The cancerous disease of Pakistan’s power market is becoming terminal with each passing day despite overdoses of price shocks to consumers. At the start of the fiscal year in July, the PDM government came with a capital blow to increase electricity tariff by a massive 47 per cent (Rs7.91 per unit) to “clear the backlog” left behind by the previous PTI government in “violation of international agreements” with the International Monetary Fund. The circular debt, as of June 30, 2022, stood at Rs2.253 trillion.

The tariff increase was aimed to generate additional revenue and bridge a financial gap of Rs893 billion in 2022-23 in meeting annual revenue requirements of about Rs2.52tr of the power companies, excluding K-Electriic, besides providing a general sales tax of more than Rs425bn to the government. It was promised that such a massive increase would take care of the delayed tariff notifications in the past and prices would begin to go down in October.

On completion of first quarter financials, it became clear that despite those back-breaking cost increases, the financial gap would conservatively remain on the higher side of Rs706bn — almost 1pc of Gross Domestic Product — during the current fiscal year. With little ‘realistic’ estimate, the gap is set to go beyond 803bn.

In fact, about Rs393bn gap has already occurred in the first quarter (July-September 2022). And all this is because of bad governance, concedes an official presentation made first to the finance minister and then to the prime minister.

While explaining various heads for this surge and sharing blame among the power and finance divisions, the presenters had the guts to suggest an amendment in the law to impose a ‘special surcharge’ at proposed rates of Rs12.60 to Rs31.60 per unit, to avoid an Rs706bn additional charge on the federal budget as ‘subsidy’.

Further electricity tariff hikes, put on hold due to political considerations, are being discussed to generate additional revenue

The cost of bad governance was defined as low bill recovery, higher losses and theft, pending generation cost, the markup on debt, cost of zero-rated incentives, Kissan package, delayed notifications, lower demand and K-Electric subsidy. The relevant divisions presented four options to pass on the cost to the general industry, commercial, bulk and other customers at an average rate of Rs31.60 per unit to bridge the Rs706bn gap through surcharges.

The presentation clearly showed that the end tariff, including taxes for commercial consumers, would cross Rs94 per unit from the existing rate of Rs49.31 per unit. For bulk consumers, the end rate was proposed at Rs78 instead of Rs40.70 per unit, and for industrial consumers, it was suggested at Rs81 per unit from Rs40.15 per unit.

The end rates for ‘other and general services consumers’ was proposed at Rs77.30 per unit from about Rs40 per unit a present without any change in the existing rate of Rs27.3 and Rs20.36 per unit for domestic and agricultural consumers at present, respectively.

Under the second option, a Rs12.59 per unit increase was proposed for all consumer categories. In that case, the commercial rate was proposed at Rs67 per unit, for bulk and industrial at Rs56 per unit, for others and general services at Rs55 per unit, Rs42 per unit for domestic and Rs35 for private agriculture. In both these cases, the required Rs706bn subsidy stood recovered.

The third option envisaged Rs2.27 per unit surcharge for all consumers along with an additional budget subsidy of Rs579bn, while the last and 4th options suggested Rs706bn additional subsidy and no increase in consumer rates.

The proposal did not get through at this stage because of political factors, but it puts bare the critical fault lines in the foundations of an economy already facing stagflation and has repercussions for the troubled International Monetary Fund (IMF) programme.

The power division conceded that the scenario shared with the IMF for completion of the 8th review was massively flawed and was bound to fail, but discounted power rates offered to zero-rated industry, farmers, and staggering fuel costs have added fuel to the fire. The full-year impact of zero-rated relief is well over Rs118bn and unbudgeted.

The bill recovery target was set at 93.58pc with the IMF, but it actually stood at 83pc in the first quarter (July-September) with a financial impact of Rs104bn. This included a Rs25bn Kissan package, Rs20bn court stays, and Rs54bn spillover. Recovery has been claimed to have improved to 91pc by the end of November, but such numbers in the power sector have always been murky until these are consolidated or audited at the end of the quarter.

System losses were committed at 15.83pc but actualised at 17.42pc. A 1pc loss translates into Rs28bn in revenue loss per annum at current rates. The tariff rebasing of Rs7.91 was assumed on July 1, 2022, but Rs7 per unit was actualised by July 25, and the remaining 91 paisa per unit was kept pending.

Moreover, the exchange rate parity was taken at 195 while it actually went beyond Rs224 most of the time, and the Kibor rate for borrowing was assumed at 10.5pc against the actual rate of over 15pc. The price shock also appeared to have played a part as electricity demand dropped to 40bn units against the targeted 45bn units. Subsidies payable to K-Electric were also massively underreported.

Private experts and the National Electric Power Regulatory Authority (Nepra) have been continually pointing out the governance issues in power companies to reduce losses and improve recoveries which are leading to circular debt but in vain.

According to Nepra, the overall actual losses in FY22 stood at 17.13pc as against the actual loss of 17.95pc during FY21. This is much higher than the allowed transmission and distribution losses for FY22 at 13.41pc. The consumer end tariff is based on 100pc recoveries, but the actual recovery in 2021-22 was 90.51pc as compared to 97.30pc during FY21, i.e. almost 7pc less than the previous financial year. This is alarming, keeping in view the current average per unit cost of the billed amount.

No wonder the distribution companies’ receivables, including KE, amounted to Rs1.398tr in FY21 but increased to Rs1.68tr by the end of FY22, showing an increase of Rs282bn. The circular debt has meanwhile gone beyond Rs2.5tr by end-September.

Published in Dawn, The Business and Finance Weekly, December 26th, 2022