The government has given an undertaking to International Monetary Fund (IMF) that it will reinstate powers of Power Division to impose surcharges on consumers through modification in the Nepra Act.
According to the IMF report, for streamlining tariff procedures and reintroducing surcharges the Nepra Act will be amended to give the regulator the power to determine and notify quarterly tariffs, ensure timely submission of tariff petitions by the Discos, streamlining the notification of annual tariffs by the government; and reintroducing the power of the government to introduce tariff surcharges to stem the accumulation of arrears. Amendments to the Nepra Act are expected to be submitted to parliament by end-December 2019.
The Fund further says that large stock of power sector arrears represents a significant quasi-fiscal risk, including combined annual debt servicing costs exceeding Rs 100 billion. The authorities, together with international partners, are designing a strategy to settle the stock of arrears while limiting the impact on government finances.
The plan envisages the following steps: (i) the government will issue new guarantees to transfer costly CPPA payables to IPPs into the PHPL; (ii) the government will absorb PHPL into its budget, fully recognizing the liabilities in PHPL as debt of the government of Pakistan and taking over the servicing of the loans contained in PHPL; and (iii) the government will reduce the stock of outstanding payables through the use of power assets privatization proceeds, recoveries from the outstanding stock of receivables, the existing debt servicing surcharge, and the rightsizing of sector-related subsidies.
The Fund observed that energy sector subsidies are very poorly targeted, requiring significant cross-subsidization in the tariff-thus increasing the level of tariffs on all consumers-and sizeable budgetary allocations. Recognizing these costs, the authorities plan to revisit all government provided power sector subsidies so the FY 2021 budget reflects better targeting of the subsidies provided to residential consumers, industrial sectors, and agricultural sector. All Discos will appoint independent Board of Directors on the basis of merit and without any political interference. Similarly, all senior management will be appointed through a competitive process.
For timely updating of tariffs, Fund review says that until the process of adjusting quarterly tariffs becomes fully automatic, the government will continue to notify tariffs for capacity payments on a quarterly basis shortly after the end of the preceding quarter. For example, the Q2 FY 2020 adjustment will take place by end-January 2020. The government plans to sign performance based contracts with all Discos by end-January 2020, with Key Performance Indicators (KPIs) for improvements in collection and reductions in losses. Moreover, the authorities will enforce existing legal procedures to initiate disconnections of non-paying consumers. Finally, regulatory benchmarks will be reassessed-the regulator's assumption of 100 percent recoveries-to address the structural accumulation of circular debt embedded in the system.
The IMF further stated that energy sector subsidies are very poorly targeted, requiring significant cross-subsidization in the tariff-thus increasing the level of tariffs on all consumers-and sizeable budgetary allocations. Recognizing these costs, the authorities plan to revisit all government provided power sector subsidies so the FY 2021 budget reflects better targeting of the subsidies provided to residential consumers, industrial sectors, and agricultural sector.
The stock of circular debt has grown from around Rs 450 billion in FY 2013 to Rs 1.618 trillion in FY 2019 (around 4.2 percent of GDP), with a more pronounced increase over the past two years. Of this amount, Rs 812 billion is accumulated in CPPA as payables to the generators, which carry a late payment charge of about KIBOR+4 percent, or around Rs 80 billion annually and contributes to a feedback loop for additional arrears accumulation. A similar amount of circular debt is accumulated in the Power Holding Private Limited (PHPL). PHPL is a wholly owned government entity established for the purpose of injecting liquidity into the power sector. PHPL uses government guarantees to borrow from commercial banks, typically 5-7 year borrowing at KIBOR+2 percent, with the proceeds used to reduce CPPA liabilities to producers. Servicing of PHPL loans is partly made through a surcharge in the tariff, equivalent to around Rs 40 billion annually that covers around 1/2 of the servicing costs. The remaining amount is covered by diverting power sector revenues, which again generates additional arrears.
The Fund further asserted that crucially the regulator assumes in the determination of tariffs losses and collection levels not reflective of Discos' actual performance. In determining the end-consumer tariffs, the regulator assumes 100 percent collection and transmission and distribution losses at 15.5 percent, a significant deviation from what Discos are able to achieve. This implies that the tariff is set at a level lower than cost recovery, therefore generating a structural shortfall in revenues in the system.
Copyright Business Recorder, 2019
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