News

ISLAMABAD:

The government has shot down a proposal to reduce electricity prices by about Rs4 per unit by retiring Rs1.8 trillion worth of circular debt through raising public debt – in a move that underscores limited options for providing any substantial relief to consumers.

The only success that the government has so far achieved is the reduction of 60 paisa per unit by terminating the contracts of five independent power producers (IPPs) a few days ago.

The Power Division had proposed that the IPPs should be paid Rs1.8 trillion worth of circular debt by issuing Pakistan Investment Bonds (PIBs) at a five-year, fixed interest rate or Islamic bonds.

The new debt had been proposed to be placed in the books of federal government, which the finance ministry did not accept, sources said.

The retirement of Rs1.8 trillion debt would have enabled the government to abolish the debt servicing surcharge of Rs3.80 per unit, which is being forcibly collected from consumers to pay interest on the Rs1.8 trillion dues to local and Chinese power plants. Of these, the dues of Chinese plants stand at Rs390 billion.

The Power Division had given two options to the finance ministry. In the first option, it proposed the issuance of PIBs to retire circular debt, which would cut the electricity price by Rs3.80 per unit.

Under the surcharge of Rs3.23 per unit, excluding taxes, the government collected Rs335 billion from consumers in the last fiscal year – a price paid due to the government's failure to timely clear the dues of power plants. After adding general sales tax (GST), the total surcharge reaches Rs3.80.

The second option was to refinance the existing debt, which would result in a cost reduction of only 89 paisa per unit.

The total circular debt amounts to Rs2.4 trillion, of which nearly Rs1.8 trillion carries interest cost. The payables of Rs520 billion to the government-owned power plants are not entitled to interest on delayed payments.

The government is paying Karachi Inter-bank Offered Rate (Kibor) plus 3% to 4.5% in interest cost on non-payment of about Rs1.1 trillion to the IPPs by recovering it through the debt servicing surcharge.

There is another Rs683 billion parked in a holding company, on which the government is paying Kibor plus 0.5%.

The Power Division was of the view that interest rates were very high and needed to be reduced by issuing PIBs, which could slash prices by 89 paisa per unit.

The finance ministry was of the view that the reasons for the accumulation of circular debt had remained unaddressed. These were mostly related to inefficiencies in the power sector like uncontrolled and high line losses, theft and low recoveries.

In the last fiscal year, the total cost of theft and low recoveries was Rs591 billion, which is projected to increase to Rs637 billion in this fiscal year, despite involving the law enforcement agencies to curb theft.

There is also the issue of increase in the public debt stock, which the International Monetary Fund (IMF) may not have allowed.

The government had tried to negotiate with China for the rescheduling of energy debt. But its attempts proved futile, as Beijing was not interested in the proposal.

The government also desired to at least sign a memorandum of understanding (MoU) for debt rescheduling during the visit of Chinese prime minister last month. But it remained unsuccessful.

Chinese energy companies have already ruled out the possibility of renegotiating the power purchase contracts. They argued that the matter of restructuring the energy debt should be decided between Chinese banks and Pakistani authorities.

However, they ruled out the possibility of renegotiating their own terms and conditions, which were related to profits and idle capacity payments, and agreed under the power purchase agreements.

Pakistan wanted an extension in energy debt repayments, a change in the currency in which the debt was acquired – from the US dollar to the Chinese yuan, and a reduction in interest rate.

Finance minister had engaged Habib Bank Limited for preparing the energy debt rescheduling proposal.

In this fiscal year, Pakistan is scheduled to repay over $2 billion worth of energy debt to Beijing, which it wants to postpone.

The government is currently in the process of renegotiating the terms of the 2002 policy on power plants that are mostly run by local investors. It is trying to cut a deal to at least reduce prices in the range of Rs2 to Rs3 per unit.

The per-unit electricity cost including all taxes and surcharges is about Rs65 to Rs70 per unit, which has already forced consumers to shift to rooftop solar panels. This reduced the national grid-based electricity demand by 8% during the first quarter of the current fiscal year.