Circular debt – myth and reality
We all know that the main reason for the forced increase in the base electricity tariff is the “tsunami” of expensive and excess electricity capacity contracted by the previous PML government on a “take or pay” basis. which hit the sector hard. The previous government also did not pass on any tariff increases over the last few years and left that burden to this government. Due to Covid-19, no base tariff increase was authorized by the PTI government in 2020 to avoid overburdening consumers (which inevitably added to the circular accumulation of debt). The current tariff increase of Rs 1.95 is still far below the actual cost of this flawed planning, by the PML government, as determined by NEPRA.
The total “mandatory” annual capacity charges were 185 billion rupees (2.1 rupees per unit) in 2013 and increased to 468 billion rupees (3.98 rupees per unit) in 2018. Due to excessive contracts and costly inherited by the PTI government, this fee rose to 860 billion rupees in 2020 and is expected to reach 1,455 billion rupees (10.82 rupees per unit) in 2023. Even assuming a 7 +% annual increase in demand electricity supply (which is quite optimistic in any base scenario), we will have a situation of “over-supply” of nearly 40% in 2023 that the economy will have to pay regardless of needs. Even though our fuel mix has improved in recent years, it is far more than offset by this recent massive increase in the fixed capacity charges that we are required to pay now.
It is an established fact that the electricity contracts signed by the previous government were, on average, 25 to 35% more expensive than comparable regional benchmarks. Imported coal-fired power plants (including the one in Sahiwal), with a guaranteed annual return of 30-35% on equity, are a political disaster that we are now grappling with. Wind and solar power plants with tariffs now averaging Rs 20-25 per unit cripple the energy sector, compared to solar IPP tariffs of Rs 6 per unit granted during the PTI government’s tenure last year .
The PTI government inherited a shattered economy in an intensive care unit which depressed demand for electricity and necessitated a devaluation of the rupee (artificially held high by the PML government, resulting in a current account deficit unsustainable), as well as an increase in interest rates to control inflation. Since 60-80% of IPP tariffs are denominated in USD, and nearly 45% of the energy produced on imported fuel, electricity consumers have had to bear a price hike due to this poor planning in the past. .
On the other hand, the PTI government renegotiated contracts of nearly 50 PPI resulting in gross savings of Rs 770 billion over the next 20 years, capped dollar indexation for local investors, reduced return on equity for foreign investors to 12- 13pc, agreed to share the cost savings on energy efficiency and operation and maintenance costs, etc. In addition, 96 billion rupees of “interest on interest” bills were canceled and 38 billion rupees saved against various international arbitral awards (against the state) of the previous era. We have also made a massive reduction (2,000 billion rupees in total) in the revenues of various government-owned power plants (nearly 14,000 MW) to provide corresponding tariff relief to consumers in the years to come. Our next goal is to restructure the existing IPP debt (increase in grade, reduce margin, etc.) and pass the savings on to end consumers.
What prevented the previous government (s) from at least trying to do the same?
To increase the demand for electricity, the PTI government recently took unprecedented and bold decisions, including imposing a moratorium on gas supply to captive power plants, offering reduced electricity tariffs to industrial customers and removing the peak hour / off-peak tariff distinction. In order to encourage exports, the PTI government continues to provide subsidized electricity (and gas) to the industries concerned (one of the main reasons our industrial tariff is arguably high is because of the “cross subsidy”. Integrated to provide corresponding relief to our residential and agricultural consumers – this has been the case for decades and reflects Pakistan’s particular socio-economic / political realities, which is easier said than looking back). We have also shut down nearly 50% of our old inefficient government-owned power plants, with the rest scheduled to be taken off the grid over the next 12-18 months. The establishment of a market for energy products, within the framework of a multi-buyer / multi-seller model, as well as a liberalized “wheeling” regime, is in full swing, which will not only give consumers electricity supply more choice, but will also reduce prices and improve customers. service quality. We have now placed professionally qualified and independent individuals on the boards of distribution companies (and NTDC), with new CEOs being selected to market in the coming weeks through an open and transparent competitive process. . We also intend to cede management control of distribution companies to private sector operators (without privatizing the assets or shares of these companies, nor jeopardizing the interests of employees) in the coming months, at the same time. to an increased share of the respective provinces in their operations and results.
All of these steps above could and should have also been taken by previous governments if they were to reform the electricity sector. It is the PTI government that is currently doing most of the work on structural reforms that previous regimes failed to do.
The previous government did not invest in the high voltage transmission grid and could not get the energy to where it was needed. The PTI government has invested 39 billion rupees since 2018-20, which has helped transmit an additional 4,000 MW. Likewise, the previous government (s) did not invest in the distribution system, which affected the quality of service delivery and efficiency for end consumers. On the other hand, the PTI government invested 74 billion rupees in the distribution system in 2019, which for the first time is more than the goal of NEPRA. Almost 85% of the system transmission and distribution (T&D) losses come from four distribution companies (Hyderabad, Sukkur, Quetta and Peshawar / tribal areas) which have been historically neglected by all previous governments. We are now focusing on these companies to improve their performance, with our limited resources and budgetary room for maneuver. Despite the tariff increases, our overall T&D losses (17.8%) and recoveries (90%) remained stable or improved slightly, but there was indeed a drop in performance last year due to Covid -19 (industry shutdown, reduction in consumer billing, etc.) that everyone except the opposition recognizes.
In summary, therefore, circular debt has increased due to two main factors:
(1) excess capacity contracts inherited by our government from the previous regime which were, on average, 25% more expensive, 40 to 50% more than our needs, signed on a take-or-pay basis (i.e. ie we pay them regardless of need), and anticipated (ie much higher rates in the first 10 years). This “tsunami” of excess and costly contracts has hit the industry very hard and has largely contributed to the circular accumulation of debt over the past two years; and
(2) the impact of Covid-19 last year due to which the government decided to freeze all tariff increases (including monthly fuel adjustment charges) resulting in an increase in outstanding debt circular;
All of the structural reforms undertaken by our government have now resulted in stopping the increase in the circular debt flow this fiscal year to almost Rs 200 billion less than the previous year. However, for a lasting turnaround, a comprehensive, data-driven circular debt management plan is now in place and will be implemented over the next three years.
The writer is the special assistant to the Prime Minister in charge of electricity and petroleum.