EconomyVolume 12 Issue # 17

A sordid story: Power sector circular debt

It is a sordid story of corruption and incompetence in the power sector. Despite the injection of billions of rupees over the last three years, the chronic power sector circular debt refuses to go away. According to the latest reports, the circular debt has for the first time spilled massively over into the entire fuel supply chain, choking ports, refineries and down to railway bogies and tanker lorries. A senior government official  told the media last week that  fuel storages are full to capacity, movement of tankers and bogies has come to a halt and more than 15 ships full of fuel are waiting at the port for unloading as the power sector struggles to make overdue payments.

As of now, furnace oil stocks in storages stand at more than 800,000 tonnes, the highest in the country’s history and enough for more than 40 days of average consumption. The power ministry has been approached many times to resolve the issue but to no avail. The Oil Companies Advisory Council (OCAC) which monitors the working of the power sector is helpless. Because of the massive stocks, the local refineries are bringing down their capacity utilisation that will cause shortage of other products like petrol, diesel and jet fuels. It is said that if the situation is not brought under control immediately, refineries would be forced to shut down because there is no way to produce petroleum products without furnace oil off-take.  The issue has been raised at product review meetings for three months and the director general oil had warned all concerned, but no remedial steps have been taken.

On the other side, in addition to independent power producers’ claims of over Rs414 billion, non-payment to oil companies are reported to be in excess of Rs300bn, including Rs270bn receivables of the PSO alone. Officials at the ministries of petroleum and finance point fingers at the power sector for mismanaged planning leading to the development of new dimensions to the crisis – oversupplies, storage constraints and logistic problems. The power ministry officials, on the other hand, blame the finance ministry and the power sector regulator for under-budgeting the power sector subsidy and unrealistic tariff, respectively.

A petroleum ministry official recently said the power sector had been demanding 16,000-18,000 tonnes per day for consumption, but power plants were not lifting more than 8,000-9,000 tonnes. According to him, fuel consumption had dropped by 30 per cent over the past year due to better availability of natural gas and higher LNG imports, but the power ministry did not plan accordingly, despite warnings by the petroleum ministry and the OCAC. The official said the railways ministry had also written a number of letters for early discharge of their stuck up wagons, while private fuel tankers were lining up outside depots and power plants. At the heart of the problem lies the power sector circular debt which has mounted to an alarming level of Rs439 billion as of February 15, 2017. This has brought it nearly at par with the 2013 level. This situation is a consequence of poor governance, failure to curb energy losses and inefficiencies. The present government, which cleared Rs480 billion of circular debt after coming into power in 2013, is feared to leave behind almost the same amount for the next government. Failure to implement the Circular Debt Management Plan, prepared in 2015, for capping the outstanding amount at a fairly manageable level, has been the main cause of the rising circular debt. Experts say that owing to persistent failure in reducing power losses and enhancing recoveries, the circular debt is bound to pile up massively ahead of the next general elections. The huge amount of circular debt will ultimately add to consumes’ resentment who might have to face electricity shortage in the coming summer due to the non-payments to power plants.

The government prepared a circular debt management plan in September 2015, to reduce it from Rs314 billion (as of end June 2015) to Rs212 billion by financial year ending June 30, 2018 (FY18), while keeping within the targets of 0.4 percent of GDP for subsidies to the power sector (about Rs128 billion) and 4 percent fiscal deficit.  It was envisaged that at the end of each month, the circular debt would be maintained below the cap of Rs314 billion. The circular debt management plan or capping mechanism includes reducing the increase of circular debt flow as well as the outstanding amount or stock.  The government also planned to increase collection from public sector power companies by 5 percent by FY2018 and to reduce losses by 1.7 percent by FY18 through efficiency gains, privatization, and private sector participation. Collections from government customers were to be rationalised and subsidies were to be paid on actual basis and paid according to schedule. However, all such targets proved difficult to achieve, mainly due to half-hearted efforts and bad governance.

Consequently, the pending payments to IPPs reached Rs439 billion by the mid of February. The receivables of Kot Addu Power Company increased to Rs68.177 billion, the Hub Power Company’s due amount went up to Rs64.194 billion, Central Power Generation Company’s to Rs62.796 billion, Northern Power Generation Company’s Rs56.747 billion, Wapda’s outstanding amount went up to Rs23.853 billion, and Jamshoro Power Company’s due amount augmented to Rs18.288 billion. These are a few prominent receivable companies, while many other companies are also awaiting their dues. Failing to get their dues, several power generation companies decided to opt for calling of sovereign guarantees in an attempt to get their money back. Some of the IPPs were to seek intervention of the apex court after the government defaulted on sovereign guarantee. The IPPs later agreed to withdraw cases and resolved the dispute through arbitration envisaged under the power-purchase agreements as part of a deal with the  government for payment of outstanding dues. Unfortunately, the situation was now reaching the previous level, and that the government must honour its sovereign guarantee to protect the investment in the power sector.

The power sector remains mired in crisis  due to serious structural issues which include corruption, pilferage, tariff differential gap, transmission losses and the non-recovery of dues. Needless to say, as long as the transmission losses are not controlled and dues recovery rate does not improve substantially, circular debt will remain a halter round the neck of the power sector.  All said and done, it is basically mismanagement that ails the power sector which needs to be addressed if a lasting solution is to be found.