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Circular death

The government has still not been able to achieve its targets of ending loadshedding

Circular death
Photo by Rahat Dar

The government has so far failed to solve the energy crisis. At the very outset of his term as Prime Minister, Mohammad Nawaz Sharif started his 6600 MW coal-based power park at Gaddani and visited the site near Hub in Balochistan.

The argument was that the power park would change the existing mix of electricity generation in the favour of cheaper electricity as it is currently titled towards electric power based on the costly furnace oil.

After one and a half years, the said project was shelved and now the government is hell bent upon setting up power plants of 3600 MW based on LNG. Now, the government is claiming to end the electricity shortage by March 2018.

Before the general elections 2013, the PML-N promised that it would end the electricity crisis in the first six month of its government. When it came into power, it said the power crisis will be over in two years. Now the Prime Minister is saying that the energy crisis will be over by the end of 2017.

However, the chief economic manager of the ruling party, Ishaq Dar, said the power crisis will be over by March 2018. However, in the last 30 months, the power tariff has increased by over 200 per cent as it managed to substantially reduce the gap between electricity generation cost and the tariff determined by the Nepra by getting included in the tariff over 2 per cent losses and imposing four charges in the electricity bills.

As the government’s economic managers are getting ready to thrust upon the nation a circular debt-capping plan agreed with the IMF, the consumers are likely to pay Rs240 billion in the head of inefficiencies of the government and the system and debt-servicing plan.

Besides, the system also faces Rs268 billion losses just because of an un-recovered cost of electricity, Rs50 billion as distribution losses, and Rs45 billion as interest on deferred payment to the Independent Power Producers (IPPs).

Pakistan’s inefficient power sector consumed almost Rs1.5 trillion during the five-year of the previous regime in the shape of subsidy, which was almost equal to the cost of Diamer-Bhasha dam at that time and no reasonable steps were taken to fill the black hole.

Moreover, in the previous government of the PPP, the duration of load shedding was 12-18 hours long on an average in rural areas and 9-12 hours long in urban areas, owing to which the country’s GDP continued to sustain 1.5-2 per cent annual loss. The government left a mammoth circular debt of Rs503 billion.

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In June 2013, the Nawaz government came in with a resolve to overcome the energy crisis. It paid off the circular debt in one go, arguing that it will pave the way for an increase in electricity generation by up to 1500-1700 MW of electricity per day. But it was not to be as the situation was back to square one soon and the promise of increase in electricity proved to be a hollow slogan.

The monster of circular debt has reared its ugly head again. Now the circular debt has increased to Rs281 billion that is supposed to be paid to the IPPs plus Rs330 billion to public sector electricity generation entities. This means that the Nawaz government failed to deliver in terms of overpowering this evil. However, paradoxically the officials at the ministry of Water and Power claimed that the circular debt issue is effectively being managed.

Independent experts are of the view that distribution losses are staying at 23 per cent whereas the government claims that these are hovering at 18.2 per cent. If the government statistics about distribution losses are to be relied upon, it means that the system is braving the loss of over Rs50 billion a year. However, the recovery of electricity bills has improved from 83 per cent to 87 per cent.

According to one of the government presentations available with TNS, the whole electric power system needs Rs1.020 trillion every year to run it, but the system braves Rs268 billion loss because of the lost cost of the electricity.

The presentation also says that the mark up on deferred payment to the IPPs has also swelled to Rs45 billion, which is also one of the contributors of the circular debt. The presentation concludes that the increase in circular debt hovers at Rs313 billion every year. The Planning Commission says that every month Rs35 billion are added to the circular debt.

An independent energy expert, Shahid Sattar, says there are some important components that the government has overlooked. They include the cost of heat rate differences at Gencos which stands at Rs6 billion, line losses beyond Nepra limits of Rs50 billion, and fuel price adjustment cost of Rs20 billion.

Talking to TNS, senior officials of the Ministry of Water and Power says the consumers have been punished by forcing them to pay all government and system inefficiencies amounting to Rs200 billion. In addition, they will also be forced to pay Rs40 billion as debt-servicing.

“So far, the average Rs3 per unit in electricity tariff has been increased in the head of inefficiencies and debt-servicing. On top of that, the privatisation proceeds that the government will manage after the sales of discos will be used in retiring the circular debt.”

The sources said that receivables of the system have alarmingly increased up to Rs613 billion out of which the federal and provincial governments and their attached departments owe to pay Rs268 billion. However, Joint Secretary Power, Zargham Khan, says that receivables stand at Rs567 billion and payables hover at Rs281 billion, saying the recoveries have imported up to 91.1 per cent. The distribution losses witnessed no improvement and stand at 18.2 per cent.

The objective of the government is to have a financially self-sustaining power sector to support economic growth. Working on this strategy, collections have seen an improvement in FY 2015 in the range of 89- 91 per cent as opposed to the previous rate of recoveries in FY 2014 of 87 per cent. Losses were reduced by 0.5 per cent in the same period. The plan for the management of circular debt until the end of FY 2018 is based on the same strategy and principles.

When the Nawaz government took charge in May 2013, the circular debt stood at Rs503 billion. Power sector entities were at the brink of financial collapse. Finance Minister Ishaq Dar had done away with the circular debt through a short-term measure with a cash injection of Rs480 billion. Now, the stock of circular debt (CD), however, has emerged again and reached Rs244 billion by July 2014, an average monthly increase of Rs18 billion compared with the FY 2013 accumulation of Rs20 billion per month.

In FY 2014-15, the stock increased to Rs321 billion by November 2014, showing an average addition in the flow of Rs15 billion each month. These figures are shocking.

This means that the Nawaz government has so far failed to solve the electricity crisis as Nandipur Power Plant of 425-460 MW is still non-operational despite the fact that a huge amount of Rs49.5 billion has been spent on it.

Neelum-Jehlum Hydropower project has already been delayed. The project’s cost has increased to Rs414 billion and the progress on the project is 74 per cent but the government has failed to come up with financial closure of the project.

Nepra, the regulator, has also mentioned in its annual report for 2014-15 that electricity consumers are facing 70 per cent over-billing.

Khalid Mustafa

khalid mustafa
The author is senior economic correspondent of The News International.

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