High line losses, dismal tax collection: energy panel admits its failure to improve Discos

The Cabinet committee on energy constituted by Prime Minister Yousuf Raza Gilani admitted its failure to bring down high line losses and improve revenue collection of the distribution companies. Consequently, the circular debt continues to grow stilting improvement in power sector, it is learnt.
Sources told Business Recorder that a summary was moved by the Ministry of Water and Power to the Economic Co-ordination Committee (ECC) of the Cabinet for issuance of sovereign guarantee of Rs 160 billion by the Ministry of Finance for capacity payment to the IPPs.
The Ministry of Water and Power in the summary identified high transmission and distribution losses, low revenue collection of distribution companies and tariff notified by the government as major reasons for financial problems in the power sector. Despite commitment to international donor agencies the government paid more than Rs 1 trillion to power sector in last four years as subsidy, resulting in an unsustainable circular debt stilting improvements in power sector, said the ministry.
Minister for Water and Power, Syed Naveed Qamar moved the summary to the ECC that is chaired by Finance Minister Dr Abdul Hafeez Sheikh and attended by the Minister for Petroleum, Dr Asim Hussain. All three are also members of the energy committee constituted by the Prime Minister some five months ago to resolve the issue of circular debt. The problem has aggravated instead of alleviating largely because of failure by the committee to take required measures to minimise administrative, distribution and transmission losses of distribution companies.
The ECC was informed that the power sector companies are facing financial problems mainly due to the fact that the tariffs notified by the government do not cover the cost of services delivered, high distribution and transmission losses and low revenue collection of distribution companies. All these factors are leading towards circular debt, which is not only affecting economic growth of the country but also causing political unrest.
The ECC was also informed that presently, Central Power Purchasing Agency (CPPA) has to pay an amount of Rs 404.447 billion to power producers as on January 6, 2012 and in case the amount was not paid immediately, power generation would not continue. In order to resolve the issue it has been decided by the energy committee that an amount of Rs 160 billion may be immediately arranged through bank borrowings in order to pay overdue capacity payments to IPPs and long outstanding dues of fuel suppliers.
The above loan, equivalent to an amount payable to IPPs by CPPA against their capacity payments only, will be arranged by the Power Holding Company (PHPL) through term financing from a consortium of local commercial banks. The amount raised through the financing will be a sort of book adjustment amongst Discos, CPPA and IPPs/fuel suppliers ie PSO and gas companies. However, banks will be requested to ensure that the credit lines of IPPs and fuel suppliers are not reduced due to this transaction.
The tenure of the above loan will be five years with two-year grace period. Repayment of the loan shall be the responsibility of the respective distribution company. The revenues from electricity consumers will be used as collateral for the above loan. The terms and conditions for the loan will be finalised with the approval of the Ministry of Finance. In order to ensure repayment of the loan, distribution companies will open a separate collection account, which will have to lien for repayment of interest, as well as principal amount of the above loan.
The ECC also decided that the Ministry of Water and Power would give necessary policy guideline to National Electric Power Regulatory Authority (Nepra) to allow distribution companies claim the financing cost of the loan in their tariff, so that the same could be recovered from the end-consumers. The ECC was requested that as the Power Holding Company Ltd is a public sector entity without assets and is only responsible for arranging the loan amounting to Rs 160 billion for power sector companies. Such financial transaction cannot be finalised without government guarantee, it was therefore, proposed that the Ministry of Finance may be advised to issue sovereign guarantee for Rs 160 billion.