A HARD PILL TO SWALLOW; Circular debt to touch Rs. 4,000 billion by 2025 for Pakistan

By: Usman Farooq, Haroon Hamid

ISLAMABAD: The power sector circular debt currently stands at PKR 2,219 billion and analysts believe that it will exceed PKR 4,000 billion (equivalent to US $24 billion) by 2025 if drastic measures are not taken. The lack of initiative in taking such ‘measures’ have already started to show their impact on an already fragile economic condition of the country plagued by COVID-19 crisis.

One of the major reasons attributing to the current state is the organizational and operational mismanagement of the Distribution Companies’ (DISCOs) who are facing several capacity issues due to obsolete grid systems. Based on several technical studies conducted various consultancy experts, these system are said to have repetitively collapsing across the country on the grounds of  which, out of total generated power of 20,574 MW, over 2600 MW remained unutilized as of 15th July 2020, as per power division sources.

The four DISCOs that include QESCO (Quetta Electric Supply Company), PESCO (Peshawar Electric Supply Company), SEPCO (Sukkur Electric Power Company) & HESCO (Hyderabad Electric Supply Company) account for 87% of total defaults in the sector. Frequent and long outages have become a norm witnessed in rural areas of the country, thereby populace specifically the common man has been subjugated to ‘feeling the heat’ from the high power tariffs and the issues faced from most of the distribution companies.

As per chapter 12 of Consumer services OBLIGATION OF DISCOs (clause b to e) state that;

b) The DISCO’s/NTDC system equipment, including overhead lines, poles/structures/towers underground cables, transformers, panels, cutouts, meters, service drops, etc. shall be installed and maintained in accordance with good engineering and utility practice.

c) To ensure proper operation of the DISCO’s/NTDC network under abnormal conditions (short-circuits, overloading, etc.) appropriate protective relays shall be installed and properly coordinated.

d) The earthing systems installed shall be dimensioned and regularly tested to ensure protection from fire and shock hazards.

e) The steel structure installed on the public places shall be earthed at ONE point through steel/copper conductor, in accordance with the DISCO’s/NTDC laid down procedures.

However, the above code of conduct is never practiced and its unfortunate common practice that DISCOs place all of the financial burden on the consumer for all such installations, repair and maintenance etc.

Looking at the big picture,  the recent power generation statistics stand at 20,574MW against a demand of 21,026MW, out of which, only 17,920MW reached the consumers i.e., 2,654 MW less than the total generated power due to system constraints and recovery-based load shedding.

For instance, in Federal capital, Islamabad Electric Supply Company (IESCO) had a demand of 1,938 MW but the company drew only 1,870 MW, i.e. 68 MW less than their demand.

In the province of Khyber Pakhtunkhwa, Peshawar Electric Supply Company (PESCO) had the demand of 2,787 MW but the company drew only 1,889 MW, i.e., 898 MW less than the allocated quota. Tribal Electric Supply Company (TESCO) had a demand of 185 MW but could only draw only 141 MW due to grid system constraints.

Likewise, in Punjab, Lahore Electric Supply Company (LESCO) and Faisalabad Electric Supply Company (FESCO) drew 3,676 MW and 2,400 MW against demands of 3,909 MW and 2,578 MW, respectively. Gujranwala Electric Power Company (GEPCO) had a demand of 2,209 MW but the company drew only 2,102 MW, almost 107 MW less than the total demand whereas in Southern Punjab, Multan Electric Power Company (MEPCO) drew less than their demand by 261 MW.

For Sindh,  Karachi Electric (KE), which has been allocated 650MW against a demand of 681MW, drew 681MW, i.e., 31MW over and above the allocated quota whereas SEPCO and HESCO drew less than their demand by 359 MW and 299 MW respectively and lastly for Baluchistan QESCO accumulated 659 MW less than their demand.

In light of the power shortfalls around the country the business activities in the cities has crippled and at the same time, inflated bills which also include heavy sums of quarterly tariff adjustments and financial charges have forced many businesses to lay-off their workforce in order to sustain themselves.

The decision makers in Federal and Provincial governments are already facing such a daunting challenge due to lack of trained staff and policy makers.  When contacted, the officials of different Discos said that their systems are unable to supply the required electricity to consumers due to old distribution systems including transformers and technical glitches.

Recently, National Electric Power Regulatory Authority (NEPRA) issued show-cause notices to all the Discos on reported load shedding with the direction to submit replies within three days but Discos have not yet submitted any update to the regulator. Furthermore, K-Electic has become a big mess to cope with for the incumbent government.

Recommendations

The most critical step to improve circular debt is to add value and requisite corporate experience to  DISCO organizational structure and operation models, which can be accomplished by privatization and to partially give ownership to provinces in their ownership and management.

The worst performing DISCOs should get a percentage of their shares public through IPO.Also the shares must be offered to their employees to make them more responsible and have a sense of ownership.

It also emphasizes streamlining tariff adjustment procedures and eliminating or fully funding customer price subsidies and exploring avenues to optimize interest costs by refinancing high cost debt.

Adequate supply capacity is available until at least 2025. Therefore Government must focus on completing the already planned projects and ant new power project must be highly scrutinized before approving to avoid capacity payments in coming years.

It is recommended that there is a need to create, empower and track performance of an independent power planner in line with NTDC integrated generation plan

The government not to approve new generation projects above those already committed, as they would increase the burden of CPP (Capacity purchase price) on the power sector.

The study also recommends that in future power plants should be installed based on take and pay contracts and the government should move towards a competitive power market.

The future power generation capacity should be based on renewable energy only to reduce the FOREX drain.

Government needs to expedite the consultations with all relevant public / private stakeholders to devise an action plan that should be formulated / constituted into an ordinanceso that a collective wisdom could be worked out to find a permanent solution to this problem.

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