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

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.

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.

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

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

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

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.

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)

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

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

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.

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 2007-08

3

2 NEPRA, State of the Industry Report 2012

3 Muhammad Latif, Chief Energy, Planning Commission of Pakistan, “Pakistan Energy Crisis and Solution”,

2011

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

8

(Rs.in million)

Sr. # Type Balance on 31.12.2012

1 GAS 36,919.96

2 OIL (PSO) 16,378.24

2a IPPs (RFO) 174,964.11

2b IPPs (GAS) 63,675.07

2c IPPs (Nuclear & SHYDO) 22,053.67

3 Sub Total: (IPPs) (2a+2b+2c) = 260,692.85

3a GULF RENTAL POWER (RPP) 621.06

3b KARKEY RENTAL POWER (RPP) 2,740.76

3c MISC. (GENCOs & etc.) 19,950.56

3d NTDC (Project, Custom‟s duty & Markup) 8,092.88

3e WAPDA 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.

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%

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

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 Projects

14

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

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

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

14

Figure 4: Import of Solar Water Geysers

23

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

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.

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.

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.

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.

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.

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

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.

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 Network

41

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

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.

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.

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.

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.

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.

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)

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.

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 Generation

59

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)

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.

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

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.

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.

35

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