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Why Circular Debt Burgeons in the Power Sector? Case of Pakistan

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Why Circular Debt Burgeons in the Power Sector? Case of Pakistan …

Why Circular Debt Burgeons in the Power Sector? Case of Pakistan

A paper for SMC by Musaddiq Ahmed Khan P.A.S.

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  • 1. INDIVIDUAL RESEARCH PAPER Senior Management Wing, National Management College, Lahore 13th Senior Management Course (SMC) 18th March to 02nd August, 2013 Why Circular Debt Burgeons in the Power Sector? by Musaddiq Ahmed Khan A write-up for the IRP submitted to the Faculty of the Senior Management Wing, National Management College, Lahore in partial fulfillment of the requirements of the 13th Senior Management Course. The contents are the end product of my own efforts and reflect my own personal views and are not necessarily endorsed by the Senior Management Wing, National Management College. Signature…………………. Date: 15th July, 2013 Paper supervised by: Mr. Toaha Hussain Bugti, Directing Staff
  • 2. i PREFACE Individual Research Paper (IRP) is one of the salient activities and requirements for successfully completing the Senior Management Course (SMC) conducted by the Senior Management Wings Lahore and Karachi, under the auspices of the National School of Public Policy (NSPP). IRP‟s importance lies in the fact that it provides participants of the SMC an opportunity to brush up their analytical and critical reasoning skills besides getting a flavour of the procedures and modalities for carrying out a structured research work. Besides that, each participant respectively benefits from a profound insight into the issue assigned for the research work. Prior to working on my IRP, I had the impression that the „circular debt‟ is a consequence of only the subsidy that the Government gives to the consumers. During the course of this work, I have realised that „circular debt‟ accrues due to a number of other factors, mainly the gap between billing of the energy and the recovery of bills, power theft, etc. I also came to know that despite a couple of good analytical reports in this regard, the Government does not lay emphasis on addressing all sources of „circular debt‟, rather it relies just on raising the tariff and does not have a comprehensive strategy to balance out this huge and perpetuating liability. I am thankful to the designers of SMC who included this type of an exercise in the curriculum. I also acknowledge with gratitude the supervisory patronage provided by Mr Toaha Hussain Bugti, Directing Staff, at each stage of this assignment. I am also grateful to all staff at SMW Lahore who extended secretarial, library and IT facilitation.
  • 3. ii EXECUTIVE SUMMARY Pakistan‟s power sector is currently suffering from very serious problems. The situation has become so severe that some analysts have started equating Pakistan‟s energy security with national security. Circular debt is a single issue that has crippled the power sector and the fiscal management of the economy. Circular debt‟s gravity is evident from the fact that the power sector received subsidies worth Rs. 1.3 trillion during the period 2008-12. Besides this subsidy, the outstanding liabilities of PEPCO towards power producers and fuel suppliers stand at about Rs. 670 billion as of 31.12.12. According to some estimates this deficit grows at humungous Rs. 30 billion per month i.e. Rs. 360 billion annually on an average at current prices. This paper analyzes the causes for the accrual of the circular debt and after identifying the same, suggests immediate, short, medium and long term measures to get the power sector rid of the circular debt. Circular debt is in more precise terms an inter-corporate debt. This means that the cost of power generation does not get recovered through revenues and thus the liabilities of one entity towards the other keep on accruing to the extent that the cash flow breaks down resulting in stoppage of power producers, reduction in power generation and consequent power outages. The paper identifies disregard of power producer efficiencies while ordering power generation; delays in determination of transmission and distribution and fuel price adjustments by NEPRA; 8% power theft; 22.6% loss in recovery of electricity bills; untargeted subsidy on consumer tariffs; inadequate budgeting of tariff differential subsidy by Ministry of Finance; de-rated power generation by public sector generation companies and high cost of power generation due to heavy reliance on expensive generation through furnace oil and diesel, etc. as the reasons of burgeoning circular debt in the power sector. The paper shows that by addressing these factors in the immediate to short term, Rs. 485 billion can be saved/recovered annually. In the medium to long term the situation will further improve when the public sector generation companies get converted to coal and new projects based on coal and hydel generation get into the system, whereby the fuel mix will improve in favor of cheaper power generation.
  • 4. iii GLOSSARY OF TERMS AJK Azad Jammu & Kashmir AEDB Alternative Energy Development Board AMR Automated meter reading ARE Alternative/Renewable Energy CCI Council of Common Interest CEOs Chief Executive Officers CPGCL Central Power Generation Company Limited CPPA Central Power Purchasing Agency DISCO Distribution Company ENERCON National Energy Conservation Centre FATA Federally Administered Tribal Areas FESCO Faisalabad Electric Supply Company FO Fuel Oil/Furnace Oil FPA Fuel Price Adjustment FY Fiscal Year GDP Gross Domestic Product GENCOs Public Sector Thermal Generating Companies GEPCO Gujranwala Electric Power Company GoP Government of Pakistan GST General Sales Tax GW Giga Watt GWh Gigawatt Hour HESCO Hyderabad Electric Supply Company HSD High Speed Diesel IEA International Energy Agency IESCO Islamabad Electric Supply Company IPP Independent Power Producer JPCL Jamshoro Power Company Limited KESC Karachi Electric Supply Company KPK Province of Khyber Pakhtunkhwa kWh Kilo Watt Hour LESCO Lahore Electric Supply Company LPS Late payment surcharges MEPCO Multan Electric Power Company MoF Ministry of Finance MoW&P Ministry of Water and Power MTB Medium-term Bonds MW Mega Watt NEPRA National Electric Power Regulatory Authority NPGCL Northern Power Generation Company Limited NTDC National Transmission and Despatch Company O&M Operations & Maintenance
  • 5. iv PAEC Pakistan Atomic Energy Commission PCRET Pakistan Council of Renewable Energy Technologies PDP USAID Power Distribution Program PEPCO Pakistan Electric Power Company PESCO Peshawar Electric Supply Company PIB Pakistan Investment Bonds PPA Power Purchase Agreement PPHC Pakistan Power Holding Company QESCO Quetta Electric Supply Company RFO Refined Furnace Oil RPP Rental Power Project Rs Pakistani Rupee SEPCO Sukkur Electric Supply Company T&D Transmission & Distribution TDS Tariff Differential Subsidy TESCO Tribal Areas Electric Supply Company TFC Term Finance Certificate TOU Time of Use WAPDA Water and Power Development Authority
  • 6. v CONTENTS EXECUTIVE SUMMARY .......................................................................................................ii INTRODUCTION .....................................................................................................................1 Statement of Problem.............................................................................................................1 Significance and Scope of Study............................................................................................2 Literature Review...................................................................................................................2 Methodology ..........................................................................................................................5 Organization of the Paper.......................................................................................................5 SECTION I ................................................................................................................................6 WHAT IS CIRCULAR DEBT?............................................................................................6 SECTION II...............................................................................................................................9 POWER GENERATION ......................................................................................................9 SECTION III............................................................................................................................17 TARIFF DETERMINATION, TRANSMISSION AND DISTRIBUTION LOSSES .......17 SECTION IV ...........................................................................................................................26 ROLE OF MINISTRY OF FINANCE & PROVINCIAL GOVERNMENTS ...................26 SECTION V.............................................................................................................................30 IMPACT ON INDUSTRY & EXPORTS...........................................................................30 CONCLUSION........................................................................................................................31
  • 7. 1 INTRODUCTION Since 2007-08, Pakistan has been suffering from frequent load shedding. It‟s advocated by the power sector managers that these power outages are a compulsion because of a growing gap between supply and demand of power electricity. This gap is not only because there is no capacity to generate power but also due to unavailability of all installed generation capacity. The reasons for unavailability of whole of the installed generation capacity need to be diagnosed and addressed as soon as possible because it may be easier to address these in the immediate to short term than adding more generation to the system. Power sector managers feel that the installed generation capacity is not available fully because primarily the stakeholders concerned do not make full recovery of revenues. This shortfall between the power generation cost and revenues perpetuates and takes the shape of an insurmountable debt liability and trap. It is therefore felt that there is a need to verify this claim as well as comprehensively analyze whether there are other reasons as well for the accrual of the circular debt in the power sector of Pakistan. Statement of Problem The circular debt is crippling the power sector, resulting in periodic financial injections by the Government to sustain the generation of power. This is a vicious cycle, whereby the more power is generated, the greater this burden grows. The purpose of this research work is to identify the root causes of the scourge of circular debt and to analyze whether there is a feasible way to arrest it. While carrying out this research, the following aspects will be explored as well: i. Inability of power producing companies to pay fuel bill to the oil and gas companies, ii. Role of NEPRA in determining tariffs and performance of its role as regulator of the power sector, iii. Financial mismanagement in the entire process, iv. To what extent the issuance of term finance certificates (PIB and GoP bonds has been helpful? v. To what extent Provincial Governments are committed in resolving the issue? vi. Impact on the industrial sector and exporters to meet the export targets.
  • 8. 2 Significance and Scope of Study Pakistan has been facing the mismanagement and consequent losses in Public Sector Enterprises (PSEs) viz. power sector (PEPCO), Pakistan Railways (PR), Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM), Utility Stores Corporation (USC), Trading Corporation of Pakistan (TCP), Pakistan Agricultural Storage & Supplies Corporation (PASSCO) as well as the National Highway Authority (NHA) for quite some time. During the last five years i.e. 2008-13, the Federal Government has spent Rs. 2.3 trillion on providing subsidies to the PSEs.1 The canvass of reforming the sick PSEs (that require persistent provision of subsidies) and plugging the black holes in the power sector (which is confronted by the circular debt) is very vast. While both issues require urgent and concrete steps for sustainable redress, the general public suffers more by the inefficiencies in the power sector due to prolonged and unscheduled power outages. Accordingly, the scope of this paper is restricted to identifying the causes of accumulation of circular debt in the power sector and exploring possible solutions. Literature Review Circular debt is a very technical matter that plagues the Power sector of Pakistan. It is distinctly different from the subsidies that Government of Pakistan provides to the PSEs. Therefore only newspaper articles and a few technical reports are available on this subject. Salient among these reports are Pakistan Economic Survey, NEPRA State of the Industry Report, Annual Report of the State Bank of Pakistan and presentations/ internal reports of the Planning Commission and the Ministry of Water and Power. Pakistan Economic Survey 2012-13 states that circular debt, weak financial position of energy companies, falling gas production, high dependence on oil/gas (over 80%), low exploitation of indigenous coal and hydel resources and unutilized power generation capacity are some of the significant constraints leading to severe energy shortages. The critical issue however according to NTDC is that the annual electricity demand growth rate is forecasted to hover around 5 to 6 percent over next ten years. With current position of expansion, it seems 1 Dr Noor Ul Haq, Mushir Anwar & M Nawaz Khan, “Pakistan‟s Response To Internal Challenges”, IPRI Publications, 15.12.11, (http://www.thenews.com.pk/Todays-News-9-76727-Counterculture-of-governance)
  • 9. 3 that crisis will not be over which in turn will effect economic growth of the country. The Survey indicates major issues at the macro level but does not go deep into identifying the operational and tactical level issues that are the cause of the circular debt. NEPRA‟s State of the Industry Report 2012 identifies that the major reasons for continued increase in circular debt are: i. Non-payment/delayed payment of tariff differential subsidy, ii. Poor recovery of energy billed by DISCOs, iii. Distribution losses, due to pilferage/theft, iv. Inability of DISCOs to pass on entire monthly fuel charge adjustment impact due to large number of cases pending before the Honorable High Courts of Pakistan, v. Due to the relief granted by the Honorable Lahore High Court for non-recovery of the fuel charge adjustment from residential consumers up to 350 units, the financial gap widened, vi. Increase in receivable from provincial government's departments and agencies. The receivables from the provincial government department and agencies can be adjusted through the Central Adjuster while making disbursements to the provincial government under NFC award. The Annual Report 2011-12 of the State Bank of Pakistan while dilating upon energy issues in detail states that the circular debt stems from: (i) higher transmission losses than allowed by NEPRA; (ii) low recoveries of billed amount; (iii) non-payment by public sector entities; (iv) high differential between generation cost and notified tariff; (v) delays and lag in determination of Fuel Price Adjustment by NEPRA, and recovery by DISCOs; (vi) payment of GST upfront on the billed amount; (vii) theft and distribution parked against TESCO and other DISCOs; (viii) delay in release of Tariff Differential Subsidy; (ix) abrupt disruptions in gas supply, which increases the cost of generation. Put simply, circular debt refers to a situation where one entity in the power supply chain – having inadequate cash-flows – is unable to discharge its obligations to its suppliers, and withholds payments. This results in cash-flow problems for other players in the sector, none of whom are then able to function at full capacity, causing unnecessary load shedding. It further elaborates that the payments received by CPPA for the sale of electricity by DISCOs comprise of two parts: (i) consumer bill payments; and (ii) Tariff Differential Subsidies (TDS) by the government. Therefore, if DISCOs do not receive full payment for
  • 10. 4 the sale of electricity (due to non-payment of bills by power consumers and/or delays in government subsidy payments) this leads to a buildup of receivables at the distribution stage. These receivables then cascade as circular debt across the power supply chain (since one firm‟s payables are its supplier‟s receivables), constraining electricity generation. To see how, consider a DISCO that is unable to pay NTDC for the electricity it had purchased. This means that NTDC, in turn, is unable to keep up payments to power producers (e.g., IPPs), from whom it purchased the electricity. Consequently, IPPs are forced to delay or withhold payments to Pakistan State Oil (PSO), the fuel supplier. Faced with persistent delays in payments for the sale of electricity, IPPs become heavily reliant on bank borrowings to maintain plant availability (as required under their Power Purchase Agreements (PPA) with NTDC). However, banks are reluctant to increase their exposure to power sector clients beyond assigned credit limits. This leaves IPPs faced with severe liquidity constraints (as was the case in FY12), and ultimately means that PSO is unable to procure sufficient furnace oil to meet the requirements of the power sector. These fuel shortages, as a result, force power plants to remain idle or produce below capacity. Unsurprisingly, this situation translates into lower power generation, and adds to load- shedding in the country. The challenge of circular debt thus continues because of the structural issues highlighted above. This explains why, even though one-off settlements by the Federal Government ease liquidity constraints in the power sector temporarily, the circular debt issue continues to persist. The Report however falls short of suggesting any precise remedial measures to be undertaken at each relevant level and for each role player to tackle the circular debt problem, which is understandable as it does not fall under the domain of that Report. A commendable effort by the Planning Commission of Pakistan was to engage USAID to carry out an in-depth assessment to identify the reasons of creation and uncontrolled growth of the circular debt and to prescribe measures to resolve it. The report “Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt” was commissioned in December 2012. This report discusses the issue of circular debt at length and concludes that the primary reasons for the circular debt in the Power sector are poor governance, delays in tariff determination and notifications, fuel price adjustments, poor revenue collection, non- payment of tariff differential subsidy by Ministry of Finance, impact of high transmission and distribution losses and non-payment by KESC. Among the secondary causes it holds thermal inefficiencies of GENCOs, inadequate budgeting of subsidies, impact of unfavorable
  • 11. 5 generation mix and high generation cost, impact of court decisions, late payment surcharges for IPPs, neglect of demand-side management, energy efficiency, renewable energy, legacy payments and payables to CPPA for power purchased. In a nutshell, it is a very elaborate report and deals the issue from all perspectives comprehensively. However, perhaps due to brevity constraints its recommendations to resolve the issue are more prescriptive in nature and do not tell how to achieve the objectives. This research paper will rely on all of these four reports but concentrate more on how to achieve the objectives recommended in all of these reports. Methodology This paper is based on qualitative and quantitative analysis with descriptive approach. The data used for analysis has been obtained from primary sources like the Ministry of Water and Power, State Bank of Pakistan, Ministry of Finance, etc. A number of publications, news items and other resources as reflected in the bibliography have been relied upon. Organization of the Paper This paper is organized in six sections. In Section I, the term „Circular debt‟ is explained in detail. In Section II, generation of power in Pakistan is dilated upon. Section III deals with tariff determination and losses in the system network. Section IV deals with the role of the federal Ministry of Finance and the Provincial Governments. Section V throws some light on the impact of power shortfall on the industry and exports. Finally the conclusion and recommendations based on the analysis under the aforementioned sections is presented.
  • 12. 6 SECTION I WHAT IS CIRCULAR DEBT? The State Bank of Pakistan, in its Annual Report FY 2011-12 explains the circular debt as follows: “Essentially, „circular debt‟ refers to cash-flow problems in the power sector that arise due to the factors like non-payment of electricity bills by consumers (public and private), transmission losses, and delays in subsidy payments. This build-up of unpaid bills (or receivables) at the distribution stage, then cascades across the power supply chain and constrains the ability of power plants to make timely payments to fuel suppliers. Fuel shortages, in turn, result in idle power generation capacity, and exacerbate load shedding in the country.” The installed generation capacity in the system is 20,443 MW, whereas at any given time the available capacity remains less than 14,000 MW. This is due to lack of payments to generation companies for buying the expensive fuel oil, forcing them to curtail their outputs. Besides that, technical availability and efficiency of generation plants is compromised due to lack of timely maintenance and rehabilitation, resulting in a curtailment of 1,500 to 2,000 MW.2 Another around 1,500 to 2,000 MW always depends on the water in dams, as depicted in the graph below: Figure 1: Seasonal Variation in Hydel Generation 2007-083 2 NEPRA, State of the Industry Report 2012 3 Muhammad Latif, Chief Energy, Planning Commission of Pakistan, “Pakistan Energy Crisis and Solution”, 2011
  • 13. 7 The gap between supply and demand in the PEPCO's system goes over 6,000 MW in summer, and remains around 4,000 to 5,000 MW for most part of the year. This gap and losses in the transmission and distribution networks force rural electricity consumers to remain without electricity over a twenty hour period.4 On the financial side, the power sector received subsidies worth Rs. 1.3 trillion during the period 2008-12, so that it could bridge the gap between the cost of power generation and the revenues collected.5 Besides this subsidy to the power sector, the outstanding liabilities of PEPCO towards the power producers and fuel suppliers stand at more than Rs. 670 billion as of 31.12.12. Consequently the fiscal deficit during the FY 2011-12 increased to 8.5% of the GDP. This size of the fiscal deficit is not sustainable as it is contributing to inflation; squeezing out private investment; impacting the balance sheet of commercial banks; and could push the country into a debt trap.6 According to Planning Commission of Pakistan, as a result of the losses from power and gas shortages, the GDP reduced by 3 to 4% in the year 2011-12. 7 According to the Ministry of Water and Power, the total liabilities of the power sector stood at Rs. 670.72 bln as of 31.12.12. A category wise break up of this liability is as follows: 4 National Transmission & Despatch Company, Power System Statistics 2011-2012 5 http://dawn.com/2013/03/11/outright-privatisation-or-gradual-reforms/, (accessed on 28.5.13) 6 State Bank of Pakistan, Annual Report FY 2011-12 7 NEPRA, State of Industry Report 2012
  • 14. 8 (Rs.in million) Sr. # Type Balance on 31.12.2012 1 GAS 36,919.96 2 OIL (PSO) 16,378.24 2aIPPs (RFO) 174,964.11 2bIPPs (GAS) 63,675.07 2cIPPs (Nuclear & SHYDO) 22,053.67 3 Sub Total: (IPPs)(2a+2b+2c) = 260,692.85 3aGULF RENTAL POWER (RPP) 621.06 3bKARKEY RENTAL POWER (RPP) 2,740.76 3cMISC. (GENCOs & etc.) 19,950.56 3dNTDC (Project, Custom‟s duty & Markup) 8,092.88 3eWAPDA Hydel 85,322.53 4 Total: (RPP & Others)(3a+3b+3c+3d+3e) = 116,727.79 Total: (Gas, Oil, IPPs, RPP & Others) 430,718.84 Loan arranged by PPHC for DISCOs 240,000.00 G/Total (Gas, Oil, IPPs, RPP, PPHC & Others) 670,718.84 Table 1: Statement showing liabilities as on 31.12.2012 The preceding discussion and the debt as reflected in Table 1 clearly demonstrate that the capacity to generate is not the real issue at least for short term. Indeed it is the inter-corporate or circular debt which has plagued the power sector of Pakistan. The data in Table 1 also shows that the liability against the IPPs is Rs. 260.7 billion as of 31.12.2012. This liability accrues due to the fact that at present the sole buyer from the IPPs is PEPCO under the sovereign guarantee of the Government of Pakistan. After clearing this current liability, one option for future can be to promote multi buyer multi seller model in the power sector. Under such a model, any power producer can identify customers for itself and supply power to them through the DISCO distribution network by paying it the Use of System Charges (UoSC). In this way, the IPPs will be better off because they will have assured customers who will make timely payments and GoP will be better off because it will not accrue fresh liabilities in this regard.8 8 Barrister Asgher, DG Legal PPIB, interview with author, June 2013.
  • 15. 9 SECTION II POWER GENERATION 1.1.Sources by fuel type Total installed generation capacity is 20,443 MW as of June 2012 (excl. that of KESC).9 The shares of each source of fuel used to generate this capacity are shown in the chart below: Figure 2: Shares of fuel type in Power generation 64% of generation is through fossil fuels (gas, RFO and HSD), only 33% is based on hydel and 3% through nuclear fuel. The thermal based power is generated from furnace oil, diesel and natural gas. The share of oil based generation is 36% and that from natural gas is 28%.10 A comparison with India and Bangladesh reflects that India relies mainly on power generation through coal and negligibly on oil. A source-wise comparison is shown in the table below: Gas Oil Coal Hydel, Nuclear or import India 9.20% 0.80% 71.00% 19.00% Bangladesh 73.00% 20.40% 3.40% 3.20% Pakistan 29.00% 35.00% 0.10% 35.70% Table 2: Comparison of electricity generation by sources, 201211 9 National Transmission & Despatch Company, Power System Statistics 2011-2012 10 ibid Thermal (Pub) 4,785 MW 23% Hydro 6,627 MW 33% Nuclear 650 MW 3% Thermal (Pvt) 8,381 MW 41%
  • 16. 10 Average costs of power generation from different fuels during the year 2011-12 are shown in the table below: Hydro Coal HSD RFO Gas Nuclear Import Mixed Wind GWh 28,643 66 1,474 30,662 23,431 4,413 296 730 6 % Share 31.93 0.07 1.64 34.18 26.12 4.92 0.33 0.81 0.01 Cost (Mln. Rs.) 4,660 206 27,848 488,617 99,340 4,978 2,662 9,331 51 Cost (Rs./kWh) 0.16 3.12 18.89 15.94 4.24 1.13 8.99 12.78 9.12 Table 3: Average Costs of Units Delivered to DISCOs (2011-12)12 A number of factors can be noted from the data in Table 3. The average fuel component of generation cost on furnace oil was around Rs.16 per kilowatt hour in 2012. The cost for generation through hydro is less than half a rupee. It is very important to note that the marginal cost of hydel power is so low since the power plants are in public sector and have recovered the initial costs of investment; therefore this cost is just the cost incurred on operation and maintenance. The new tariffs given by NEPRA for the hydel projects in the private sector range between 7-8 cents per kWh. Again in case of nuclear power the cost shown above is the O&M cost. Nevertheless, coal, hydel, gas and nuclear based power generation is far cheaper than that through fossil oils. This implies that the coal, hydro, natural gas and nuclear shares in the electricity generation should be increased to improve the fuel mix and therefore reduce the power purchase costs of DISCOs and consequently the consumer bills. As reflected in Table 4 below, WAPDA is executing, on priority basis, the projects such as 969 MW-Neelum Jhelum, 1410 MW-Tarbela 4th Extension, 7100 MW-Bunji, 4320 MW- Dasu, 740-MW Munda Dam and most mentionable 4500 MW Diamer Bhasha Dam projects, to cope with the increasing demand of power. Almost 96 percent work on the main dam at Mangla, spillway and allied facilities has been completed and resettlement work is in progress.13 11 National Transmission and Despatch Company, National Power System Expansion Plan 2011-30 12 NEPRA, State of the Industry Report 2012 13 Ministry of Finance, Pakistan Economic Survey 2011-12
  • 17. 11 S# Project Estimated Cost (Rs. Billion) Storage (MAF) Capacity (MW) Status 1 Neelum Jhelum, AJK 84.502 RoR 969 49% Nov 2016 2 Tarbela 4th Ext.– Swabi 88.825 - 1,410 World Bank agreed to finance the project. Prequalification of Civil and E&M bidders in process. 3 Diamer Basha – Kohistan 894.00 8.1 4,500 Ready for Construction. WAPDA is arranging financing. 4 Bunji – Astore 646.00 RoR 7,100 Feasibility study completed. Design & Tender Documents under finalization. 5 Munda – Mohmand Agency 133.1 1.3 740 Feasibility Completed. Consultants mobilized for Detailed Engineering Design to be completed by May 2014. 6 Dasu – Kohistan 570 RoR 4,320 Feasibility study completed. Detailed engineering design and tender documents will be completed in Feb 2014. Total 9.4 19,039 Table 4: WAPDA's Mega Hydel Projects14 In the private sector, Laraib Energy Limited has commissioned 84 MW hydroelectric power generating complex known as the New Bong Escape Hydroelectric Power Complex on the Jhelum River in Azad Jammu and Kashmir (AJ&K). Finally, the United States and Pakistan signed implementation agreements to upgrade three Pakistani thermal power stations at Jamshoro, Muzaffargarh, and Guddu. It will restore approximately 305 MW of lost power generation capacity. On the nuclear side, under construction nuclear power plants C-3 and C-4 are of 340 MW each and are expected to start generation in 2016 and 2017, respectively.15 As far as coal is concerned, Pakistan has approximately 186 billion tons of coal reserves most of which remain untapped. The largest reserves, 175 billion tons of lignite coal, are located in the Thar desert of Sindh. Thar coal has a heat content of 11,000 BTU/lb (dry basis); however, 14 WAPDA, Hydro Potential Brochure 2013 15 Ministry of Finance, Pakistan Economic Survey 2011-12
  • 18. 12 Thar coal is yet to be developed for mining and power generation despite the huge potential of 100,000 MW. There are plans to increase domestic coal production from 4.5 to 60 million tons/year over the next 5 years. Assuming 50 million tons/year of coal production can be diverted for power generation, there is a potential to install coal-based power generation capacity in the range of 9,000-10,000 MW. This, however, would require a huge capital investment of over $30 billion plus associated transmission networks.16 The Private Power and infrastructure Board (PPIB) is a „One Window” facilitator to the private investors in the fields of power generation on behalf of the Government of Pakistan (GoP). PPIB is currently processing twenty six (26) multiple fuel (oil, coal, gas, cogeneration and hydel) Independent Power Producer (IPP) projects with a cumulative capacity of around 8,050 MW. The government in its bid to diversify its energy mix, has been giving due attention to fast track the development of Alternative / Renewable Energy (ARE) resources in the country. The Alternative Energy Development Board (AEDB) and the Pakistan Council of Renewable Energy Technologies (PCRET) are facilitating power generation through solar, micro-hydel, wind, bagasse, biomass etc. AEDB has issued Letters of Intent (LoIs) to 43 IPPs pursuing development of wind power projects at different times till 2010. Out of these, 19 IPPs with a cumulative capacity of approx. 950 MW are at various stages of development in Gharo Keti Bander wind corridor.17 Pakistan produces a huge amount of municipal waste (up to 50,000 tons/day) and agricultural waste in the form of biomass, cotton sticks, and rice husk etc. Converting this waste into energy can generate power. AEDB has also issued a LoI to set up a 12MW biomass to energy power project in Sindh to SSJD Bio Energy. Another LoI has been issued to M/s Lumen Energia Pvt Ltd. to set up a 12MW power plant at Jhang based on agricultural waste like cotton stalk, rice husk, sugarcane trash, biogas, wheat chaff and other crops as multi-fuel sources. M/s Pak Ethanol (Pvt) Ltd. is vying to set up a 9 MW biogas power project at Matli, Sindh.18 16 Friends of Democratic Pakistan, Integrated Energy Sector Recovery Report & Plan, Oct 2010 17 Alternative Energy Development Board 18 ibid
  • 19. 13 As Pakistan has a population more than 180 million, out of which 65 to 70 percent are associated with agriculture & livestock, so biogas production is the best and only way to meet energy as well as power needs of the rural population.19 In the micro-hydel sector, Productive Use of Renewable Energy (PURE) Project is being implemented to install 103 small hydro power plants in Khyber Pakhtunkhwa (KPK) and Gilgit Baltistan (GB), with the total cost of US$ 19.5 million. Another project for 250 plants is under preparation for the same areas. Eight hydro projects with a total capacity of 80MW have been initiated under the Renewable Energy Development Sector Investment Program (REDSIP) with the support of the Asian Development Bank (ADB).20 In Solar Energy, 6 LOIs for cumulative capacity of 148 MW on-grid solar PV power plants have been issued by AEDB till 2012. Additionally 3 LoIs of 70 MW capacities have been issued by Punjab Power Development Board (PPDB).21 Pakistan has immense solar resources, suitable for both Photovoltaic (PV) and thermal i.e., Concentrated Solar Power (CSP) applications. Following the Government Policy of duty/tax exemption, import / installation of equipment for solar technology has increased manifold. Following is the trend of import of solar panels: Figure 3: Year-wise Import of Solar Panel Capacity (MW)22 Similarly the trend of import of solar geysers is also on the rise: 19 Aleem Malik, “Biogas a good alternative to meet energy deficit”, 24.5.2013; weeklypulse.org/details.aspx?contentID=3668&storylist=16, (accessed 28.5.13). 20 Alternative Energy Development Board. 21 NEPRA, State of Industry Report 2012. 22 Ministry of Finance, Pakistan Economic Survey 2012-13; Alternative Energy Development Board. 0.14 1.00 5.53 2.58 9.35 26.97 54.77 0.00 10.00 20.00 30.00 40.00 50.00 60.00 2007 2008 2009 2010 2011 2012 2013
  • 20. 14 Figure 4: Import of Solar Water Geysers23 1.2.Generation losses & efficiencies of power plants The net capacity factor of a power plant is the ratio of its actual output over a period of time, to its potential output if it were possible for it to operate at full nameplate capacity indefinitely. To calculate the capacity factor, the total amount of energy the plant produced during a period of time is divided by the amount of energy the plant would have produced at full capacity. For the hydel power generation under WAPDA, the average capacity factor was 41% during 2012, which is quite good comparing with the international average capacity factor of 44% in 2009.24 For the thermal power stations, it is more informative if their efficiencies are evaluated in terms of their „heat rates‟. The heat rate is defined as the amount of fuel consumed for each unit (kWh) generated. Over time, as efficiencies of generating units have declined, heat rates have increased. The higher the heat rate of the plant, the greater the amount of fuel consumed per unit of electricity generated. The Table 5 below shows that the heat rates of different thermal units have increased by 2-19% over time as compared to the NEPRA benchmarks. This means that generation through oil based thermal plants is expensive not only due to the increase in price of oil, as discussed above, but also due to decrease in efficiencies of the thermal plants. 23 ibid 24 “Electric Power Annual 2009”, http://www.eia.gov/electricity/annual/archive/03482009.pdf; (accessed 30.6.13) 260 743 2,396 6,848 11,060 13,294 14,981 0 2000 4000 6000 8000 10000 12000 14000 16000 2007 2008 2009 2010 2011 2012 2013
  • 21. 15 GENCOs NEPRA Actual Diff CPGCL (GENCO I) Block 1 8,533 9,153 7% Block 2 9,481 10,200 8% Block 3 11,377 13,109 15% Block 4 12,189 14,041 15% NPGCL (GENCO III) Unit 1-3 (TPS Muzaffargarh) 10,788 11,677 8% Unit 4 (TPS Muzaffargarh) 10,692 11,087 4% Unit 5-6 (TPS Muzaffargarh) 12,158 14,164 16% Units 1-2 (SPS Faisalabad) 14,368 * * Units 1-4 (GTPS Faisalabad) 15,366 17,708 15% Units 5-9 (GTPS (Faisalabad) 11,701 * * Unit 1-3 (Multan) 14,114 16,169 15% JPCL (GENCO II) Unit 1 (Jamshoro) 10,655 11,505 8% Units 2-4 (Jamshoro) 10,862 12,930 19% Unit 1-2 (Kotri) 21,813 22,353 2% Units 3-7 (Kotri) 10,564 11,902 13% Table 5: GENCO Heat Rate Comparison25 In view of the above discussion, it is very important to carry out reliable heat rate audits of all public sector generation companies and undertake necessary maintenance or conversion to coal to improve the efficiency of power generation. As far as IPPs are concerned, the National Power Control Centre (NPCC) maintains a merit order of the power plants on the basis of their respective power generation efficiencies (heat rates). Based on this merit order the NPCC is required to direct power generation from the IPPs starting with the most efficient first.26 However NPCC does not follow the merit order 25 USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012. 26 Mr. Masood Akhtar, ex-GM System Operations, National Power Control Centre (NPCC), NTDC, interview by author, May 2013.
  • 22. 16 of the power plants and therefore incurs an annual loss of Rs. 60 billion.27 Mr. Masood Akhter, ex-GM System Operations NPCC refuted this claim and said that NPCC is at times constrained to select less efficient power plants due to unavailability of fuel with the more efficient ones. Based on these contradictory claims, a realistic way forward can be to paste the merit order of power plants on the website of NTDC along with the daily „despatch order‟ (i.e. instructions by NTDC to generate power) and daily release of payments to the IPPs. This measure, though very small, will ensure a lot of transparency in the whole operation of power despatch and payments. 27 Presentation by Kohinoor Energy Ltd during Local visit of 13th SMC, July 2013.
  • 23. 17 SECTION III TARIFF DETERMINATION, TRANSMISSION AND DISTRIBUTION LOSSES It is the role of the power sector regulator, National Electric Power Regulatory Authority (NEPRA) to determine the tariffs for generation companies, whether in public or private sector; as well as those for the National Transmission and Despatch Company (NTDC) and the Distribution Companies (DISCOs). The procedure for tariff determination entails that the applicant files a tariff petition before NEPRA stating all expenditures and cost of loans etc. and then NEPRA after public hearing of the petition determines the tariff for that case. Same procedure is followed in case of NTDC and DISCOs. The only difference is that in these cases the petitions reflect the assets and operational expenses of these companies. NEPRA then keeping in view the O&M expenses and the return on assets for these companies gives the transmission/use of system charges for NTDC and the tariff at which the DISCOs can charge the different type of consumers besides keeping a small margin for the DISCOs called the „distribution margin‟. Besides these, NEPRA hears petitions for fuel price adjustment (FPA) in all tariffs every fortnight since the price of fuel keeps on changing.28 3.1.Role of Regulator (NEPRA) NEPRA was created through the Act called the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 on 16th December, 1997 as part of strategic power sector reforms program envisaged by Government of Pakistan (GoP). The mandate given to Authority includes provision of affordable electric power, promote competitive environment, grant licenses for Generation, Transmission & Distribution of electric power, determine tariff, etc. Currently NEPRA‟s tariff determinations include: i. Quarterly determination in respect of 9 Distribution Companies including KESC. ii. Monthly Fuel Price Adjustment in respect of 9 Distribution Companies including KESC. 28 Mr. Zargham Eshaq JS Ministry of Water & Power, Mr. Zia ur Rahman MD NTDC, Mr. Nisar Bazmi GM Planning Power NTDC, interviews by author, Islamabad and Lahore, 2013.
  • 24. 18 iii. Fortnightly Fuel Price Adjustments in respect of GENCOs, IPPs etc. Tariff for generation companies is determined on rate of return (cost plus basis) in most cases; tariff of NTDC and DISCOs is determined on annual cost plus basis where, in addition to the costs, certain return on equity or assets is allowed.29 3.2.Generation Tariff Power plants that produce electricity (e.g., IPPs, private; and GENCOs, Wapda Hydel, etc., public), have Power Purchase Agreements (PPAs) with a single purchaser, the National Transmission and Dispatch Company (NTDC). This PPA specifies a two-part tariff structure which includes (i) Capacity Charge: to cover the fixed costs of maintaining power plant capacity (e.g., operating and maintenance expenses (O&M), debt servicing, and return on equity, etc.) that are to be paid regardless of dispatch; and (ii) Energy Charge: to cover variable costs, mainly fuel (based on a benchmark for fuel prices by NEPRA), and variable O&M costs, that depend on the amount of electricity actually sold. Fuel costs above or below the NEPRA benchmark are passed onto consumers as Fuel Prices Adjustments (FPAs). 30 3.3.Transmission Tariff NTDC purchases power from generation companies to sell it onwards to distribution companies (DISCOs). For providing this service, it receives a Use of System Charge (UOSC). It includes a fixed component (which depends on a particular DISCO‟s maximum power demand during a billing period); and a variable charge which is the average price of electricity procured from the generation companies (adjusted for NEPRA approved power losses incurred during transmission).31 29 NEPRA, NEPRA ACT No. XL of 1997, NEPRA Rules, NEPRA Regulations and NEPRA Codes. 30 State Bank of Pakistan, Annual Report FY 2011-12. 31 Ibid.
  • 25. 19 3.4.Distribution Tariff Each DISCO has a separate tariff approved by NEPRA. This is because in addition to the cost of power procured from NTDC, it includes a Distribution Margin. This margin covers the costs associated with use of the DISCO‟s infrastructure (e.g., O&M expenses, depreciation, return on assets, etc.), and an adjustment for power losses incurred during distribution. Since these losses vary widely across DISCOs, this would mean that consumer tariffs too would vary across the country. However, in order to ensure uniform consumer tariffs across the PEPCO system, the government provides a Tariff Differential Subsidy (TDS) at this stage. Therefore, while DISCO tariffs are determined by NEPRA; the rates that consumers pay are notified by the government.32 Delays in tariff determination and notification contributed Rs. 72.19 billion to the circular debt for FY 2012. Tariff determinations for all nine DISCOs were delayed for nine months and it took an additional month for the notification to be published. Consumer tariffs in 2011- 12 were largely based on 2010-11 values when the actual fuel cost for 2012 was 52% higher than the previous year. Without new tariff values from NEPRA and the GOP, the DISCOs had no chance to receive the necessary cash required to meet their monthly wholesale power cost.33 3.5.Fuel Price Adjustments (FPAs) In addition to the foregoing, consumer tariffs are adjusted fortnightly/monthly by NEPRA for variation in generation fuel costs, against approved benchmarks through Fuel Price Adjustments (FPAs). These can be driven by variation in the actual fuel mix versus NEPRA‟s reference mix (e.g., gas shortages that force power plants to substitute gas with more costly High Speed Diesel) and/or changes in fuel prices on global markets (e.g., furnace oil). Either of these can automatically increase (or decrease) generation costs, and is passed on to consumers through FPAs. These charges appear on consumers‟ electricity bills separately based on units consumed in the previous month. It is the pass-through of these adjustments that experiences delays.34 32 ibid 33 USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012, 10. 34 Mr. Zargham JS MoW&P, interview by author, May, 2013; USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012.
  • 26. 20 Delays in NEPRA‟s application of the Fuel Price Adjustment (FPA) mechanism contributed Rs. 33.19 billon to the circular debt in 2012.35 In view this analysis, the timely processing of tariffs and FPAs by NEPRA needs to be revamped so that the delays contributing significantly towards the circular debt are removed. 3.6.Impact of Tariff Determination on Consumers Like India, Pakistan‟s government subsidizes the cost of electricity by paying distribution companies the difference between the cost of production and the intended price, as shown in Table 6. The fiscal burden of maintaining a subsidy for all end consumers has become substantial.36 The PPP-led Government struggled to keep up with its pledges to make subsidy payments, which in turn left distributors in arrears to suppliers. The upshot has been that the complex network of government-managed and private energy suppliers, generators and distributors has become weighed down by intra-corporate debt.37 A solution to the problem would be to reduce the subsidy and bring prices in line with actual costs. This is a politically sensitive issue however, and efforts to do so in the past have caused protests and cost the Government political support. For instance, in June 2011, the Government was forced to abandon plans to reduce the subsidy when the MQM withdrew from the ruling coalition in response chiefly due to political reasons.38 Consumption (Units) NEPRA Tariff (Avg Rs) GoP Tariff (Avg Rs) Subsidy Rate (Avg Rs) Amount of annual subsidy (Rs. Mln) Domestic up to 50 3 2 1.0 2,300 Domestic 01-100 9.9 5.8 4.1 54,200 Domestic 101-300 13.1 8.1 5.0 55,000 Domestic 301-700 15.5 12.3 3.2 12,300 35 ibid, 11. 36 Although heavier users generally receive a lower rate of subsidy, there is no system of cross-subsidization, whereby certain types of consumer pay over the odds to subsidize the prices paid by others. A World Bank report found that the richest 20% in Pakistan benefitted most from power subsidies. 37 House of Commons Library “Pakistan in 2013”, Research Paper 12/76, 06 December 2012 38 Foreign Policy, “Uh-oh. Pakistan can‟t pay its electric bills”, 10 May 2012
  • 27. 21 Domestic > 700 (inc. load > 5Kw) 17.2 15.1 2.1 2,800 Commercial 14.4 11.4 3.0 12,400 Industrial 12.9 10.3 2.6 54,000 Bulk supply 13.1 10.3 2.8 4,000 Agri. Tube well 12.6 9.4 3.2 28,000 Others 14 10.8 3.2 7,500 Total 12.57 9.55 3.02 232,500 Table 6: Tariff Differential Subsidy, 201239 Table 6 very clearly shows that the GoP gives subsidies of 24% on an average to consumers under different categories. The issue of concern is that this subsidy is enjoyed by even those consumers and those categories of consumers who can afford the price of electricity. This subsidy is called the Tariff Differential Subsidy (TDS) and is a distortion in the whole tariff notification process; this is why the international funding organizations and IMF keep on pressing the government to rationalize the power tariffs. Based on the discussion above, a rational determination of TDS is to remove the subsidy given to domestic consumers using in excess of 700 units and from all other categories except the agriculture tube wells. However, this rationalization of TDS must be carried out in six monthly phases so that the consumers adjust to the change accordingly. This rationalization will save almost Rs. 110 billion annually at 2012 tariffs. 3.7.Transmission and Distribution Losses The electric power physical network comprises four distinct interfaces where the electric power changes hands from one stakeholder to the other. At the first interface, the power generation companies sell energy to NTDC at different generation tariffs that are determined by NEPRA; these tariffs comprise two components i.e. energy purchase price and the capacity purchase price; the tariffs are linked to the USA consumer price index as well as 39 Power Finance Wing, Ministry of Water & Power.
  • 28. 22 inflation and therefore keep on changing.40 NTDC owns the main backbone of the physical network and transmits this energy over 500/220 kV levels to the „common delivery points‟ (CDPs), which is the next interface where the energy is purchased by the DISCOs from NTDC. The DISCOs maintain the distribution network and step down this energy to 11kV level (third interface) for sale to the consumers at the fourth interface. The voltage level at this interface is either 440V or 220V. A schematic diagram of this network is as below: Figure 5: Schematic Diagram of the Electric Power Network41 Figure 5 shows the first three interfaces marked as A, B and C. The losses due to inefficiencies in generation have been discussed in the earlier sub-section. The difference in the energy values between the points B and A are the losses that occur while transmitting the energy to the threshold of DISCOs and are technically called „transmission losses‟. The point B designates the CDPs and the DISCOs are billed by NTDC in accordance with the energy drawn by each DISCO at the corresponding CDPs. The „distribution losses‟ are those that occur between the points C and B. Beyond point B, the technical losses are very minimal.42 Therefore, if the energy billed to all consumers in the area of a particular DISCO is less than the energy recorded at point C during that period then it means that this shortfall is due to „administrative losses‟, a euphemism for power theft. NEPRA allows 2.5% as transmission losses and up to 10% as distribution losses. While determining the tariffs for NTDC and the DISCOs, NEPRA incorporates these values as a pass through to the consumers. According to NTDC, the transmission losses during the year 2010 were 3.15% and the auxiliary parasitic consumption in the power generation premises 40 NEPRA and PPIB. 41 Mr. Masood Akhtar, ex-GM System Operations, National Power Control Centre (NPCC), NTDC, interview by author, May 2013 42 Mr. Nisar Bazmi, GM Planning Power, NTDC, interview by author, May 2013 GENERATION DISCOs NTDC TRANSMISSION 500/220kV COMMON DELIVERY PTS. 220kV 11kV FEEDERS A B C
  • 29. 23 was 2.03%.43 This makes a total loss of 5.18% before the energy reaches point B. During discussions with the senior management at the National Power Control Centre (NPCC), it was revealed that while allocating the quotas of electric power to the DISCOs, the NPCC deducts 5% from the generated power and distributes the remaining power among the DISCOs at present. It is important to note that the readings from point A in Figure 5 get communicated to the NPCC in real time through Supervisory Control and Data Acquisition (SCADA) system. The readings from meters at point B and C are however not available to any agency in real time; neither to the NPCC nor to the respective DISCOs. Accordingly, there is no means to ascertain the exact losses between these points in real time or at any one instant in time. The situation gets further aggravated by the fact that at many locations the meters are of old analogue type and the recording from those meters are manually done by duty staff. In this scenario, an alternative measure was adopted i.e. the billing data was acquired from the Pakistan Information Technology Company (PITC), which is a subsidiary of the PEPCO and maintains all data for the power sector. Based on these calculations, the total distribution loss was 18% in 2012.44 This implies that the total loss from generation end to the interface C turns out to be 23% which is greater than the total 12.5% allowed by NEPRA. The excess loss is 10.5% out of which 2.5 % is before the energy reaches the DISCO and 8% within the DISCO network. This 8% excess distribution loss is not only due to the lack of degradation of the distribution network but also includes power theft. This 8% of excess loss in the distribution system translates into almost Rs. 75 billion by extrapolating the data provided by PITC for 10 months of FY 2012. There is another view that the annual theft amounts to almost Rs. 100 billion.45 However, at present due to lack of real time reliable metering at points B and C, it is difficult to segregate the real excess distribution technical losses and the theft. In the absence of such metering tree, another way of ascertaining the power theft is to carry out a technical audit of all distribution networks but the same has not been carried out due to vested interests.46 The way forward is that the real time communication through reliable meters is established at all CDPs, which are about 480 metering points. NTDC has invited tenders to establish real 43 NTDC, “Power System Statistics 2011-12” 44 NTDC, “Power System Statistics 2011-12” 45 Mr. Munawar Baseer, ex-MD PEPCO, presentation to 13th SMC, 15th July, 2013. 46 Mr. Shahid Khan, ex-GM Technical NTDC, interview by author, June 2013.
  • 30. 24 time communication after installing meters at these points to the National Power Control Centre and all DISCOs under the „Secured Metering System‟ (SMS) Project. Nevertheless, NTDC is causing a lot of delay in evaluating the received bids. It is required that the bids be evaluated at the earliest and contract awarded.47 As far as 11kV metering point C is concerned, USAID is sponsoring a project for installing about 6,000 meters that will have the capability of communicating power load data to NPCC and DISCOs at 5 minute refresh cycle. The project is expected to be commissioned in August, 2013.48 3.8. Billing and Recovery Position: The following table gives billing and recovery position for all the DISCOs Jul 2012-Apr 2013 Quantitative Data (MkWh) Units Purchased by DISCOs 65,227.59 Units Sold 53,831.67 Units Lost 11,395.92 (A) Losses %age 17.47 Computed Assessment (Mln. Rs.) Govt. 74,678.03 Private 525,464.29 (B) Total 600,142.32 Current Collection against (B) Govt. 44,270.25 Private 420,461.57 (C) Total 464,731.82 Arrears Receivables Govt. 960,804.05 Private 2,198,571.20 (D) Total 3,159,375.25 Arrears Collection Govt. 7,278.10 Private 57,030.39 (E) Total 64,308.49 Current Collection % 47 Mr. Daud, Consultant Planning Power NTDC, interview by author, June 2013. 48 Mr. Robert Kolling, Adviser Distribution, USAID PDP, Ministry of Water & Power, email exchange by author.
  • 31. 25 Govt. 59.28 Private 80.02 (F) Total 77.44 Arrears Collection % Govt. 0.76 Private 2.59 (G) Total 2.04 Table 7: Energy purchase, Billing and Recovery Position49 The data in Table 7 shows that the performance of DISCOs has been very dismal as far as recovery of arrears is concerned. Regarding the recovery of current bills it is an overall 77.44%. This means that on top of the transmission and distribution losses, another 22.6% was lost during the first 10 months of the FY 2012-13. It is beyond understanding to sustain stable power generation, which requires continuous supply of funds to purchase oil and gas, in the face of such heavy deficit in recovery of the billed energy. This 22.6% turns out to be Rs. 135 billion when extrapolated over the whole financial year. It is also believed that the DISCOs park some units of energy in the form of excessive billing to conceal theft. In return such practice adds to the less recovery of bills.50 Based on the above analysis, almost Rs. 210 billion is lost to excess distribution losses (technical + theft) and non-recovery of billed amount. A remedy for eliminating this loss is to implement the SMS project at the earliest so that actual theft becomes visible and DISCOs are held accountable for recovering the stolen energy amount as well as full billed amount. It is also extremely important to carry out financial audits of the DISCOs the determine whether there are any questionable practices in issuing the bills in the first place. 49 Pakistan Information Technology Company (PITC) 50 USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012, 15.
  • 32. 26 SECTION IV ROLE OF MINISTRY OF FINANCE & PROVINCIAL GOVERNMENTS 4.1 Payment of TDS, PIBs & TFCs In order to incentivize banks to continue lending to power sector clients – and keep the supply chain running – the government struck two key deals with commercial banks in FY12. These deals reduced banks‟ outstanding power sector exposure by swapping it for government securities. Essentially an asset adjustment on banks‟ balance sheets, this entailed a significant cost: the first swap increased the fiscal deficit by around 1.5 percent of GDP. This swap alone accounts for nearly 45.0 percent of total government borrowings from commercial banks in FY12. 51 Deal 1: Banks had been lending to PEPCO under government guarantees to offset unpaid tariff differential subsidies. In 2009, the government set up the Pakistan Power Holding Company (PPHC) to acquire PEPCO‟s outstanding debts. By FY12, banks‟ exposure to PPHC had risen considerably. In order to encourage banks to continue lending to the power sector, these assets were swapped for sovereign debt. In effect, the government borrowed Rs 391.0 billion from commercial banks by issuing MTBs and PIBs in November 2011, and swapped Rs 313.0 billion (around 1.5 percent of GDP) worth of government securities for PPHC‟s liabilities. This cleared banks‟ balance sheets of exposure to the publicly owned power sector and converted it into direct lending to the government.52 Deal 2: Even after this, banks still had significant exposure to the IPPs, which had been borrowing from banks for working capital requirements. However, as IPPs exhausted their assigned credit limits, banks were unwilling to extend additional loans. As a result, cash- strapped IPPs were finding it difficult to procure fuel to maintain power generation. To address banks‟ reluctance, PPHC-issued securities worth Rs 136.0 billion were swapped for bank loans in February 2012. By freeing used-up credit lines, this created room for fresh bank lending to IPPs.53 51 State Bank of Pakistan, “Annual Report 2011-12”, Sub-section 4.1. 52 Ibid. 53 Ibid.
  • 33. 27 Notwithstanding these efforts, the power sector remains vulnerable to global oil prices given a heavily skewed fuel mix towards thermal generation – particularly imported furnace oil. This burden will have to be borne either by the government through subsidies, or consumers through higher tariffs. Since the government has already spent a total of Rs 464.3 billion (or 2.2 percent of GDP) on power sector subsidies and swap deals in FY12, further financial support in the form of subsidies will pose great fiscal burden. Furthermore, as discussed earlier, the bulk of this spending was financed by borrowing from banks. Such borrowings, to keep the power sector running, have implications for commercial banks‟ operations – it has already skewed their balance sheets towards sovereign debt. Finally, such financial instruments provide only a momentary relief and cannot address the systemic and structural factors that create the circular/inter-corporate debt. Rather such instruments add to the financial liabilities of the power sector. The GOP‟s annual budgeted line item for this subsidy totaled Rs. 50 billion for FY 2012, while the DISCOs claims for the same period amounted to Rs. 156 billion. The outstanding balance of the TDS to be paid by the Ministry of Finance was Rs. 106.02 billion at the end of 2012, which adds to the circular debt.54 This implies that proper budgeting for the TDS by the Ministry of Finance and timely release to the CPPA NTDC can reduce the gap in cash flow. 4.2 Role of Provincial Governments At the provincial level, governments are generally not proactive in the resolution of issues such as the reconciliation of electricity bills, payment of tube well subsidy arrears, arrears of provincial departments, and arrears due to court orders. In addition, the failure to accept responsibility for the problems stemming from the allocation of power shortages to different provinces is another reason behind it.55 The lack of interest of the public sector in clearing its dues against electric power is reflected in the Table 8 below: 54 USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012, 13. 55 Ibid, 8.
  • 34. 28 SR. No. CATEGORY RECEIVABLES (Rs. Bln) 1 Federal Government 7.096 2 AJ&K Govt 22.925 a Punjab 8.693 b KP (Inc FATA) 19.997 c Sindh 43.749 d Balochistan 6.102 3 Total Prov. (a+b+c+d) 78.541 4 TOTAL (1 To 3) 108.562 5 FATA Domestic Consumers 18.545 6 Agri. T/Wells in Balochistan 1.217 7 KESC 44.541 8 G-TOTAL (4+5+6+7) 172.865 Table 8: Receivables from public sector as of April 201356 The data in Table 8 reveals very important information. The receivables are Rs. 173 billion. Had the DISCOs been able to make these recoveries, the circular debt could have been decreased to a large extent. The federal government is also blamed that it has not adequately attended to a comprehensive legislation needed to improve governance and reduce electricity and fuel theft. The Government of Pakistan needs to develop a comprehensive policy for effective governance of the power sector, including reducing the number of GoP entities involved in the sector, which often have overlapping or ill-defined authority and often lack the capacity to effectively perform their designated functions. For example, lack of political consensus on hydropower development and generation planning has led to increased dependence on imported fuel or furnace oil and, as a result, an unbalanced power generation mix that has necessitated customer subsidies. As subsidies were not allocated appropriately, benefits extend to those beyond the targeted customer sector.57 In view of the losses that occur due to theft, non-recovery of billed amounts and non-payment by the public sector, the whole power sector cycle i.e. from generation to consumer suffers from a deep cash-flow deficit. To address this component of the total deficit, a workable option is to give all DISCOs under the management of the respective provinces under the arrangement that the payment for energy purchased by the DISCOs will be the liability of the 56 Power Finance Wing, Ministry of Water and Power 57 Aleem Malik, “Dynamics of circular debt in Pakistan”, 5.4.2013, weeklypulse.org/details.aspx?contentID=3463&storylist=16, (accessed 2.6.13)
  • 35. 29 corresponding provincial government. If any provincial government does not clear its due for any month, the dues will be deducted at source from its National Finance Commission Award share. This mechanism will ensure that the federal government does not encounter cash shortfall for generation of the available capacity. The provinces will also become a stakeholder in the sense that it will be in their interest to improve the performance of DISCOs in curtailing theft and recovery of billed amounts.
  • 36. 30 SECTION V IMPACT ON INDUSTRY & EXPORTS 62% of Pakistanis have access to electricity, although those that do face chronic shortages. In the face of rising consumer demand, the problem of load-shedding (planned power cuts) has intensified in recent years and an unreliable supply remains a major obstacle to economic growth and competitiveness. In the summer of 2012, cuts of up to 20 hours per day led to street protests in Peshawar, Jhelum and Lahore.58 Figure 6: Relationship between GDP Growth and Electricity Generation59 There exists a strong relationship between GDP growth and electricity growth as shown in Figure 6 above. It can be easily deduced that periods of low or negative electricity growth have witnessed low GDP growth rate, while periods where electricity growth picked up there is increase in GDP growth rate.60 Power outages are estimated to cut growth by 2 percentage annually, making it unlikely that Pakistan will be able, without significant reform, to move toward the 7 percent growth rate needed to generate adequate employment and meaningful poverty reduction.61 58 “Protesters go on rampage in Punjab, KP”, News, 30 July 2012 59 Hydrocarbon Development Institute of Pakistan 60 Ministry of Finance, Pakistan Economic Survey 2012-13 61 Khurshid Ahmad, “Power sectors arrears hamper growth, economy suffers”, April 26, 2013; weeklypulse.org/details.aspx?contentID=3552&storylist=16, (accessed 28.5.13)
  • 37. 31 CONCLUSION The management of the current circular debt and to ensure that it does not crop up again is not an impossible task. It is a result of a number of reasons that can be grouped under poor governance of the power sector, lack of ownership and accountability. This deficiency of governance from power generation to tariff determination, irrational tariff subsidies, technical losses, theft and shortfall in revenues results in a gap between the cost of generation and recovery of that cost in the form of electricity bills from the consumers. This gap translates into a trap that is periodically addressed through cash injections without tackling the structural issues that cause that trap, therefore the circular debt keeps on perpetuating. Unless the government addresses these structural issues, one time injection of cash in to the sector to clear liabilities will not eliminate the circular debt, since it will start accruing again from the very next day.
  • 38. 32 RECOMMENDATIONS In view of the foregoing discussion and analyses under each section, salient measures that can effectively reduce the volume of the circular debt and preempt it from growing again are as follows: 1. Merit order of all power plants should be posted on the website of NTDC along with the daily „despatch order‟ (i.e. instructions by NTDC to generate power) and daily release of payments to the IPPs. This measure, though very small, will ensure a lot of transparency in the whole operation of power despatch and payments and save Rs. 60 billion annually. 2. Processing of transmission, distribution tariffs and FPAs by NEPRA needs to be revamped so that the delays contributing significantly (Rs. 72 billion and Rs. 33 billion respectively) towards the circular debt are removed. 3. To eliminate theft of 8% (Rs. 75 billion annually), the way forward is that the real time communication through reliable meters is established at all CDPs, which are about 480 metering points under NTDC‟s „Secured Metering System‟ (SMS) Project. USAID sponsored AMR meters at about 6,000 points on 11kV feeders must be installed as soon as possible. After commissioning of these two metering projects, the DISCOs must be held responsible for any loss in excess of that shown by these meters. 4. It is extremely important to carry out independent financial audits of all DISCOs for verifying their billing processes and to detect any overbilling or parking of units. The DISCOs must be made responsible for recovering all of the current bills. A workable option is to give all DISCOs under the management of the respective provinces under the arrangement that the payment for energy purchased by the DISCOs will be the liability of the corresponding provincial government. If any provincial government does not clear its dues for any month, the dues will be deducted at source from its National Finance Commission Award share. This arrangement will make Provincial governments take ownership of the whole revenue recovery of bills thus curtailing the current 22.6% loss in bill recovery amounting to Rs. 135 billion. 5. Ministry of Finance must budget adequately for the TDS and its timely release to the CPPA NTDC can reduce the gap in cash flow. 6. A rational determination of TDS is to remove the subsidy given to domestic consumers using in excess of 700 units and from all other categories except the agriculture tube
  • 39. 33 wells. However, this rationalization of TDS must be carried out in six monthly phases so that the consumers adjust to the change accordingly. This rationalization will save almost Rs. 110 billion annually at 2012 tariffs. 7. It is very important to carry out reliable heat rate audits of all public sector generation companies and undertake necessary maintenance or conversion to coal to improve the efficiency of power generation. 8. Multi-buyer Multi-seller private sector energy market needs to be promoted. Under this arrangement, the IPPs will have the option of identifying power purchasers and sell them directly instead of the government. This initiative will relieve the load of payment from the government and enable the IPPs to get payments from the private customers in time. 9. The coal, hydro, natural gas and nuclear shares in the electricity generation should be increased to improve the fuel mix and therefore reduce the power purchase costs of DISCOs and consequently the consumer bills. These recommendations are transformed into an improvement imperatives matrix showing short term, medium term and long term categorization of these imperatives: ACTIONS DURATION 1.Merit order of all power plants should be posted on the website of NTDC along with the daily „despatch order‟ (i.e. instructions by NTDC to generate power) and daily release of payments to the IPPs. This measure, though very small, will ensure a lot of transparency in the whole operation of power despatch and payments and will save Rs. 60 billion annually. Immediate to one month. 2.To eliminate theft of 8% (Rs. 75 billion annually), the way forward is that the real time communication through reliable meters is established at all CDPs, which are about 480 metering points under NTDC‟s „Secured Metering System‟ (SMS) Project. USAID sponsored AMR meters at about 6,000 points on 11kV feeders must be installed as soon as possible. After commissioning of these two metering projects, the DISCOs must be held responsible for any loss in excess of that shown by these meters. Six months. 3.Ministry of Finance must budget adequately for the TDS and its timely release to the CPPA NTDC can reduce the gap in cash flow. One year.
  • 40. 34 4.A rational determination of TDS is to remove the subsidy given to domestic consumers using in excess of 700 units and from all other categories except the agriculture tube wells. However, this rationalization of TDS must be carried out in six monthly phases so that the consumers adjust to the change accordingly. This rationalization will save almost Rs. 110 billion annually at 2012 tariffs. One year. 5.Processing of transmission, distribution tariffs and FPAs by NEPRA needs to be revamped so that the delays contributing significantly (Rs. 72 billion and Rs. 33 billion respectively) towards the circular debt are removed. Short term. 6.It is extremely important to carry out independent financial audits of all DISCOs for verifying their billing processes and to detect any overbilling or parking of units. The DISCOs must be made responsible for recovering all of the current bills. A workable option is to give all DISCOs under the management of the respective provinces under the arrangement that the payment for energy purchased by the DISCOs will be the liability of the corresponding provincial government. If any provincial government does not clear its dues for any month, the dues will be deducted at source from its National Finance Commission Award share. This arrangement will make Provincial governments take ownership of the whole revenue recovery of bills thus curtailing the current 22.6% loss in bill recovery amounting to Rs. 135 billion. Short term. 7.It is very important to carry out reliable heat rate audits of all public sector generation companies and undertake necessary maintenance or conversion to coal to improve the efficiency of power generation. Short term. 8.Multi-buyer Multi-seller private sector energy market needs to be promoted. Under this arrangement, the IPPs will have the option of identifying power purchasers and sell them directly instead of the government. This initiative will relieve the load of payment from the government and enable the IPPs to get payments from the private customers in time. Short term. 9.The coal, hydro, natural gas and nuclear shares in the electricity generation should be increased to improve the fuel mix and therefore reduce the power purchase costs of DISCOs and consequently the consumer bills. Medium to Long term.
  • 41. 35 BIBLIOGRAPHY Ahmad Khurshid, “Power sectors arrears hamper growth, economy suffers”, April 26, 2013; weeklypulse.org/details.aspx?contentID=3552&storylist=16, (accessed 28.5.13). Akhtar Masood, ex-GM System Operations, National Power Control Centre (NPCC), NTDC, interviewed by author, May 2013 Alternative Energy Development Board. Asgher Barrister, DG Legal PPIB, interview by author, June 2013. Daud, Consultant Planning Power NTDC, interview by author, June 2013. Dr Haq Noor Ul, Mushir Anwar & M Nawaz Khan, “Pakistan‟s Response to Internal Challenges”, IPRI Publications, 15.12.11, (http://www.thenews.com.pk/Todays-News-9-76727-Counterculture-of- governance). Electric Power Annual 2009”, http://www.eia.gov/electricity/annual/archive/03482009.pdf; (accessed 30.6.13). Eshaq Zargham, JS Ministry of Water & Power, Zia ur Rahman MD NTDC, Nisar Bazmi GM Planning Power NTDC, interviews by author, Islamabad and Lahore, May 2013 Foreign Policy, “Uh-oh. Pakistan can‟t pay its electric bills”, 10 May 2012. Friends of Democratic Pakistan, Integrated Energy Sector Recovery Report & Plan, Oct 2010. Government of Pakistan, Ministry of Finance, Pakistan Economic Survey 2011-12 Government of Pakistan, Ministry of Finance, Pakistan Economic Survey 2012-13, Government of Pakistan, National Transmission & Despatch Company, Power System Statistics 2011- 2012 Government of Pakistan, National Transmission and Despatch Company, National Power System Expansion Plan 2011-30 Government of Pakistan, NEPRA, NEPRA ACT No. XL of 1997, NEPRA Rules, NEPRA Regulations and NEPRA Codes Government of Pakistan, NEPRA, State of the Industry Report 2012 Government of Pakistan, NEPRA, State of the Industry Report 2012. Government of Pakistan, NTDC, “Power System Statistics 2011-12” Government of Pakistan, Power Finance Wing, Ministry of Water & Power Government of Pakistan, State Bank of Pakistan, Annual Report 2011-12, Sub-section 4.1. Government of Pakistan, State Bank of Pakistan, Annual Report FY 2011-12. Government of Pakistan, WAPDA, Hydro Potential Brochure 2013 Government of USA, USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012 House of Commons Library “Pakistan in 2013”, Research Paper 12/76, 06 December 2012. http://dawn.com/2013/03/11/outright-privatisation-or-gradual-reforms/, (accessed on 28.5.13). Hydrocarbon Development Institute of Pakistan. Khan Shahid, ex-GM Technical NTDC, interview by author, June 2013.
  • 42. 36 Kolling Robert, Adviser Distribution, USAID PDP, Ministry of Water & Power, email exchange by author. Latif Muhammad, Chief Energy, Planning Commission of Pakistan, “Pakistan Energy Crisis and Solution”, 2011 Malik Aleem, “Biogas a good alternative to meet energy deficit”, 24.5.2013; weeklypulse.org/details.aspx?contentID=3668&storylist=16, (accessed 28.5.13). Malik Aleem, “Dynamics of circular debt in Pakistan”, 5.4.2013, weeklypulse.org/details.aspx?contentID=3463&storylist=16, (accessed 2.6.13). NEPRA and PPIB Pakistan Information Technology Company (PITC) Protesters go on rampage in Punjab, KP”, News, 30 July 2012 ______________________________

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