Circular debt raising concerns in power sector

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The State Bank of Pakistan has announced that it will facilitate banks in case they require any regulatory support towards early resolution of the circular debt issue.
Presently, the independent power producers (IPPs) are facing a severe financial crisis which would now be solved by the SBP. The acting Governor stressed upon the financial sector to play its due role in resolving the ongoing energy crisis in the country that is hampering business activities and life of the common man, the SBP said. He said an early resolution of this critical issue is in the interest of all, including that of the banking industry itself. It is to be noted that the Prime Minister has set up a high profile committee, which is focusing on remedial steps to develop a long term solution of the energy crisis.

Factors behind the crisis

Representatives of IPPs identified the factors behind the crisis. They informed that the Government of Pakistan (GoP) is considering various short and medium term options for resolution of the energy crises faced by the country on a sustainable basis. These options include use of coal as a substitute to oil, import of gas as raw material and constructing small hydro power projects. The issues being faced by the IPPs are mainly due to lack of short term liquidity. It was suggested that the issues could be solved by allocation of working capital limits to PEPCO, extension of L/C time period from 60 to 90 days for IPPs and conversion of outstanding circular debt into long term Pakistan Investment Bonds (PIBs). These bonds would help to distribute the responsibility for financing to a larger number of banks and development finance institutions (DFIs). The banks demanded that the GoP should first focus on paying off its direct circular debt of Rs300 billion through issuance of PIBs on priority basis, whereas financing to individual IPPs, existing and incremental, would be taken care by the banks their selves on case to case basis.
The problem of circular debt started with the start of the energy crisis. A common trend emerged since 2009 that was ‘not to pay others’ dues,’ with non-payments by the government controlled organisations. Therefore, the government is directly responsible for this financial crisis. For instance, all government controlled institutions and departments such as KESC, Karachi Water and Sewerage Board, Sui Southern Gas Company, PSO and others are not clearing each others’ dues. A tussle is going on amongst them and the federal and provincial governments are also not ready to pay their dues and the ultimate sufferers are the honest consumers who are paying their electricity bills on time. The other discriminatory behavior is that if common consumer fails to pay bill in time, the line is disconnected promptly but government organisations and departments are using electricity without paying bills for years. On this situation the US Agency for International Development (USAID) has also shown serious reservations over the alarming rise in the inter circular debt of the energy sector due to which consumers are not being supplied power regularly.

Inter-corporate circular debt piles up

The Economic Survey 2010-11 also depicted that the organisations in the energy sector owe Rs258.5 billion that has pilled up the inter corporate circular debt, till April 2011, against Rs103.9 billion during the corresponding period last year, showing an increase of 147 per cent. The power producing companies noted that dues under circular debt have increased 1.5 times as compared to those in the last year. Therefore, they are unable to pay the oil import bills to international oil suppliers. According to details available, the receivables amounted to Rs775.2 billion and payables totalled at Rs516.7 billion. Out of Rs258.5 billion, net receivables of PSO stood at Rs51 billion, SSGCL Rs7.1 billion, PEPCO Rs2.7 billion, OGDCL Rs115.5 billion, PARCO Rs37.5 billion, GHPL Rs9.6 billion, PPL Rs22.2 billion and KESC Rs27.5 billion, 2010. The KESC now claims that its domestic consumers owe Rs24 billion while commercial consumers have not paid Rs13 billion in dues, however it did not mention how much the government departments owe to the organisation. This amount is almost equivalent to the amount KESC is required to pay to fuel suppliers. Moreover, the public was warned about an electricity disconnection in the case of non-payment of bills, but government entities were not touched upon for recovery of dues or given a threat of power disconnection. The SNGPL has net payables of Rs13.4 billion and the Karachi Water and Supply Board depicts an amount of Rs1.2 billion. This situation clearly indicates the inefficiency of the power generating companies who have not collecting payments on time and appropriate action was not taken due to which dues piled up and have reached such exorbitant levels.

Rising and falling demand

On the one hand power generation companies are unable to produce electricity to the maximum level and on the other hand, the average electricity demand increased at the rate of 5.2 per cent per annum, during 2001-10. However, the demand reduced to 2.8 per cent during July-March 2010-11 as against the same period last year. This was perhaps because of slow economic activities and non affordability of electricity tariffs for domestic consumers. When the PPP government came into power, the government borrowing was about Rs600 billion that included issuance of energy-related stock and other subsidies. The Prime Minister is also seen to help less in this regard. He constituted a committee to convene an energy conference but four months have passed and no results have materialised. He is continuously appealing, not ordering, to all stakeholders, particularly the provincial governments, to honour their commitments made during the energy summit, held in April 2011, and pay their electricity dues so as to bring down the circular debt. However, uptil now nor has any action been taken against them neither have they paid a fraction of their dues.

Action on part of the govt

The government has formulated a strategy based on raising Rs130 billion by floating term finance certificates. It was to make a series of adjustments in the government’s receivables from the public sector oil and gas companies. By implementing these measures, it hopes to reduce the circular debt to a ‘negligible level,’ but past experience, shows that this strategy is not realistic and is not likely to achieve the desired targets. The PM said circular debt will be regularly monitored on a daily basis and the dues and claims of different organisations, including the provincial governments would be settled. However, it is not known what the outcomes of these instructions are going to be. The present government blamed that the power crisis was due to a complete freeze imposed by the previous government on electricity tariffs during 2003-07, resulting in the creation of circular debt of about Rs400 billion which upset the whole energy sector, including IPPs, oil and gas suppliers and refineries.
The former Finance Minister Shaukat Tarin had announced in July that circular debt had successfully reduced to Rs70 billion and the rest of the amount would be cleared by December 2009. However, the debt has almost doubled since then. Later on, the government was planning to eliminate the circular debt of Rs400 billion in the budget 2011-12.
On April 16, 2010, the fuel suppliers including PSO, OGDCL, SSGCL, SNGPL, PARCO and PPL had receivables to about Rs276 billion. The Federal Government had to intervene to save the power sector, however the vicious circle of debt which began to worsen since June 2009 has re-emerged. All the stakeholders agreed on one point that inter-corporate debt of the energy sector is the mother of all evils. The fact, that this vicious circle of debt has emerged because of poor cash flows and not because of failure in recovery of full cost from consumers, needs to be accepted. The problem further aggravated because of inappropriate planning, ad hoc policies, and lack of good governance and above all, failure of the federal and provincial governments, autonomous bodies and bulk consumers to pay their bills on time.

Transmission and
distribution losses

However, one of the main reasons playing important role is transmission and distribution (T&D) losses, standing at about 40 per cent that have not been controlled. They mostly comprise of theft. Insiders say one per cent of T&D loss is equivalent to one billion rupees, aggregating to Rs40 billion per month or Rs480 billion per annum. Half of these losses are supposed to be due to technical issues and the obsolete T&D system. The pilferers cause a loss of Rs240 billion per annum, an amount which could be used to install new units without any financial burden. Moreover, if pilferages are completely eliminated, there would be no need to increase the tariffs that is burdening consumers.
As far as the energy crisis in Karachi is concerned, KESC has an installed capacity of 1890MW but its dependable capacity is 1351MW, out of which 1021MW is contributed by the Bin Qasim unit. However, the utility has been operating, at an average of around 1000MW because of shortage of gas or inability of paying the fuel suppliers. This shows an 800MW loss of capacity, which could be used to reduce the incidence of load shedding. Moreover, it is to be realised that every increase in tariff encourages pilferage of electricity. Therefore, if the government wants electricity theft to be reduced, tariffs have to be brought down to an affordable level for the common man. Besides, all illegal connections should be regularised.

PSO’s situation

In spite of huge receivables, PSO’s 9MFY11 financial results showed that it earned 23 per cent more than what it did during the same period last year, yet the performance was far from satisfactory for a variety of reasons. For instance, refineries have time and again delayed or stopped fuel supply to PSO on account of non-payment as payables have mounted to extraordinary levels. The Prime Minister Syed Yusuf Raza Gilani has now directed the Ministry of Finance and the Ministry Water and Power to pay Rs25 billion to PSO and IPPs by mid-September to enable companies for generating electricity to the maximum capacity, so that people are subject to minimum load shedding. The Minister for Water and Power told the prime minister that the power sector would not become viable until an across-the-board 12 per cent rise in power tariff is passed on to the consumer in phases. The Prime Minister agreed to the proposal but directed them not to notify the increase in power tariff till the settlement of the case pending in the courts.
There was a time when PSO considered an amount of Rs100 billion as receivables to be at dangerous levels but on April 18, 2011, the figure has reached Rs186 billion. Experts say one per cent of T&D loss is equivalent to one billion rupees, aggregating to Rs40 billion per month or Rs480 billion per annum. If half of these losses are excluded as technical losses due to the obsolete T&D system, the pilferages losses still amount to Rs240 billion. If these thefts are completely eliminated, there would be no need to increase tariffs.
Experts advised that dependence on expensive furnace oil should be curtailed to a minimum level; the use of coal, wind, solar and hydel power for generation should be encouraged. Presently, cost of generation is also very high because of highly inefficient power plants that work at lower capacity and run below capacity levels in order to save fuel.

PIBs

In order to retire the circular debt, GoP has offered two options to banks, PIBs and GoP Bonds for Rs270 billion that include 3 instruments of 3, 5 and 10 years, equal to a 20, 30 and 50 per cent facility, respectively. The biggest advantage of having PIBs is that it will be eligible for SLR. The other option has the same conditions but would not qualify for SLR. Presently, SLR for PIBs is 10 per cent of the Demand and Time Liability (DTL) and 15 per cent of the total issued.
Financial experts say that the bigger problem would arise at the time when the bank accounts of power holding companies will be settled and they would once again approach banks for fresh loans. The other disadvantage is that these bonds have no secondary market and the banks have to wait for their maturity.
The TFCs may be a temporary solution but if pilferage continues and power plants are not operating at maximum capacities, the situation will remain the same or even deteriorate in future.
On the one hand, oil demand is increasing with every passing day and on the other hand, only 14 wells were drilled during the five months of FY11, an average of 2.8 wells a month compared to 23 wells during same period of last year, i.e. 4.6 wells per month, including both exploratory and development wells.
The E&P companies had plans to drill a total of 80 wells in FY11, which comes to about 6.6 wells per month. In FY10 they drilled 68 wells, 32 per cent lower than the target of 100 wells. However, around four years back, E&P used to drill 6.4 wells a month on average. But after the emergence of circular debt in FY07 and onwards and deteriorating security conditions, drilling activities have declined during the period.
The federal government has so far failed to resolve this issue. Long hours of load shedding are continuing and that has badly affected industrial production; the growth has been over one per cent only. People are losing thousands of jobs. Exporters are finding it difficult to meet their export targets. Therefore, the government should realise the gravity of these problems and immediately strive to resolve the circular debt issue.

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