ISLAMABAD: Power Division is said to have opposed payment of Net Hydel Profit (NHP) to provinces on the basis of the AGN Kazi formula, saying that it will increase circular debt by Rs 500 billion per annum, well-informed sources told Business Recorder. The opposition of the AGN Kazi formula was one of the reasons for the removal of former Secretary Power, Irfan Ali who retired as OSD last month as he was not given any posting after removal from the post of Secretary Power.
The government has realized circular debt will rise by Rs 538 billion if no action is taken owing to a number of parameters, including Discos’ losses, inefficiencies, Discos under recoveries and unpaid subsidies, etc.
The sources said more than 70% of circular debt is due to pending policy decisions and if these decisions are not taken timely and the operational efficiencies of the power sector remain at the current level the circular debt flow will reach Rs 1.258 trillion in 2023 from Rs 881 billion in 2022 and Rs 436 billion in 2021.
Power Division stated that to ensure effective management of circular debt, there is a need to address the flow of circular debt through effective efficiency improvement measures.
Circular Debt Mitigation Plan (CDMP) intends to reduce the existing flow of Rs 538 billion per annum to less than Rs 112 billion per annum. The plan covers the period from Feb-2021 to FY 2023 and describes the mechanism to address the CD issue in Pakistan power sector and how to control the flow of circular debt.
The circular debt mitigation plan will include reducing the increase in circular debt flow. The plan also proposes some measures on aimed at reducing the stock of circular debt.
Discos’ collections are planned to increase by 5.73% from FY2020 and losses are planned to be reduced by 2.12% from FY2020 through efficiency gains. Collection from government customers will be rationalized and subsidies will be on actual basis and paid according to schedule. The sources said access to affordable supply of electricity is the rudimentary objective of the policy and regulatory framework of the power sector. At present, almost 80-85% cost of the end consumer is composed of the generation cost. Targeted investment in the generation sector without accounting for cost implications, demand growth, target customers, technological advancements, risk and return matrix, non-least cost-based expansion have resulted in the escalation of the cost of electricity to the point where the consumers have started switching on the alternate solutions.
According to the proposed circular debt management plan, the government has projected reduction of circular debt by Rs 33.65 billion in FY 22 and Rs 38.50 billion in 2023 due to renegotiation of PPAs with government power plants, whereas renegotiation with IPPs on PPAs will reduce circular debt by Rs 18.91 billion and Rs 24.17 billion in FY22 and FY23, respectively.
However, Power Division argued that if Net Hydel Profit (NHP) is paid as per the AGN Kazi formula, circular debt will increase by Rs 495 billion per annum.
The plan also envisages issuance of pending tariff notifications, including quarterly tariff determinations and tariff determinations for FY 2021-2023. Notifications of quarterly tariff adjustments in October 2021 at a rate of Rs 1.59 per unit will save circular debt by Rs 97 billion in FY 22 and Rs 54 billion in FY 2023.
With annual rebasing, tariff will be increased by Rs 1.39 per unit in July 2021, the impact of which has been estimated at Rs 126 billion in FY 22, and Rs 137 billion in FY 23 whereas in July 2022, the increase of Rs 1.95 per unit will have a financial impact of Rs 181 billion.
The sources said, Cabinet Committee on Energy (CCoE) was also informed that GoP is providing relief to the electricity consumers in the form of different subsidy schemes (TDS, ISP, ZRI, FATA, AJK, etc.) Currently, there is a gap between subsidy committed by GOP and fund budgeted through fiscal space which resulted in cash shortfall that was added to the circular debt. Finance Division would have to increase unbudgeted subsidy to Rs 218 billion in FY22 and FY23 from the existing Rs 194 billion.
Power Holding Limited (PHL) is a wholly-owned government entity, established for the purpose of securing financing for the power sector.
PHPL regularly borrows from the commercial banks, the debt is guaranteed by Ministry of Finance, the proceeds are used to pay off liabilities of power sector. PHPL was used mainly because the power sector could not function owing to heavy amounts of payables towards IPPs and others. The obligation to pay IPPs is also guaranteed under the government’s policy.
The total PHL loans of power sector were Rs.977 billion as on Dec-2020. To recover the markup portion of the loans amounting to Rs. 290.862 billion there is already a surcharge @43 paisa per unit levied in the consumer bill which is not sufficient to cover the markup charges of total loans. The remaining markup is being paid through electricity generation collection and the same is added to the circular debt.
As of Dec 31, 2020 around Rs.123 billion was paid as interest charges from electricity generation portion on behalf of Power Division for the period from FY18-19 to Dec-20. Further, no cash flow exists to service the principal amount of debt; therefore, none of the facilities obtained by PHPL has been retired. In order to retire the old stock GoP will transfer all the debt as public debt and will allocate budget to retire the public debt in a phased manner.
In FY21, Rs 36 billion was converted into public debt whereas Rs 130 billion is expected to be converted in FY22. The amount of PHL markup covered by the annual budget will be Rs 164 billion in FY 23. The impact of IPP markup to circular debt before IPP markup reduction plan was Rs 137 billion in FY 23 whereas impact of IPP markup to circular debt after settlement of stock will be Rs 109 billion in FY 23.
According to the PPAs settlements, payment to IPPs was of Rs 180 billion in FY21 and Rs 270 billion in FY22 whereas reduction in CPPA-G payables to IPPs is Rs 101 billion. The amount of IPPs markup covered will Rs 84 billion in FY 22 and Rs 108 billion in FY 23.
The estimated addition in circular debt due to non-payment of KE will be of Rs 180 billion in FY 23 from Rs 132 billion in FY22 and Rs 92 billion in FY21.
The plan envisages technical losses at 17 percent in FY 21, 16.32 percent in FY22 and 15.70 percent in FY23.
The under-recoveries of Discos result in a cash loss which is added to the circular debt. The impact of recovery shortfall on circular debt before recovery improvement is estimated to be Rs 224 billion in FY 23, however, the impact of recovery shortfall on circular debt after recovery improvement will be of Rs 80 billion in FY 23. Recovery which was 92.07 percent in FY21 is estimated to rise to 94.90 percent in FY22 and 95.98 percent in FY23. This will bring savings of Rs 12 billion in circular debt in FY21, Rs 59 billion in FY22 and Rs 87 billion in FY23.
