Resolving Pakistan's Circular Debt, Electricity Shortages
As Pakistanis discuss major causes and crippling effects of the worst ever power crisis in the nation's history, "load shedding" and "circular debt" are two key phrases that have entered the vocabulary of average people in Pakistan during the last few years.
Load Shedding:
What do these common phrases mean? Let me start with "load shedding" first. Long and daily power outages are called "load shedding". "Load shedding" is supposedly an attempt to share a limited resource equitably among many consumers. In addition to insufficient installed capacity as the culprit, the dramatic increase in "load shedding" in the last two years is commonly also blamed on growing "circular debt" which results in significant under-utilization of power plants already in place. There is credible data to suggest that the deepening electricity crisis since 2008 has more to do with the independent power producers(IPPs) operating at less than 50% of their installed capacity because they can not pay for the fuel they need to produce more. The outgoing finance minister Mr. Shaukat Tarin acknowledged the problem of circular debt, and tried to focus on it. He even threatened to quit last year over the lack of resolution of this problem. However, he was only partially successful in paying down the government debt. He is reportedly taking a parting shot at the problem on his final day in office.
Key Players:
The key players in this "circular debt" trap are the federal and provincial governments as the biggest deadbeats, the power distributors like KESC, the power producers like Pepco and Hubco, and the fuel suppliers like government-owned Pakistan State Oil (PSO) and partially state-owned Pak-Arab Refinery Ltd (PARCO). This debt circle begins with the government as the biggest debtor and ends with a government-owned entity as the biggest creditor. So the obvious question is: If the government is both the biggest debtor and the biggest creditor, then why is it that the government leaders can not solve the problem? Is it the lack of will? or the lack of competence? Is there a personal profit motive of the top leader of the ruling PPP, who is allegedly pushing rental power plants (RPPs) contracts ahead of the speedy resolution of circular debt? Is it a combination of corruption and incompetence? The answer to these questions depends on who you ask.
Circular Debt:
While you ponder possible answers to the question of resolving circular debt, let me share with you an interesting story posted by Naresh Goyal that explains circular debt and how it can be resolved:
It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town... He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one.
The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher. The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.
The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel...
The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.
The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.
At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.....
Summary:
Clearly, the circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF and the US officials in their recent meetings with Pakistan government have described the circular debt as a significant threat to the country’s economy.
After signing hundreds of millions of dollars worth of rental power plant (RPPs) projects in the face of harsh criticism, the government is finally starting to deal with rising circular debt to address power shortages. Outgoing finance minister Saukat Tarin recently told the News that “in real terms the circular debt has swelled to Rs108 billion which mainly includes non-payment of Rs42 billion by KESC, Rs21 billion by the government of Sindh and Rs15-16 billion from commercial consumers to the Pakistan Electric Power Company (Pepco)".Just prior to leaving office, Tarin has decided to raise Rs. 25 billion as a small step toward settling a debt estimated at hundreds of billions of rupees.
Unless Pakistani government deals with the economics of power generation by boldly tackling the issue of growing circular debt quickly, it will be almost impossible to get the IPPs to fully utilize existing installed capacity, much less attract new investments in the power sector.
Related Links:
Tarin's Parting Shot at Circular Debt Problem
Circular Debt: Finance 3.0
Shaukat Tarin Resigns
US Fears Aid Will Feed Graft in Pakistan
Pakistan Swallows IMF's Bitter Medicine
Shaukat Aziz's Economic Legacy
Pakistan's Energy Crisis
Karachi Tops Mumbai in Stock Performance
Pakistan's Electricity Crisis
Pepco Increases Load Shedding By 5 Hours
Load Shedding:
What do these common phrases mean? Let me start with "load shedding" first. Long and daily power outages are called "load shedding". "Load shedding" is supposedly an attempt to share a limited resource equitably among many consumers. In addition to insufficient installed capacity as the culprit, the dramatic increase in "load shedding" in the last two years is commonly also blamed on growing "circular debt" which results in significant under-utilization of power plants already in place. There is credible data to suggest that the deepening electricity crisis since 2008 has more to do with the independent power producers(IPPs) operating at less than 50% of their installed capacity because they can not pay for the fuel they need to produce more. The outgoing finance minister Mr. Shaukat Tarin acknowledged the problem of circular debt, and tried to focus on it. He even threatened to quit last year over the lack of resolution of this problem. However, he was only partially successful in paying down the government debt. He is reportedly taking a parting shot at the problem on his final day in office.
Key Players:
The key players in this "circular debt" trap are the federal and provincial governments as the biggest deadbeats, the power distributors like KESC, the power producers like Pepco and Hubco, and the fuel suppliers like government-owned Pakistan State Oil (PSO) and partially state-owned Pak-Arab Refinery Ltd (PARCO). This debt circle begins with the government as the biggest debtor and ends with a government-owned entity as the biggest creditor. So the obvious question is: If the government is both the biggest debtor and the biggest creditor, then why is it that the government leaders can not solve the problem? Is it the lack of will? or the lack of competence? Is there a personal profit motive of the top leader of the ruling PPP, who is allegedly pushing rental power plants (RPPs) contracts ahead of the speedy resolution of circular debt? Is it a combination of corruption and incompetence? The answer to these questions depends on who you ask.
Circular Debt:
While you ponder possible answers to the question of resolving circular debt, let me share with you an interesting story posted by Naresh Goyal that explains circular debt and how it can be resolved:
It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town... He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one.
The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher. The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.
The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel...
The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.
The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.
At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.....
Summary:
Clearly, the circular debt problem has assumed alarming proportions, threatening Pakistan's future. The IMF and the US officials in their recent meetings with Pakistan government have described the circular debt as a significant threat to the country’s economy.
After signing hundreds of millions of dollars worth of rental power plant (RPPs) projects in the face of harsh criticism, the government is finally starting to deal with rising circular debt to address power shortages. Outgoing finance minister Saukat Tarin recently told the News that “in real terms the circular debt has swelled to Rs108 billion which mainly includes non-payment of Rs42 billion by KESC, Rs21 billion by the government of Sindh and Rs15-16 billion from commercial consumers to the Pakistan Electric Power Company (Pepco)".Just prior to leaving office, Tarin has decided to raise Rs. 25 billion as a small step toward settling a debt estimated at hundreds of billions of rupees.
Unless Pakistani government deals with the economics of power generation by boldly tackling the issue of growing circular debt quickly, it will be almost impossible to get the IPPs to fully utilize existing installed capacity, much less attract new investments in the power sector.
Related Links:
Tarin's Parting Shot at Circular Debt Problem
Circular Debt: Finance 3.0
Shaukat Tarin Resigns
US Fears Aid Will Feed Graft in Pakistan
Pakistan Swallows IMF's Bitter Medicine
Shaukat Aziz's Economic Legacy
Pakistan's Energy Crisis
Karachi Tops Mumbai in Stock Performance
Pakistan's Electricity Crisis
Pepco Increases Load Shedding By 5 Hours
Comments
KARACHI: The receivables of Hub Power Company Limited (HUBCO) against WAPDA have piled up to Rs 75 billion on account of electricity purchase as of February 21, 2010 and of this Rs 69 billion is classified overdue or payable immediately.
According to HUBCO's communique sent to KSE here Monday, the board of directors of power Supply Company was told that as a result of WAPDA outstanding HUBCO owes Rs 68 billion to Pakistan State Oil (PSO) for fuel supply to the power plant.
The company's obligation to PSO remains covered by a Stand-by Letter of Credit of Rs8 billion provided by HUBCO to PSO under the Fuel Supply Agreement.
One of the consequences arising from this situation has been that the fuel supplied by PSO has been insufficient to meet the plant's minimum operational requirements.
HUBCO said that the company is in constant follow-up with WAPDA and the Federal Government for early release of the entire outstanding amounts.
In addition, WAPDA is unable to provide a Letter of Credit as required under our power purchase agreement (PPA) for an amount of Rs12.92 billion. The obligations of WAPDA under the PPA are secured through the Sovereign Guarantee of the Government of Pakistan under its implementation agreement with HUBCO.
HUBCO plant has operated at an average load factor of 76% and an average complex availability (ACA) of 877. Electricity sold to WAPDA was 2,012 GWh.
ISLAMABAD: With the circular debt issue still unresolved, three major refineries have stopped oil supplies to Pakistan State Oil and two others have threatened to do the same if their dues are not cleared.
The PSO sent on Wednesday an “SOS” to the prime minister`s adviser on petroleum and ministers for finance and water and power for immediate payment of Rs60 billion to avert a shortage of petroleum products in the country.
In his last communication to the federal government, PSO`s outgoing managing director Irfan Qureshi said: “Attock Refinery Limited, National Refinery Limited and Byco have already discontinued supplies to PSO while Parco and Pakistan Refinery Limited have expressed their inability to continue supplies because of financial constraints. This will ultimately lead to severe shortage of POL products in the country.”
The refineries have taken the extreme step because of PSO`s inability to clear about Rs100 billion dues. The PSO`s own receivables from power sector and the government of Pakistan on account of price differential claims reached Rs181 billion on April 20.
The country`s largest fuel supplier said that from Feb 1 it had supplied oil worth Rs78 billion to the power sector but received only Rs45 billion. The remaining Rs33 billion and the opening balance of Rs148 billion on Feb 1 have left the PSO in dire straits. It has already defaulted on its tax obligations and is on the verge of international default on Rs39 billion in 21 days.
The PSO said it immediately needed Rs60 billion to avoid default on international payments and to clear its dues to tax authorities and local refineries.
Last week, the fuel supplier had expressed its inability to import furnace oil for power generation.
“The circular debt issue has now reached a point where the PSO expresses its inability to be able to continue its furnace oil imports from May onwards.
“With no financial limit available and all our bank borrowing limits exhausted, we have no option, but to suspend import of fuel oil from May 15, 2011 to avoid any default and create a bad image of Pakistan in the international community.”
The government plans to issue term finance certificates of Rs130 billion to the local banks, but no concrete step has been taken because of the absence of the finance minister and finance secretary who have been in Washington for talks with the International Monetary Fund and other lenders.
Because of water and gas shortages, power companies are already resorting to more than five hours of loadshedding which could escalate if furnace oil supplies are affected.
The government has paid Rs120 billion overdue electricity subsidies to improve the financial condition of power companies, leaving it with the option of either letting the budget deficit slip to 6.3 per cent or playing with the figures to restrict it to 5.5 per cent.
The payments would partially improve the balance sheet of the power sector that has been crippled by the government’s inability to pay price differential claims. The arrears that have increased to Rs288 billion are one of the main reasons for the massive power shortfall, recorded at 7,200 megawatts on Tuesday, as companies are not running at optimum capacity. The capital injection will enable power companies to purchase fuel for electricity generation.
The payments have been made to the Pakistan Electric Power Company (Pepco), Pakistan State Oil, oil refineries, power generation and distribution companies. However, these will widen the budget deficit by another 0.7 per cent of national income, torpedoing the revised fiscal framework.
The government that has been struggling to restrict the budget deficit to Rs941 billion or 5.5 per cent of Gross Domestic Product (GDP) is now facing a situation whereby the gap may swell to Rs1,078 billion or 6.3 per cent.
Finance ministry officials said so far the ministry was reluctant to pay its dues because of the negative implication for the budget deficit – the gap between national income and spending. Officials added that the government paid Rs98 billion on Wednesday while the remaining Rs22 billion would be released today (Thursday).
Sources said the finance ministry was considering deferring payment of other subsidies like those for agriculture and fertilisers to the next financial year. There is an option to even defer some of the electricity subsidies of this fiscal year.
Any attempt to play with the figures may invite the International Monetary Fund’s wrath that in the past slapped penalties after noting tempering with budget figures.
According to the Budget Strategy Paper 2011-12, the government will pay Rs186 billion electricity subsidies by June-end. The accumulative power subsidy for this year and the previous two years amounts to Rs306 billion. The finance secretary was not available to comment on the issue.
The circular debt still stands at Rs168 billion even after Rs120 billion payments. The major factor for the debt now is the refusal of provinces to pay their dues to Pepco. The four provinces, Fata and AJK owe Rs106 billion to Pepco, according to official documents. Of this amount, a major chunk of Rs76 billion is due to be paid by the provinces. Punjab owes Rs9 billion whereas Sindh owes Rs37 billion.
The ongoing massive power shortage is partly because of oil and gas shortages and partly because of inefficient power plants. Although the government has paid a handsome amount, there is still a big question mark on the sustainability of the power sector due to resistance to reforms. The government is not ready to completely disband Pepco and it is also not amending the National Electric Power Regulatory Authority Act that is necessary to ensure full power tariff recovery.
Karachi Electric Supply Company’s (KESC) tariff structure is another source of concern. This year alone, the federal government will pay Rs40 billion subsidies to KESC on account of price differential.
The other major factor is longstanding receivables from private consumers. All the distribution companies are unable to recover Rs69.7 billion from private consumers which are overdue from two months to three years, according to the documents.
A daily on Monday described the acute power shortage in Pakistan as an “existential emergency” as it called for establishing a national power management plan.
An editorial in the News International noted: “Our installed sources of power generation exceed our power needs and if all were working at capacity we would be a net exporter of power.”
Giving statistics, it said: “Our power shortfall has now reached 5,000 megawatts. We are generating 13,240 MWs against a peak demand of 18,065MWs.
“Industry has ground to a halt; productivity in key sectors like that of cotton goods has dropped almost to zero in places like Faisalabad, the hub of the cotton spinning industry. In Lahore loadshedding has reached 14 hours a day.”
The editorial said that the problem is affecting every province.
It went on to say that at the heart of the matter “lies the inability to resolve the circular debt crisis and an embedded inefficiency in power distribution along with power theft”.
Taking a dig at government announcements to tackle the electricity situation, the editorial said: “We have lost count of the number of prime ministerial pronouncements on the management of the power crisis, the empty plans that never seem to materialise and the grand political statements that this or that much power has been added to the system since this government took office.”
Calling it “an existential emergency”, it added that the country needs a national power management plan.
http://www.khaleejtimes.com/DisplayArticle08.asp?xfile=data/international/2011/June/international_June778.xml§ion=international
KARACHI - The prolonged hours of unscheduled load shedding can be brought to an end with just a small investment of $1.5 billion. “Currently, the country is facing a shortfall of 4,000MW in the production of electricity, but this can be overcome by investing only $1.5 billion, which is a small amount compared to the scale of the power crisis that has paralysed the economy and making lives miserable for the people,” Sohail Wajahat H Siddiqui, managing director/CEO of Siemens Pakistan and a member of the Pakistan Business Council (PBC), told Pakistan Today.
The PBC is a body of the elite business groups in the country that holds interactions with government officials, including the president and the prime minister, to find out ways and means to overcome the energy and economy crises and to put the economy on the path of stability. Siddiqui said that under the short-term strategy, an investment of $1.5 billion is required to produce 4,000MW of electricity that would end the shortfall in production and demand.
“I’ve have submitted a comprehensive report to the government from the platform of the Pakistan Business Council to overcome the energy crisis on the short-term and long-term basis,” he added. He said that under the short-term strategy, the upgrading and overhauling of the existing power plants would be sufficient to enhance output of electricity by 4,000MW, adding that for the long-term plan, the government should focus on the generation of electricity from wind, solar, hydel and gas.
“Power generation from the wind and solar technology is expensive, but this technology is essential to develop a mixed energy culture,” he said. “If the crude oil prices shoot above $200 to $250 a barrel in the future, how would the economy and consumers be able to face this crisis?” he questioned, adding that in this situation, alternative energy resources prove helpful to generate low-cost electricity.
Siddiqui said that the government should make serious efforts to develop the energy sector, which has been neglected in the past, creating an unprecedented energy crisis in the country. “Had the previous governments developed big dams and established new power plants in the past to generate additional electricity and to meet the country’s growing demand, the country would not have been facing this crisis now,” he argued.
He said that Pakistan is suffering a loss of about two percent of the GDP a year because of the energy crisis that triggers unemployment, affects industrial production, tax revenue collection and paralyses overall economic activity in the country. “A will is required to eliminate the electricity shortage and to ensure a smooth sailing of the ailing economy,” he said, adding that the PBC has decided to play a crucial role to support the government in overcoming major problems.
http://www.pakistantoday.com.pk/2011/05/%E2%80%98only-1-5bn-needed-to-bring-end-to-power-woes%E2%80%99/
SUMMER in the plains of Pakistan is excruciating enough without the added joy of 20 hours of power cuts a day. Earlier this month protesters in several towns in Punjab, Pakistan’s wealthiest province, smashed windscreens, blocked motorways, shut down markets and set fire to the offices of parliamentarians and an electric utility. They clashed with police who brought out handcuffs and tear gas and fired live rounds in the air.
It was a reaction to electricity shortages that had plunged parts of the province into darkness and scorching heat. At one point the gap between supply and demand hit 7,500 megawatts (MW), or nearly 40% of national demand.
Under the current government, the power sector has neared the top of a list of security, political and foreign-policy problems that includes some heavyweight contenders. Last week’s confluence of events once again underlined how easily Pakistan’s power sector can slip into collapse. The system’s many weaknesses find it all too easy to conspire. Cool weather in the north meant a reduced flow of hydroelectricity. Demand shot up as summer temperatures further south soared into the forties and air-conditioners strained to keep pace.
Meanwhile, several private power producers had to halt or slash production because the state-run power purchasing company hadn’t paid them. They had not been able, because the biggest consumers (especially provincial and federal governments) had not paid their own electricity bills. The bills that were paid are not enough to cover the cost of generation.
This so-called “circular debt”, currently about $880m, is an ongoing problem. The government usually bites the bullet, as it did this time, by paying off a portion when power producers are about to sue for default, enabling them to start generating again—for the moment. What remain unaddressed are the structural issues that cause the debt to pile up again: poor recovery of dues (receivables stand at $4 billion), electricity theft, transmission losses, reliance on imported oil and politically sensitive subsidies for certain groups. Perpetuating all of this is a lack of efficiency and co-ordination across a maze of state-owned agencies including a power purchaser, distribution and generation companies, a regulator and various ministries. The gap between the effective cost of generation and payments received is estimated at $12 billion over the past four years.
http://www.economist.com/blogs/banyan/2012/05/pakistan%E2%80%99s-energy-crisis
ISLAMABAD: The United States Agency for International Development (USAID), in its effort to assist government-owned power distribution companies in loss reduction and revenue enhancement, is in the final stages of rolling out a nationwide installation of Automated Meter Reading (AMR) projects.
According to a press statement of USAID issued here on Thursday, initially, the project would be targeting areas with high thefts and high line losses. The AMR would provide highly accurate electronic meter readings with very little human intervention, using computer technology to transmit meter readings data via GSM/GPRS and radio frequency.
This would help distribution companies in monitoring the energy consumption trends among different consumer categories, understand consumer patterns, reduce electricity losses and increase their revenues.
The installation of AMR meters would start in the first quarter of 2013. With the intervention approaching its installation phase, the USAID Power Distribution Programme organised an AMR solution requirements workshop in Lahore. The main objective of the workshop was to better understand and gather distribution companies’ business requirements.
AMR project teams from all five distribution companies (Islamabad Electric Supply Company, Peshawar Electric Supply Company, Lahore Electric Supply Company, Hyderabad Electric Supply Company and Multan Electric Power Company) actively participated in the workshop.
http://www.thenews.com.pk/Todays-News-3-154887-USAID-to-roll-out-largest-automated-meter-reading-project-in-Pakistan
Energy and Security: Natural Gas and the Example of Pakistan
By Paul Sullivan,
Georgetown University
I recently got a question the other day about Pakistan. It is having a serious electricity crisis. One of the solutions proposed to me was that a pipeline be built from a neighboring country, Iran, which has a lot of natural gas in order to fuel the power stations of this South Asian state.
Fuel is not enough.
The electricity generating stations in Pakistan need to be better maintained. Many plants are simply not running due to bad maintenance. More people need to be paying their electricity bills. The pricing of electricity needs to be more rational. Without the right amount of payments coming into an electricity company, even if it is a public sector company, the company cannot remain solvent and well run for long. Pakistan’s electricity is produced by two public sector utilities and about 20 plus independent power producers.
Part of the problem with this in some developing countries is that in the villages and even the large cities one can see thousands of “informal” wires being connected from the electrical poles to houses and businesses without any meters (or even safe connections, but that is another story). Income losses from essentially stolen electricity are gigantic.
Pakistan’s electricity demand growth of about 10-11 percent per year is overwhelming its supply of electricity.
About 55 percent of Pakistan’s people use biomass, such as cow dung, other agricultural waste, garbage and more to heat, cook, etc. These people will likely have an increasing want for electricity connections in the future. Pakistan will not develop even near to its potential if this huge proportion of its population is not connected with electricity, either on a grid or via distributed energy systems at the village and town levels.
These distributed systems could use the vast wind, solar, geothermal and other renewable energy resources available, but severely underutilized in the country. Setting up distributed power systems in villages and small towns could also prove to be a lot cheaper than extending Pakistan’s often shaky and overused grid....
http://ubpost.mongolnews.mn/?p=4213
In order to eliminate circular debt, the government has released Rs 362 billion to the Independent Power Producers (IPPs), out of which four IPPs announced that they have received a total sum of Rs 116.826 billion as a part of their overdue receivables, according to the Karachi Stock Exchange (KSE) notice released on Tuesday.
Five IPPs out of 19 others, in Memorandums of Understanding (MoUs) signed between government and IPPs, including Hub Power Company Limited (Hubco), Nishat Chunian Power Limited (NCPL), PakGen Power Limited (PKGP), Kohinoor Energy Limited (KEL) and Nishat Power Limited (NPL) have announced officially in notices to all bourses of the country that they have received around Rs 116.826 billion from Central Power Purchasing Agency (CPPA), Water and Power Development Authority (WAPDA) and National Transmission and Despatch Company (NTDC).
Hubco remained prime beneficiary as the company stated in a letter to the KSE that the company has received overdue amounting to Rs 75 billion out of Rs 83.2 billion (overdue as of May 31, 2013) for Hubco and Rs 17.4 billion for Narowal Plant from WAPDA and NTDC, bringing the total to Rs 92.4 billion.
Hubco announced that the company has paid Rs 55.8 billion to Pakistan State Oil (PSO) as agreed under the settlement arrangement.
Hubco has entered into three MoUs with the government as required by them for the settlement of agreeing to convert Hub plant from oil to coal, extend the credit period for its Narowal Plant from 30 days to 60 days and to endeavour to operate the plants at full capacity.
Under the MoUs, IPPs also agreed to achieve their maximum generation capacity and provide 1,500 megawatts (MW) to 1,700 MW to the national grid before Ramazan, four IPPs including Hubco, Lalpir, Pakgen and Saba Plant, have agreed on conversion to coal-based power generation within 18 months, extend credit period from 45 days to 60 days and reduce interest rate on late payments by public sector power companies.
Similarly, NCPL announced that the company has received overdue receivables amounting to Rs 6.86 billion from CPPA without any reduction in existing delay mark-up rate of existing 4.5 percent to 2.5 percent as against expected cut of 2.0 percent from 4.0 percent to 4.5 percent.
Likewise, PKGP also informed the KSE that the company has received overdue receivables amounting to Rs 6.982 billion from CPPA at existing delay mark-up rate.
Also, KEL announced in a letter to KSE that the company has received overdue receivables amounting to Rs 3.504 billion from WAPDA.
Muhammad Affan Ismail of BMA Research told this scribe that the fund injections (cash or otherwise) are a short-term solution and have no long-term implications on operational factors or returns to investors. Best would be to recall the Rs 82 billion Tem Finance Certificates (TFCs) issued last year by the government in order to help solve the power crisis, he added.
NPL has announced that it has received overdue amounting to Rs 7.080 billion.
---
Naveed Tehsin of JS Research believes that PSO stands out as a key beneficiary from the retirement of the circular debt as its receivables and payables to local refineries have sharply declined to Rs 79 billion (down 54 percent) and Rs 9 billion (down 66 percent), respectively.
Tehsin expected that receivables would further decline by Rs 48 billion after the issuance of Pakistan Investment Bonds to PSO.
http://www.dailytimes.com.pk/default.asp?page=2013%5C07%5C03%5Cstory_3-7-2013_pg5_1
The National Electric Power Regulatory Authority (NEPRA) in its annual report has blamed the Ministry for Water and Power for purposefully not supplying required amount of electricity to the consumers, hence deliberately resorting to load shedding.
The report also found that TOU (Time of Use) electricity metres of 70 per cent consumers were outdated, which either loot the consumer or deprive the government from justified charges.
“TOU meters of 70 per cent consumers were outdated due to which some consumers were billed off-peak rates and some with peak rates.”
The report said that TOU meters help the consumers to pay less while in other cases it makes them pay more than what they had actually consumed.
Some of the observations made in the report are as follows: The connected/running load of most of the consumers under domestic, commercial and industrial B-2 consumers was more than their sanctioned load. However, no action in the form of issuing notices or extending the load has been taken by DISCOs. Transformers are running on 80% to 100% overloading due to which frequent tripping was occurring; TOU meters of 70% consumers were outdated and out timed due to which some consumers were billed off-peak rates and some with peak rates; 11KV metering rooms were found in miserable conditions, having no protection (relay) system; Lines and poles were found in poor condition, which is also a reason for increased number of interruptions, resulting in non-achievement of reliability standards.”
http://www.samaa.tv/economy/2016/10/circular-debt-in-pakistan-power-sector-declining-imf/
The annual increase in circular debt of Pakistan’s power sector has come down from Rs 222 billion to just Rs 8 billion in the fiscal year 2015-16.
It was revealed in the data graphics released by the International Monetary Fund (IMF) about the circular debt of Pakistan’s Power sector.
According to the data, power sector losses paid out of the federal budget in Pakistan have come down from Rs 342 billion in fiscal year2012-13 and Rs 138 billion in fiscal year 2013-14 to zero since past two years fiscal years 2014-15 and 2015-16.
#Pakistan has #electricity overcapacity but it still suffers #power shortages because of lack of #grid capacity. #PTI govt to increase investment in grid and delay about 10,000 MW worth of planned #coal/#wind power projects. #cost #debt #economy #PMLN https://www.bloomberg.com/news/articles/2021-01-27/pakistan-struggles-to-tackle-an-unfamiliar-glut-of-electricity
After spending decades tackling electricity shortages, Pakistan now faces a new and unfamiliar problem: too much generation capacity.
The South Asian nation’s power supply flipped to a surplus last year after a flurry of coal- and natural gas-fired plants were built, mostly financed by the Belt and Road Initiative launched by Chinese President Xi Jinping in 2013. Pakistan is slated to have as much as 50% too much electricity by 2023, according to Tabish Gauhar, special assistant to Prime Minister Imran Khan for the power sector.
That is problematic because the government is the sole buyer of electricity and pays producers even when they don’t generate. To help tackle the issue, the government has negotiated with producers to end that system, lower their tariffs and asked them to delay the start of new projects, according to Gauhar. It is also trying to convince industries to switch to electricity from gas.
“We have a lot of expensive electricity and that is a burden,” he said.
While the Chinese financing and the surplus is a welcome change after years of shortages that left exporters unable to meet orders and major cities without electricity for much of the day, two main problems remain. The first is a creaking network, and the second is the need to supply cheaper power while keeping emissions in check.
“Pakistan has overcapacity, yet it still has power shortages because of the unreliability of the grid,” said Simon Nicholas, an analyst at the Institute for Energy Economics & Financial Analysis. “They haven’t invested in the grid the same way they’ve invested in power plants.”
The last nationwide blackout happened just last month after an outage at the country’s largest facility. While the new plants have also boosted coal generation to a record fifth of the power mix, Pakistan plans to increase the share of wind and solar to 30%, while another 30% will be generated from river-run dams.
Pakistan will pay private power producers 450 billion rupees ($2.8 billion) in overdue electricity bills in a deal to reduce future tariffs. The government targets to pay 40% of that bill by the end of February, with the second payment slated before December, according to Gauhar. A third of the payment will be made in cash, with the rest in fixed income instruments, he added.
About 8 gigawatts worth of government-owned power plants will also have tariffs reduced. And Pakistan plans to negotiate lower tariffs for mining and power generation at the Thar coalfield, said Gauhar.
The government aims to delay about 10 gigawatts worth of planned power projects, including coal and wind plants, since there won’t be any need for them next year, said Gauhar.
https://www.dawn.com/news/1599538
THE government’s plan to settle the outstanding dues of IPPs amounting to Rs450bn in three tranches is only the first step towards liquidation of the power sector’s circular debt. According to reports, the IPPs will get 30pc of their existing debt stock this month and the remaining amount in two equal tranches in June and December. Under the plan, one-third of the arrears will be paid to the power producers in cash and the remainder in the form of Pakistan Investment Bonds at the floating rate. The IMF also gave its nod to the plan after the government agreed to heftily increase the base electricity tariff as demanded by the lender of the last resort. The payment of the first tranche will immediately lead to materialisation of the MoUs signed between the government and power producers in August last year into formal agreements. The MoUs provide for changes in the terms of the existing power purchase agreements that will reduce the size of the guaranteed capacity payments or fixed costs paid to the IPPs, a major source of accumulation of the circular debt. The government is expecting savings of Rs850bn over a period of 10 years, following the modifications in PPAs. The IPPs, which had demanded full payment of their money before they agreed to implement their revised PPAs, seem to have moved away from their earlier position in the ‘larger interest of the country’ as the plan will also help them improve their tight liquidity position and make new investments in new schemes.
The settlement scheme covers the 50-odd IPPs which were set up in the 1990s and 2000s and had consented to the alterations proposed in their power purchase deals with the government. The majority of these plants have completed their life cycles or paid off their debts. Therefore, we should not expect an immediate resolution of the circular debt problem even after materialisation of the revised deals with the IPPs. In recent years, the major build-up in the circular debt has been caused by capacity payments to large power projects set up since 2015, primarily as part of the multibillion-dollar CPEC initiative, with Chinese money. So far, no progress has been made to get the terms of the PPAs with these companies renegotiated although we are told that contacts have been made with Beijing at the highest level. Until these contacts pay off, the resolution of the mounting power-sector debt will have to wait.
Owais Rawda explores what the most recent request for IMF climate funding means for power sector reform.
https://www.power-technology.com/comment/pakistan-to-reform-power-distribution-after-imf-meetings-minister-says/
At last week’s International Monetary Fund (IMF) Annual Meetings, Pakistan’s finance minister Muhammad Aurangzeb requested $1bn in funding from the IMF’s Resilience and Sustainability Trust (RST) to help mitigate the country’s climate risks and accelerate its energy transition. Established in 2022, the RST offers vulnerable low- and middle-income countries long-term concessional cash for climate-related spending.
Pakistan’s power sector circular debt, driven by inefficiencies in the power distribution network, crossed Rs2.66tn ($9.5bn) in May, according to a debt report released by the government’s power division. Meanwhile, citizens have suffered significant and frequent power outages in recent years, leaving millions without electricity.
The government’s faulty capacity payment contracts with independent power producers (IPPs) have come to light as the primary source of these challenges. Interest rates borne from private IPPs have not only worsened the debt crisis but spiked consumer tariffs, making electricity unaffordable.
In light of Aurangzeb’s request, coupled with multiple IPPs terminating their contracts with the government, the South Asian nation is now likely to announce significant reforms.
“These IPP payments had a detrimental effect on the overall quality of life for our citizens,” Awais Laghari, Pakistan’s minister for energy’s power division, tells Power Technology. “It is imperative that necessary steps are taken to resolve the issue.”
Without specifying the plans, he claims that the power division is currently evaluating options “through which the fiscal burden shared by the consumer, whether through taxes or debt repayments, can be optimised through various interventions that improves household economics and consumption at the same time”.
Laghari says that there are also plans to “unbundle electricity” and create a competitive market for energy, citing the recent introduction of an independent system and market operator (ISMO) as a step in this direction.
“This will ensure that a B2B [business-to-business] market for electricity can develop, which can eventually evolve into a B2B2C [business-to-business-to-consumer] market thereby providing greater options for consumers and lower prices through a competitive process,” he says.
The minister adds that the role of renewables in reforming the country’s power market will be imperative, “given their price advantage”. He believes that their ability to generate cheap electricity will “always put them ahead in any competitive market regime, making them critical to the success of the market.”
Following the IMF meetings, Laghari says that the government plans to “move forward actively” with the privatisation of electricity distribution companies and that “necessary improvements in governance are already underway”.
He believes that privatisation can enhance the efficiency of these companies, allowing them to remain a key player in the power market, which in turn will result in more affordable prices for consumers.
“Similarly, we continue to focus on investment in transmission to remove constraints so that lower cost electricity generated in the South can be moved across the country and overall consumer tariff can be reduced.”
About the author: Owais Rawda is a regulatory policy researcher that has written about the energy and technology industries.
https://www.arabnews.com/node/2592811/pakistan
Pakistan’s government is negotiating 1.25 trillion Pakistani rupee loan with commercial banks
Plugging unresolved power sector debt is top priority under ongoing IMF bailout program
KARACHI: Pakistan’s government is negotiating a 1.25 trillion Pakistani rupee ($4.47 billion) loan with commercial banks to reduce its bulging energy sector debt, the power minister and banking association said.
Plugging unresolved debt across the sector is a top priority under an ongoing $7 billion International Monetary Fund (IMF) bailout, which has helped Pakistan dig its way out of an economic crisis.
“The loan will be repaid over a period of 5 to 7 years,” Power Minister, Awais Leghari told Reuters, adding that the term sheets are yet to be signed.
Pakistan’s government, the largest shareholder or owner of most power companies, faces a challenge in resolving debt due to fiscal constraints. To address this, Islamabad has raised energy prices, as recommended by the IMF, but still needs to settle the accumulated debt.
“We’ve approached many banks, let’s see how many participate. It’s a commercial transaction and they have the choice of participating, however, we think there is liquidity in the system for it and banks have the appetite,” Leghari said.
The government plans to reduce “circular debt” — public liabilities that build up in the power sector due to subsidies and unpaid bills — this year by eliminating government-guaranteed debt and moving to a revenue-based system.
This approach is expected to lower financing costs, enabling the government to pay off interest and service debt obligations, he added.
“Such repricing of liabilities induces more efficiency, and reduces cost for consumers,” said Ammar Habib Khan, adviser to the power minister.
Zafar Masud, Chairman of the Pakistan Banks Association, told Reuters that the interest rate would be a floating exchange rate and the country’s top banks would participate, in addition to those who are already part of the outstanding loan.
“This will help in clearing up all the debt in the next 4 to 6 years which has been sitting on banks’ balance sheets,” he said.
Masud added that more than half of the 1.25 trillion debt is already on the banks’ books and is undergoing restructuring through self-liquidating facilities, which currently lack identifiable cash flows to support them.