Cabinet likely to approve multipronged strategy to deal with circular debt


–Federal cabinet all set to approve strategy to rid power sector of whopping Rs807 billion circular debt today

–Clear Net Hydel Profit claims of all provinces

ISLAMABAD: The federal cabinet is all set to approve a multipronged strategy to rid the power sector of its whopping Rs807 billion circular debt and clear the Net Hydel Profit (NHP) claims of all provinces, Pakistan Today has learnt.

According to sources in the Ministry of Energy, the cabinet is likely to approve today the decisions made by the Economic Coordination Committee (ECC) in its meeting held on January 25 on proposals submitted by the Power Division regarding the report on NHP and Syndicated Islamic Term Finance Facility of Rs200 billion for Power Sector Liquidity through Power Holding (Pvt) Limited.

The ECC had recommended a revised term sheet as agreed upon by the Mandated Lead Arrangers and Power Holding (Pvt) Limited and signed on January 16 besides that out of the Islamic loan being raised, payments are made in such a manner that substantial funds flow to PSO through various generation companies/power producers in addition to payments of RLNG.

It had also recommended the Power and Finance divisions to prepare a non-cash settlement plan to clear the outstanding payables.

The ECC had decided that funds raised under the Syndicated Islamic Term Finance Facility will also be used for payments to WAPDA against its invoices for onwards payment of NHP claims by the governments of Punjab and Khyber Pakhtunkhwa on a pro-rata basis.

Power Division informed the meeting that payable circular debt in respect of GENCO’s IPPs Allied Office NTDC on account of Energy (EPP), Capacity (CPP), others and interest was Rs807.887 billion as of December 31, 2018 whereas power sector receivable, as of November 11, 2018, was Rs1,041 billion, including subsidies of Rs170.4 billion.

It was stated that the payable to IPPs under the Energy Purchase Price (EPP) involved major payments to organisations like PSO, SNGPL, SSGC, PPL, Mari and to individual plants running on various fuels.

These pending payments have accumulated over the last five years due to the gap between the electricity being purchased/invoiced by CPPA and the recoveries being made by the DISCOs.

Another major reason for accumulation of circular debt is non-payment of subsidies by the federal government. An archaic transmission and distribution system ridden with power theft and wastages is one of the root causes.

Further delay in determination and imposition of tariff creates gaps between the cost of electricity and the amount being recovered from the consumer.

It was also pointed out that the overall policy structure of investment and tariff determinations for the power sector that rates of return on investor equities are not only high but governed by principles like rupee-USD indexation.

Power division further informed that the ECC vide case No. ECC-106/22/2018 dated October 24, 2018, approved tariff rationalisation for the power sector and decided the NHP payable to the provinces.

Built in the tariff, other than the flow of Rs33 billion for the FY2018-19 will be paid to the provinces by WAPDA through commercial borrowing.

It was told that the NHP payable have been included in WAPDA’s generation tariff and necessary adjustments have been made in the consumer end tariff.

The payables of NHP are based on the MoU between the government of Pakistan, Punjab and KP as the full and final settlement of the receivables of NHP. The MoUs were approved by the CCI.

Regarding NHP of Punjab, the meeting was apprised that arrear claims of the Punjab government towards NHP was Rs82.71 billion which was endorsed by WAPDA. The CCI vide case No. 7/3/2016 dated December 16, 2016, decided as under:

To settle Rs.38.12 billion, WAPDA would issue an irrevocable promissory note of one-year duration to the government of Pakistan by December 31, 2016. The issuance of this promissory note will not be contingent upon tariff.

The balance of Rs44.59 billion will be paid in three equal instalments after tariff determination by CCI/NEPRA i.e. Rs.14.86 billion each in FY 2017-18, FY 2018-19 and FY 2019-20.

It was further informed that tariff determined by NEPRA was based on the revenue requirement of the sector split into prior year adjustments (PYA) and future revenue requirements.

Pursuant to the approvals of the ECC, syndicated term finance facilities amounting Rs607.035 billion have already been executed through Power Holding (Pvt) Limited for funding the repayment liabilities of the DISCOs.

The government of Pakistan decided to obtain a fresh loan from a consortium of Islamic Banks against the assets of the DISCOs/GENCOs as collateral. The facility was approved by the ECC vide its decision No.ECC-135/27/2018 dated November 27, 2018.

Requisite approval from the BoDs of DISCOs was also obtained.

This loan will be used to ease out liquidity crunch of the sector by paying outstanding liabilities to various sectoral entities. For repayment of the Islamic Facility and Assignment Accounts is being created at the level of CPPA. This assignment account will ensure biannual payment against the servicing of the loan.

Power Division also submitted the following proposals to the ECC for consideration and approval:

a) Out of the Islamic loan being raised, payments will be made to PSO for fuel supplies through HUBCO, KAPCO   and GENCOs in addition to payments for RLNG. Further, payment on account of energy to coal-based power plants will be made. Payment for capacity to nuclear power plants and WAPDA to discharge their balance liabilities towards the NHP arrears of the provinces against WAPDA’s invoices to CPPA will be made. Balance payments will be made to IPPs against the outstanding capacity payments.

b) Approval of the revised term sheet at Annex-E of the summary.

c) The revenue stream for the Assignment Account created for the biannual payment against the servicing of the Islamic financing facility will be through DISCOs regular payments. The ECC earlier decision at Serial No.2 vide Case No.ECC-106/22/2018 dated October 24, 2018, that the industrial consumers will continue to be paid with Rs3/unit as Industrial Support Package (ISP).

The funding will be met through the efficiency gains of the power sector by improvement in recovery and reduction in losses “to be modified to the extent of deleting the sentence, the funding will be met through the efficiency gains of the power sector by improvement in recovery and reduction in losses.

d) Outstanding subsidies be immediately reconciled and paid mostly as cash settlement for the sector.

During the enduring session, the forum was apprised that the formula for NHP had already been agreed among the federation and provinces in early 2007.  The CCI approved MoUs for payment of the arrears of the NHP in the year 2015-16.

The meeting was informed that during the past three months, the power sector has successfully reduced its losses by 1.5 per cent, which was a great achievement.