Power sector’s sinking ship?

The burden of power sector’s circular debt has touched Rs. 1200 billion mark, a deadweight legacy left by the PML-N government to the new government. The previous PPP government had left a circular debt of Rs. 480 billion, which was paid in 2013. Members of the Economic Coordination Committee (ECC) in its meeting on Monday could not evolve a mechanism to deal with the recurring circular debt, ahead of another spike in electricity prices that are set to rise by 33 percent which is likely to deepen the sector’s woes.

The ECC was informed by National Power Regulatory Authority (NEPRA) that electricity tariff could further go up as much as Rs. 15 per unit, forcing the incumbent government to review the previous government policy of giving subsidy on electricity to industrial sector. The price of electricity is already the highest in the world which has badly affected the competitiveness of the manufacturing sector as the exportable products are losing comparative advantage in the international market.

The major contributory factors to the recurring circular debt include shady deals of thermal power generation projects; criminal neglect of power generation from cheap and renewable source such as hydel, wind and solar; default of electricity bills of Rs. 850 billion by political and business elite and provincial governments, and Kunda syndrome.

Pakistan People’s in its second tenure in 1993-96 made electricity purchase agreements with Independent Power Producers, envisaging certain clauses heavily loaded against the national interest, particularly the one related to payment liability for the idle capacity of thermal power plants, consuming the most expensive fuel like furnace oil and diesel. These agreements were originally signed on the principle of “build operate and transfer the ownership” to the government of Pakistan. Their documents were then manipulated and changed to “build, operate and own” by the private companies. Renowned legal experts Barrister Sardar Latif Khosa in a current affairs programme of a private TV Channel described the change in the status of the agreement as illegal, although the IPP agreements were made in the government of his party which did nothing to renegotiate and rectify it in its third tenure in 2008-13. The clause pertaining to payment for idle plant capacity plus mark up on loans acquired by private power companies adds 40 percent to the circular debt.

The last PML-N government also did not dare to renegotiate the power purchase agreements because of their policy of protecting the vested interest like Mian Mansha and the shady deals they intended to ink with Chinese Companies for health hazardous coal based thermal power plants which also involve the heavy liability of capacity and reclamation charges, yet another contributory factor of piling circular debt. The National Distribution and Transmission Company (NDTC) lost a case regarding payment of Rs. 11 billion to nine IPPs last year in London Court of International Arbitration (LCIA). An appeal was filed in London High Court against the order of Arbitration Court. It was hastily withdrawn within one week of its filing but NDTC had to pay an additional amount of Rs. 66.7 million as litigation charges to IPPs.

Capital expenditure (Capes) for the coal power projects is 40  percent higher than the international cost and coal power tariff is 8.4 cent per unit as compared to a tariff in many jurisdictions of five cent and below. In the meantime more evidence has emerged against irrational coal tariff that Chinese power producing companies will charge and for the payment of which the previous government agreed to create a revolving fund in the banking system. The bids made for Jamshoro Coal Power Plant by the financiers other than Chinese for Engineering, Procurement and Construction (EPC) were one half of the bidding value of contracts made under CPEC framework. Likewise, the hydropower projects being completed by Chinese under the umbrella of CPEC will alarmingly raise the power tariff. A comparative data of different hydel power projects shows that per unit cost vary widely. Karot has 2.03 times more the reference cost of Dasu, the latter project is financed by the World Bank and former by the Chinese. Similarly, the cost of other projects financed by Chinese is also on high side. Kohal  is 3.31 times, Azad Pattan is 3.97 times, Suki Kinari 2.38 times and Mahal 2.50 times.

Power sector needs urgent drastic reforms aimed at lowering the electricity tariff for reviving and boosting the economy rather than hitting it further with electricity price increases. A more vigilant oversight of EPC bidding process has to be introduced. The focus should shift on more competitive projects like hydel, solar, wind and hybrid of solar and wind. There is dire need of 10000 MW low cost electricity generations, bringing the average tariff significantly down and reducing expensive fuel imports.


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