The government is set to impose yet another surcharge of 70 paisa per unit on all consumer categories to service an 80 billion rupee loan that would be incurred by the Power Holding (Private) Limited (PHPL) from the private commercial banks. In this context, it is relevant to note that the State Bank of Pakistan report on quarterly performance of the banking sector July-September 2017 notes a "notable decline in advances to the energy sector attributed mainly to retirement by one of the public sector oil companies;" however, with this loan the exposure of the banks to the energy sector would again rise choking advances to other productive sectors.
The decision to borrow this amount from the commercial banking sector reflects the continued poor governance of the energy sector which, in turn, accounts for a rise in the inter-circular debt to over 750 billion rupees (including the stock of debt as parked in PHPL) which is attributed to failure to ensure a full cost recovery, failure to reconcile the enhancement in generation capacity during the past nearly five years with transmission capacity as well as considerable transmission and distribution losses. The liquidity crisis has been dealt with by unbudgeted injections into Pakistan State Oil to enable it to import fuel - an action that widens the budget deficit with repercussions on the common man in the form of higher inflation.
The International Monetary Fund in its first post-programme monitoring discussions report dated March 2018 noted that "accumulation of new payment arrears of power distribution companies (so-called circular debt) - which was brought down to near zero at end 2015-16 - has resumed, reaching 193 billion rupees (0.5 percent of GDP) since July 2016 with an accumulated stock of such arrears of 514 billion rupees (1.5 percent of GDP) by end December 2017." The Fund stated that priority areas must include "ensuring cost recovery in the energy sector."
A look at an electricity bill reveals that the actual cost of electricity is around one-fourth of the total bill. Fuel Price Adjustment (FAP) reflects the international price fluctuations of crude oil, coal and liquefied natural gas. Fuel charge is the cost of fuel used to produce electricity. In addition, there are three surcharges levied on an electricity bill and include: (i) Financing Cost Surcharge is on all consumers at the rate of 0.43 paisa per unit; (ii) Tariff Utilization Surcharge applied at the rate of 2.67 rupees per unit if consumption for a month is in excess of 300 units and is an attempt to minimize circular debt and harmonize differences in tariffs across Pakistan; and (iii) Neelum-Jhelum Surcharge levied at the rate of about one percent of the cost of electricity of that month.
Taxes levied on a bill are varied and include: (i) Electricity duty which is at the rate of 1.5 percent of the cost of electricity used; (ii) General Sales Tax (GST) is 17 percent of the total electricity cost; (iii) income tax; (iv) further tax; (v) GST on FPA; (vi) income tax on FPA; (vii) extra tax on FPA; (viii) further tax on FPA; and (ix) sales tax on FPA.
Thus poor governance in the energy sector which leads to borrowing accounts for the levy of surcharges on electricity bills and, at the same time, there is heavy reliance on sale of electricity to generate revenue for the government because of the relative ease of collection. This approach accounts for higher electricity bills not only for domestic consumers but also for the commercial sector that passes on higher costs to consumers. Industry unfortunately has suffered greatly because in the domestic market, it fails to compete due to significant smuggling across our huge porous borders and in the international markets it cannot match the price on offer by competitors in other countries.