EDITORIAL: Reports appearing in media suggest that the government intends to secure a 1.25 trillion rupees loan from commercial banks to retire the circular debt which currently stands at 2.5 trillion rupees; in other words, 50 percent of the circular debt would be retired though the rate on offer by the government for the loan is still being negotiated with commercial banks though the general perception is that the deal is imminent.
The objective of this exercise is to reduce the interest rate as well as late payment charges to Independent Power Producers at Kibor plus 2 to 4.5 percent with the expectation that it would lower the per unit cost of electricity which can be passed onto the consumers.
However, the reduced interest payable would be passed onto the consumers as at present that would be payable in five to six years.
It is relevant to note that previous loans from commercial banks to fund the inefficiencies in the power sector are parked in the Power Holding Private Limited Company since 2008 and administration after administration pledged to multilateral lenders to decrease the flow as opposed to the stock of circular debt but with little success.
In March 2021, Asian Development Bank in its Proposed Programmatic Approach and Policy Based Loan for Subprogram 2 Islamic Republic of Pakistan: Energy Sector Reforms and Financial Sustainability Circular Debt Impact on Power Sector Investment identified the five contributors to the circular debt notably (i) high cost of power generation eventually contributing to the Discos’ collection and operational inefficiencies; (ii) pitfalls and delays in the tariff determination; (iii) high transmission and distribution losses and poor revenue collection by the Discos; (iv) partial (and often delayed) tariff differential subsidies (TDS) payment by the government to Discos and K-Electric; and (v) high financial costs on borrowings by the PHPL and expensive late-payment penalty charges on the CPPA-G payables. Sadly, all these factors continue to undermine the sector’s performance to this day and therefore the move by the government to borrow and thereby reduce the interest rate payable on these loans fails to target rampant inefficiencies as well as flawed policies that include the inability to look at the overall macro picture which, in addition to the ADB identified issues, also includes the payment of tariff differential subsidy of, on average, more than half a trillion rupees per annum to DISCOs at the taxpayers’ expense. Even K-Electric, which is a private sector company was budgeted a payment of 174 billion rupees in the current year.
One would urge the government to rely on sector experts rather than generalists, and politicians with the best intent in the world are largely generalists, to draft a comprehensive power sector policy that must include papering out the lacunas in the existing contracts with IPPs, largely Chinese who have reportedly agreed to restructure repayments but are unwilling to renegotiate the terms, desist from launching programmes envisaging higher reliance on green energy notably solar/wind (though without doubt this must be the way forward in future), given that any reduction in demand from the national grid raises tariffs to pay the IPPs resistant to contract renegotiations — from’ take or pay’ to ‘take and pay’ mode.
An International Energy Agency report noted indirectly that Pakistani industry (a non-member country) operates at a disadvantage and pays double the rate compared to China, US, India as well as most European Union countries that, after suspension of cheap fuel from Russia as part of the US-led sanctions, has suffered a massive rise in electricity rates.
However, electricity is not the only factor of production that is more expensive in Pakistan than in our competitor countries - capital borrowing costs are higher while labour maybe cheaper but it is less skilled than in competing countries.
To encourage exports successive governments have extended fiscal and monetary incentives to the five major export industries, a practice that the present government has agreed to abandon as part of the loan agreement on the ongoing 7 billion dollar Extended Fund Facility with the International Monetary Fund, which is likely to have a dampening effect on our exports.
The power sector has been operating at very high inefficiency levels, and successive administrations have implemented only those reforms agreed with the lenders that envisage passing on the buck of sectoral inefficiencies onto the general public through higher tariffs. This must change as poverty levels have risen in this country to a high of 44 percent and the capacity of the common man to pay the electricity tariff and make ends meet has shrivelled markedly.
Copyright Business Recorder, 2025
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