Debt swells due to inefficiency, theft and losses faced by power distribution firms
ISLAMABAD: The power sector circular debt jumped to Rs2.31 trillion by the end of June 2023 after revenue gains from a massive increase in electricity prices were lost to the inefficiencies, theft and losses faced by power distribution companies.
Official statistics showed that during fiscal year 2022-23, which ended in June, the Pakistan Democratic Movement (PDM) government failed to bring about any improvement in the “acute” power sector situation. There was a gross increase of Rs789 billion in the circular debt with average rise of nearly Rs66 billion per month.
After excluding the impact of increase in electricity prices and budget subsidies, there was a net rise of Rs57 billion in the circular debt during the last fiscal year, reversing the decrease a year earlier.
The stock of circular debt at the beginning of FY23 was Rs2.253 trillion, which jumped to Rs2.31 trillion, according to officials of the energy ministry.
As part of conditions set by the International Monetary Fund (IMF) and World Bank, the PDM government increased electricity prices twice in the past one year. It first raised the tariff by Rs7.91 per unit in July last year and then jacked up the tariff by Rs8 per unit from July this year.
In addition to this, the government slapped a debt servicing surcharge of Rs3.23 per unit and withdrew subsidies for the agriculture and industrial sectors.
These increases pushed up per-unit prices to over Rs50 but the bureaucracy and the last political leadership failed miserably in correcting the wrongdoings of power distribution companies. Some people having monthly income of less than Rs20,000 have got monthly bill of Rs16,000 for July.
Details showed that the consumers of Faisalabad, Gujranwala and Islamabad power distribution companies compensated for the losses and theft by the consumers of Sindh.
Against National Electric Power Regulatory Authority (Nepra)’s target of reducing losses of Sukkur Electric Power Company (Sepco) to 17.1%, its actual losses were more than double at 34.6%. Similarly, against Nepra’s target of 18.6%, the actual losses of Hyderabad Electricity Supply Company (Hesco) were 27.5%.
Compared to these, the target for Gujranwala Electric Power Company was to slash losses to 9.1% but it outperformed as its losses were equal to 8.6%. Similarly, the target for Faisalabad Electricity Supply Company was 8.8% but its actual losses were 8.6%.
However, all power distribution companies combined collected less-than-the-targeted electricity bills. The Power Division again failed to implement the Circular Debt Management Plan despite making lives of the consumers miserable.
Payables to power producers jumped from Rs1.35 trillion in June last year to Rs1.44 trillion at the end of June 2023. But the stock of circular debt came down by Rs35 billion to Rs765 billion during the period under review on the back of budget subsidies. Another Rs111 billion was added on account of payables to fuel suppliers.
Of the gross increase of Rs789 billion in the circular debt, a rise of Rs396 billion, ie, 50%, came because of inefficiency and losses of power distribution companies and lower recovery of bills.
The last government added Rs160 billion to the circular debt on account of losses incurred by power distribution companies, up by one-fifth in one year.
Low recovery of bills added another Rs236 billion to the circular debt during FY23, which was higher by 31%.
For the last fiscal year, the government had budgeted Rs570 billion in power subsidies, but after an understanding with the IMF they were jacked up to Rs912 billion.
Details showed that Rs100 billion was added to the circular debt owing to delay in payments to power producers.
Another Rs43 billion was added to the debt on account of interest payment to banks on the amount of Rs765 billion parked in a power holding company.
The government had imposed a debt servicing surcharge of Rs3.23 per unit to address the issue, which is tantamount to passing on the cost of its inefficiency to power consumers. Still, it could not restrict the source of increasing the circular debt.
An addition of Rs250 billion to the circular debt came on account of delays in the recovery of generation cost through quarterly and monthly fuel charges.
The gross increase in circular debt was Rs789 billion but Rs447 billion was “net-off” through other means like prior years’ adjustment on account of power tariff hikes.
Another Rs342 billion was reduced by paying subsidies from the budget. The IMF had forced the government to impose taxes in February this year to pick the cost of additional subsidies for the power sector.
A recent report of the IMF stated that the energy sector’s long precarious situation has become acute with severe liquidity pressures now adding to the continued over-accumulation of unsustainable payment arrears.
It added that the situation has built up over the past decade on the back of slow reform to address deep-seated deficiencies that create operational losses and raise generation costs, aggravated by political reluctance to pass-through international commodity prices, currency depreciation, and financial and other costs to tariffs, and repeatedly granting new unbudgeted, untargeted subsidies.
This was demonstrated again by further deterioration in the power sector in FY23 with substantial unexpected additional budgetary subsidy needs amid a higher-than-expected arrears accumulation, binding liquidity constraints, and increased recourse to supply shortages with regular widespread power outages, according to the IMF.
