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Ministry of Finance has reportedly agreed to convert PHPL debt of over Rs 800 billion into public debt with bi-annual review of power sector performance as per an agreement with the World Bank, well-informed sources in Finance Division told Business Recorder. The ECC recently approved a proposal of Power Division for conversion of Rs 136.5 billion PHPL loan into public debt.

The plan envisages Finance Division converting PHPL's existing GoP guaranteed borrowings as public debt over the period from FY 2019 to FY 2023 or over the extended period. In this connection, maximum amount of PHPL's debts to be converted into public debt shall be fixed at Rs800 billion and Finance Division will make payments to lenders to the extent of principal amount as and when due through cash or instruments and PHPL shall continue to pay the interest recovered through tariff and any shortfall will be met through further debt surcharge by way of amendment in the Nepra Act or efficiency gains.

As per the plan, the circular debt flow will remain around Rs 75 billion per annum over the plan's period. The plan does not address the currently payable amount of circular debt of over Rs 1.1 trillion. Therefore, Power Division was requested to make revised plan which should include strategy for: (i) settlement of existing circular debt stock of Rs 1.1 trillion and additional circular debt flows; and (ii) settlement of PHPL debt (over and above Rs 800 billion). The revised plan needs to be over a longer period till the issue is conclusively addressed. The cumulative circular debt is over Rs 2 trillion as of now.

The plan provides the key reasons of circular debt as sectoral inefficiencies, discrepancies in the tariff regime and regulatory issues. However, following variables are required to further augment the plan: (i) quantity of electricity purchased vis-a-vis the quantity of electricity sold annually over the projection period ;(ii) the price of electricity for various categories of consumers over the projection period;(iii) the comparison of domestic electricity prices with international benchmarks over the projection period and (iv) the implications for cost of business and cost of living for un-subsidized sectors.

The circular debt management plan indentifies high T&D losses, low recoveries, failure to rationalize tariffs and insufficient subsidies as the main causes of build-up of circular debt. Commenting on provision of subsidy by Ministry of Finance in the last ten years, evidently and legally tenable claims have been cleared and claims carrying, for example, taxes in the case of FATA, non-determination of Water Usage Charges (WUC) and tariff on bulk rate for AJ&K by Power Division and legal objections in the case of KE's claims however, remained pending. Further, Industrial Support Package (ISP) claims and AJ&K claims totaling Rs 150 billion have also been cleared. Resultantly, the remaining claims being not in hundreds of billions therefore, cannot be attributed as the key reason for the much higher size of circular debt. The disproportionate size of the circular debt however could therefore be clearly attributed to the high cost of generation on the expensive generation mix and governance issues.

As the plan does not mention other gaps and shortcomings in design and/or implementation of past power policies, among other reasons it needs to address the following factors/ issues as primary contributors to the high cost of generation to continuous flow of circular debt;(i) Debt repayments of IPP projects are front-loaded over first 10 years of 25-year project life which results in prohibitively high tariffs during first 10 years. Circular debt management plan may explore the possibility to extend the payment of debt in tariff over the period of the plan(s) and;(ii) very high profit rates in the range of 15 per annum in USD terms were offered to all IPP investors including local investors with little or no foreign currency exposure. Profit rates offered to the investors may be reviewed/ rationalized for the future IPPs.

The plan noted that the country has gone into an excess supply situation as more generation capacity has been, and continues to be, added without a similar increase in consumption. Large capacity payments, combined with growing over supply situation has exacerbated the circular debt problem. Transmission and distribution capacity has not grown in line with the generation capacity. These lead to distortions and inefficiencies e.g. running of inefficient plants at the expense of efficient plants.

Finance Division has asked Power Division to list down the object of circular debt plan e.g. providing electricity at internationally competitive prices while eliminating circular debt, etc. Power Division has been further asked to identify lessons learned from the past and steps to be taken to rectify past mistakes.

Finance Division also sought explanation from Power Division about changes made or to be made to the future power policy and to the structuring, design and implementation of future IPP projects and contracts e.g. taking measures to increase consumption of electricity supplied through national grid, replacing fixed-capacity-payments-based contracting regime with an alternative regime that leads to modern and competitive electricity markets, improving IPP contracts or their implementation to include / enforce provisions for performance-based audits and claw-back of excess profits earned by IPP investors; matching the debt repayment period with the project life, closing down inefficient plants, expansion/upgrade of transmission and distribution infrastructure, etc.

Additionally, Power Division has been asked to make projections for at least 10 years showing how the key variables pertaining to power sector will evolve/ improve over this period as a result of the plan e.g. cost of generation from various sources, generation mix, electricity prices to various categories of consumers, differential of electricity prices vis-a-vis international benchmarks, level of electricity generation/ purchase and consumption, cost of transmission and distribution, recovery rates etc.

However, Finance Division has further stated that the conversion of PHPL's debt would be subject to bi-annual review of the entire power sector's performance against the goals and targets envisaged in the plan.

Copyright Business Recorder, 2020

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