Power Sector: PML-N on the wrong foot

load sheddingIn its election manifesto PML-N promised to curtail announced and unannounced load shedding and also rationalize the tariff to facilitate industrial consumers and lessen the burden on domestic consumers. However, a review on the government headed by Muhammad Nawaz Sharif tells a contradictory story.

While there is a lot of talk about adding new generation facilities, the capacity utilization of existing facilities are dismal. The country is mainly surviving on hydel plants and IPPS and the output of power plants operating in the public sector is even less than 25 percent, either the plants need major overhaul or don’t have the funds to pay the cost of fuel.

Since assuming power PML-N government has paid nearly Rs750 billion to clear the circular debt and also raised tariff to improve cash flow of distribution companies. But, the fact is that the size of circular debt still hovers above Rs250 billion and outages range from 8 to 16 hours per day.

Experts say while the government has been dishing out money to the favorite IPPs, it has completely failed in containing theft and recovering overdue amounts. With regular intervals the PML-N government keep on announcing new projects and new deadlines for ending load shedding. However, experts are of the consensus that if the government continues to pay money without removing the root causes of the crisis the problem will never be resolved even if double the amounts are paid.

The PML-N government has announced yet another plan, which at the best can be termed fleecing the consumers who still bother to pay their bills. Recent developments in the power sector, such as 1) tariff rationalization with the imposition (post legal challenge) of equalization surcharges, raising the weighted average consumer tariff by 15% to Rs14.8/KwH and 2) finalization of planned privatization of three DISCOs, IESCO, FESCO and LESCO which combined contribute 47%YoY to PEPCO systems.

Taken at face value, these measures are expected to allow the government to raise Rs181 billion (with total units sold for the period at 95.14TwH) and fit it into government’s aim of curtailing tariff differential subsidies by 47% to Rs118 billion. A number of policy questions and possible implications of these actions are yet to be ascertained but the track record of the government with regards to privatization of electric utilities raises many questions about the outcome of announced measures and level of success to be achieved.

With the GoP reducing the budget allocation for tariff differential subsidy by 47%YoY to Rs118 billion, the level of pilferage is bound to rise and receivables to increase. Unfortunately, high losses and low recoveries of the entire system has inched up the circular debt figure to Rs270 billion) despite RFO prices remaining low (falling 30%FYTD). This leaves a large sum of borrowing that needs to be financed.

According to news sources, for Rs360 billions of power sector public debt parked in Power Holdings, Rs6 billion need to be paid quarterly to banks (effective annual rate of 6.7%). Thus the need to levy debt service surcharge, which on top of additional surcharges raises the weighted average consumer tariff by 15% to Rs14.8/KwH. This means that the government will be further penalizing the consumers rather than spending the amounts allocated under PSDP.

Privatizing distribution companies remain a big question mark. Finalizing appointment of financial advisors to undertake divestment of three major distribution companies IESCO, LESO and FESCO, accounting for 47% of all units distributed in the system may be an achievement. Generally referred to as the best of the 9 distribution companies operating in the public sector. However, to mislead the potential strategic investors quantum of of transmission and distribution quoted are incorrect. The term line losses is used for the LESCO/FESCO/IESCO for FY14 and quoted at 13.4%/11.3%/9.5% much lower than the actual losses. The revelation of actual losses and poor recovery will play an important role in the ultimate sale of these entities.

Apart from this, a number of policy questions arise from these developments, that include: 1) whether adequate monitoring and regulatory infrastructure has been created to oversee performance of privatized entities, 2) what impact will an increased cost of electricity have on industry and 3) if the cost of producing electricity is passed on to customers, when can the tariff setting process be completely rationalized.

 

 

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