 during the half year ended on December 31, 2016 compared with the same period in 2015.
On the other hand, its trade debts unpaid bills owed by government rose by over 18 percent from Rs6.38 billion in June 2016 to Rs7.55 billion in December 2016. Its overdue trade debt stood at 6.19 billion at the end of December, up by almost a third from Rs4.73 billion in June.
The power purchaser is also deducting millions from capacity charges bills of generation companies on account of ‘non-availability of the plants’.
The IPPs claim that the deductions are illegal because their plants were not available for generation owing to fuel shortages caused by non-payment of electricity they had sold to the power purchaser.
The reduced profitability and growing trade debts have caused a liquidity crunch for most power producers and forced them to borrow from banks to make payments to fuel suppliers.
The chief financial officer of an IPP set up under the 1994 power policy said that circular debt has remained a major concern for power producers, creating working capital issues for them and forcing them to shift reliance towards short-term borrowings to pay for fuel and dividends.
The government is hardly in a position to pay back the power producers their entire trade debt stock owing to its weak financial position.
Repeated attempts have been made by IPPAC and its Members to meet the senior officials of the government to resolve the long outstanding, audited and verified, overdue amounts, as well as to address pending policy issues on taxes and outstanding dispute resolutions, all to no avail.
In an arbitration process regarding illegally held back amount, the GOP Attorneys have taken the position that the IPPs should be exercising their legal right of calling GOP Guarantee when they are not paid, rather than going into dispute processes.
Left with no choice, the IPPAC Members have submitted GOP Guarantee calls, under their contracts, for a portion of the overdue amounts.
The IPPAC feels that in this time of growing restoration of investor confidence in Pakistan, it is quite unfortunate that the MoWP has chosen not to address these issues.
It may seem the government is unwilling and probably not to pay the bills of private power producers thus maintaining the fallacy of circular debt.
The circular power debt/crisis is very much a shot in the governmental foot and always has been; and the problem exists at a federal as well as provincial level.
Pakistan must fix its priorities and concentrate on coal as developing countries around the globe are giving preference to coal fired power plants. ADB has already offered financing for two blended coal thermal power plants.
The main reason for the current power crisis is non-recovery of outstanding dues. Electricity price is already high and tariff should not be increased further.
Electricity should be provided to the industry on full cost recovery. A short-term plan may be submitted to the committee.
The Ministry of Water and Power should take all appropriate steps to recover outstanding amount without any fear.
As energy companies face the risk of default due to a runaway circular debt, the Ministry of Water and Power has rushed to Prime Minister Nawaz Sharif, seeking allocation of additional subsidy to clear outstanding bills in the energy chain.
“The entire subsidy earmarked for electricity consumers in the current fiscal year has been consumed and the power ministry has nothing to retire debt in the energy chain,” said an official aware of the development.
Over the past few days, independent power producers (IPPs) have been warning the government that they will invoke sovereign guarantees if their dues are not settled.
In the previous fiscal year, subsidy payments had jumped to Rs196.54 billion compared to the target of Rs137.6 billion. According to current year’s budget documents, Rs95.4 billion had been set aside for subsidizing the power industry, excluding K-Electric.
According to the official, receivables of Pakistan State Oil (PSO) – the state-owned oil marketing giant had gone up to Rs280 billion whereas the Ministry of Finance released only Rs20 billion. Power producers are major defaulters as they owe PSO Rs228 billion.
“Secretaries of water and power, and petroleum had reached an understanding that current bills of PSO against power producers would be cleared, but it did not happen. Now, these dues have gone up to Rs19 billion,” the official said.
In a high-level meeting held at the Ministry of Water and Power, the power sector pointed out that the government had slashed subsidy for the ongoing fiscal year, which had been consumed and nothing was left to pay off the debt.
The ministry also admitted before economic managers that a large part of the power subsidy was paid out of the tariff rationalization surcharge collected from the consumers.
Power subsidy stands above Rs100 billion every year and a major chunk of it is contributed by the consumers themselves.
They also pay over Rs200 billion in a year due to surcharges and high benchmark transmission and distribution losses set by the National Electric Power Regulatory Authority (Nepra).
The power ministry, in a meeting of the Economic Coordination Committee (ECC) held on February 13, revealed that 2014-15 and 2015-16 were the only fiscal years in the past more than a decade when no losses of the power sector, which used to be on overage Rs200 billion per year, were covered from the federal budget.
It brought down the power sector’s burden on national budget from 2.4 percent of gross domestic product in 2012-13 to around 0.7 percent in 2014-15.
The ministry pointed out that the other stream of cash flow into the power sector was the release of subsidies from federal budget. However, a large part of the subsidy burden eased after the imposition of tariff rationalization surcharge on high-end consumers.
Some reconciliation process was going on between the power and finance ministries over the subsidy claims and arrears, which were expected to be settled in coming months.
According to the ministry, the power sector has shown marked improvement in its performance over the past two years. Its recoveries improved from 88-89 percent to 93 percent in 2016, the highest in history.
Similarly, transmission and distribution losses, which stood around 19 percent in 2014, came down to 17.8 percent in December 2016.These led to a positive growth in cash flow totaling Rs116 billion in the past two years.
Generation companies, which suffered a cumulative loss of Rs7.78 billion in 2013-14, overcame the loss and reported net profit of Rs5.77 billion in 2015-16.