THE rise in power sector circular debt is continuing albeit at a slower pace thanks to a record fall in oil prices and regulatory relaxations in quality and standard benchmarks.

This would take care of the IMF conditionality for the 10th quarterly review of its three-year progamme due on January 26. However, the latest stock of the debt going beyond Rs680bn and flows

continuing, the special audit report of the Auditor General of Pakistan (AGP) on Rs480bn payments to power sector supply chain in 2013 makes a case study to avoid repeating mistakes.

The AGP desired that the issue of circular debt be resolved on a permanent basis with a commitment to zero tolerance for technical, financial and operational lapses in the power sector

On an apple to apple comparison, the 2013 stock of the circular debt amounted to about Rs503bn before it was settled and now the fresh stock stands at around Rs350bn. The total stock goes up after Rs335bn debt parked against Power Holding Company – a subsidiary of the power ministry – is included.

The payables and receivables on account of K-Electric and its suppliers and consumers is not included in these numbers although it involves a fresh legal question as the power supply agreement with KE had expired in the first quarter of 2015 and power supply continues without any legal cover.

Taking advantage of the low oil prices, the government has introduced three special surcharges of about Rs2.50pc and got Nepra’s clearance to add another 2.5pc system losses in the consumer tariff to reduce monthly buildup of circular debt but this has only burdened the honest consumers.

After a lot of controversies, the special audit report of the AGP finalised in consultation with the ministry of water and power was presented to the parliament recently. The report noted that the net amount of overall circular debt stood at Rs480bn after setting aside about Rs23bn as liquidity damages.

Of this, Rs342bn was paid to the power sector by finance division through the State Bank of Pakistan as cash settlement. The AGP concluded that the entire amount was ‘irregular payment, for ‘settlement of circular debt, without pre-audit’

The law required that the Controller General of Accounts (CGA) should authorise all payments and withdrawals from the Consolidated Funds and Public Accounts of the federal and provincial governments against approved budgetary provision after pre-audited checks as the AGP may prescribe from time to time.

The AGP held that this mandatory law was contravened by the finance division on June 27, 2013 when it advised the central bank to credit Rs342 billion to Pakistan Electric Power Company (Pepco) onward payment to clear accumulated outstanding balance of IPPs and Gencos. This was ‘unauthorized and irregular payment.’ On the insistence of the government that similar payments were made in the past, the matter would now be settled as a fait accompli by the public accounts committee (PAC) of the National Assembly.

The auditor believed the payment of Rs270bn to IPPs (independent power producers) also included Rs32bn late payment charges for the period between June 2011-2013. AGP held that delayed payments resulted in undue loss of such a big amount of public money because of ‘management lapse’.

The ministry of water and power did not agree that this burden was because of any mismanagement but a ‘systematic issue.’. The AGP has, nevertheless, recommended fixing the responsibility for delayed payments.

The Audit also held that another non-cash settlement of Rs25bn by the finance ministry against receivables of National Transmission and Dispatch Company and Gencos against the federal government in the absence of invoices and supporting documents.

“Authenticity of payment claims of Rs25.104bn and its adjustment made by finance division could not be ascertained” On top of that, amount of Rs23bn recoverable from 11 IPPs as liquidity damages for delayed commissioning, forced outage or sub-optimal operations but this was not recovered by Pepco. The audit held that these claims should have been adjusted while settling circular debt but an undue favour was given to IPPs.

Moreover, the audit noted that the government or its agencies made ‘unjustified payment’ of Rs32.5bn to IPPs during June 2011 to June 2013 for idle capacity of their power plants without purchasing energy.

It held that when the country was facing acute power energy shortage, there was no justification to pay for idle capacity. The poor planning resulted in extra-financial burden on NTDC and undue favour to IPPs.

Also, the AGP found irregular purchase of gas amounting to Rs28.354bn in the absence of gas supply agreements with gas companies and another unjustified payment of Rs18.5bn to IPPs on account of general sales tax.

The audit also held that there was no justification for payment of Rs2.7bn for forced outages because of fuel shortages.

While pointing out a number of other fiduciary issues, the AGP has recommended strengthening of prudent financial management to avoid irregular payments in future and piling up of circular debt and maximum focus on recovery of outstanding amounts at all stages of supply chain of the power sector.

The AGP has called upon the government to put in place a mechanism of performance monitoring of the power companies to enforce compliance with generation licences, tariff determinations and quality standards.

It desired that the issue of circular debt be resolved on permanent basis with a commitment to zero tolerance for technical, financial and operational lapses in the power sector and the government and power companies should take steps to drastically reduce theft and technical and administrative losses which remain uncovered and cause accumulation of circular debt.

According to Nepra estimates, such losses cause around Rs200 billion per annum.

Published in Dawn, Business & Finance weekly, January 11th, 2016