ISLAMABAD: The power sector has resumed building circular debt after an initial freeze that came about following a historic dip in international oil prices, improvement in bill collection and slight reduction in system losses.

A senior government official told Dawn that a recent meeting of the Economic Coordination Committee (ECC) of the cabinet was informed that overall recoveries had crossed 93 per cent consecutively in fiscal years 2015 and 2016 compared to 88-89pc in 2014.

Likewise, technical and distribution losses dropped during the same period to 17.8pc by end-December 2016 from 19pc in 2014.

“These two accounts by themselves have provided a positive cash flow to the power sector, totalling Rs116 billion in these two years,” Water and Power Secretary Yousaf Naseem Khokhar informed the ECC. He added that the sector showed marked improvement in its performance in two years.

Pace of accumulation picks up in last few months

Generation companies were making a cumulative loss of Rs7.78bn in 2013-14. They not only overcame their losses, but also reported a profit of Rs5.77bn in 2015-16.

“All these achievements as well as a historic drop in oil prices helped keep the power sector’s circular debt within the range of Rs320-330bn from December 2014 to June 2016,” the ECC was informed.

Mr Khokhar reported that these two fiscal years were the only period in over a decade when no losses were paid out of the federal budget. The payment would be around Rs200bn annually. This reduced the budgetary burden from 2.4pc of GDP to 0.7pc.

The meeting was, however, not informed that about Rs6 per unit was being charged to consumers over and above tariffs determined by the National Electric Power Regulatory Authority (Nepra) for almost two years. These included about Rs4.50 per unit additional cost to consumers through a series of surcharges, like tariff rationalisation and financing cost etc, and about Rs1.50 per unit by withholding notifications on tariffs determined by the regulator 2015-16 onwards.

Yet the overall amount of circular debt has now gone beyond Rs800bn, significantly higher than Rs685bn about seven to eight months ago, Pakistan Electric Power Company (Pepco) officials informed the meeting. It is parked equally in Power Holding Ltd and accounts of distribution companies.

Power ministry officials, speaking to Dawn after the meeting, explained that this figure includes both old stock and fresh accumulation. The figure is at an acceptable level, they said, even though the stock of arrears was around Rs400bn.

They claimed the amounts that are still not reconciled and reported on balance sheets could not be taken as circular debt. A gap of this size should be seen as normal in an annual business of over Rs1.2 trillion, they added.

The rise in circular debt has also been highlighted by the International Monetary Fund (IMF) in its report released last month. It said, “Some renewed accumulation of arrears in the power sector has been observed,” which was brought to nearly zero by 2015-16 with the help of favourable oil prices and sustained reform efforts.

The IMF asked the government for “swiftly addressing the resumption in the accumulation of arrears to ensure a financially viable and growth-supporting power sector” and noted Rs53bn accumulation of power-sector arrears in the first half of 2016-17, with the stock increasing to Rs374bn.

The IMF said this showed a widening of the system’s operational deficit due to delays in passing through to consumers higher generation tariffs and weaker bill collection by distribution companies, only in part compensated by the positive impact of a reduction in distribution losses and still low oil prices.

Informed sources, however, said the stock of arrears (parked in Power Holding Ltd) and being financed through bonds, term finance certificates and loans and being serviced through financing cost had actually gone beyond Rs400bn after recent adjustments.

The official said whatever financial pressure the power sector faced had been resolved through a recent financing arrangement of Rs193bn approved by the ECC on July 25.

Published in Dawn, August 8th, 2017