NationalVOLUME 15 ISSUE # 24

Power sector’s endless woes

The power sector is an Achilles’ heel of the Pakistan economy. The list of its woes is endless: a ramshackle governance structure, high system losses, poor recoveries resulting in unaffordable tariffs and subsidy from the public treasury.

The problems have been highlighted in the latest report of the Auditor General of Pakistan (AGP) for 2018-19, which says that the power division has not been able to deliver on its medium-term goal of developing an efficient and consumer-centric generation system that could meet the needs of the people and boost the economy.

The energy mix is a vital factor in the power sector that determines the cost of energy. As on June 30, 2019, the national installed energy capacity stood at 32,809MW and de-rated energy capacity was 29,763MW. Only 25.20 per cent of energy is being produced from cheap hydel resources and 5.46pc from renewable sources, whereas the remaining 4.18pc from nuclear and 65.16pc is generated from other expensive thermal sources. It reflects that the energy mix is highly skewed towards expensive fuel constituents.

Paradoxically, Pakistan now has excess energy capacity at its disposal, significantly more than the current or short-term expected demand. The available power generation capacity in 2018-19 stood at 31,986MW, including 17,680MW of private power. On the other hand, peak demand remained at 20,795MW and 21,425MW during 2017-18 and 2018-19 respectively, implying that excessive capacity payments are being made to independent power producers (IPPs) as per binding agreements without the purchase of energy. Moreover, new IPPs with 7500MW capacity are due to be made part of the national grid in the coming 3-4 years.

The AGP has pointed out the ad hoc mechanism in dealing with the power sector debt and payment of liabilities to the independent power producers (IPPs) are flawed. The loans and their financial charges are an extra uncovered cost related to the purchase of financing worth Rs200 billion raised through the issuance of sukuk to partially settle the circular debt of the energy sector. About 70 properties of power companies were sold and leased back from Meezan Bank Ltd (head of a consortium of banks) along with the issuance of sukuk bonds. “It implies that power sector government properties could face a risk of en-masse sale/transfer out to private bodies on account of default in any principal re-payments”.

The performance of the power division has been especially deficient in the matter of recoveries. All distribution companies (Discos) are facing revenue shortfalls. In 2018-19, about 93,887 million units worth Rs1.342 trillion were billed to consumers against which recovery of Rs1.061tr was made, indicating a recovery percentage of 79.06. The shortfall resulted in less receipt of revenue by the Discos, showing managerial inefficiencies and policy bottlenecks. Compared with the last financial year, there was an improvement of 1pc in revenue recovery. Still, the recovery shortfall of 21pc posed a significant operational challenge to the Discos. Recovery in Hyderabad, Tribal Areas, Quetta and Sukkur companies was only 54.17pc, 18.92pc, 24.29pc and 38.54pc respectively in 2018-19.

The transmission and distribution (T&D) losses are another major drag on the power sector. T&D losses in the Discos and their financial impact amounted to Rs37.5b and Rs35.8b in 2017-18 and 2018-19, respectively. Thus, the performance of the Discos in reducing T&D losses remained unsatisfactory. It also shows that the development initiatives being made in the companies for enhancing the power transmission and distribution system are yet to show any results.

Huge receivables are a major challenge. Over the years, the volume of receivables from running and dead energy defaulters has increased significantly and it has become an important cause for power sector debt accumulation. As of June 2019, the total receivables amounted to Rs572.179b. Of it, Rs476.932b pertained to running defaulters and Rs95.247b to dead defaulters. The huge amount of receivables has added to the financial crunch in the power sector.

Due to the late payment of government subsidies, like tariff differential subsidy, agricultural subsidy for tube-wells, other provincial government subsidies, subsidy to the Azad Jammu and Kashmir government and outstanding payments from K-Electric, Rs.549.2b was held up as of June 2019. The receivables are adding up to the overall circular debt of the power sector. As on June 30, 2019, the total amount of circular debt stood at Rs.1.517tr, including Power Holding Private Limited loans of Rs809.840b from Rs1.160tr in 2017-18, registering an increase of Rs357.378b or 31pc in one financial year.

A major objective of foreign-funded projects had been the enhancement and strengthening of the power sector at both distribution and transmission levels. However, five Asian Development Bank Efficiency and Distribution Enhancement Investment programmes were closed during 2018-19. The projects had been started for the enhancement of transmission lines, construction of grids etc with total funding of $684.20m, but despite a revision of closing dates from June 30, 2018, to September 16, 2019, the $188m loan i.e. 27pc remained unutilised.

After analysing the power situation in detail, the report has recommended that the government formulate a new policy and create a more efficient governance structure to make the power market more competitive by providing an enabling environment and enacting progressive laws and regulations to attract foreign investment.