Power Sector Losses to Increase Up to Rs 450bn
Mehtab Haider
ISLAMABAD: The government has estimated that the power sector losses will increase up to Rs450 billion during the current fiscal year against the revised estimates of Rs293 billion, sources said. However, according to estimates given by the Planning Commission high-ups, the power sector losses could not be curtailed below Rs550 billion at any cost and during the period of political transition, these losses could increase beyond imagination.

The increase in the power sector losses will pave the way for further hike in the revised estimates of fiscal deficit to 6.5 percent as envisaged by the government in the Budget Strategy Paper, which was approved by the last cabinet and a copy of which is available with The News.

According to the finance ministry’s assessment, the tariff differential subsidy (TDS) would increase to Rs280 billion in the current fiscal year as the government has preferred to keep electricity tariff at the existing level. In February 2013, the power sector was provided Rs48 billion on account of TDS as compared to previous month’s average of Rs20 billion for power sector on a monthly basis. The Rs280 billion TDS amount included Rs50 billion subsidy for the Karachi Electric Supply Corporation (KESC).

“The non recovery of electricity bills will stand at Rs100 billion in the current fiscal year, thus the losses will touch Rs380 billion,” said a source. Another Rs60 billion will be added to the power sector’s deficit as the National Electric Power Regulatory Authority has allowed a benchmark on the losses of distribution companies. If the losses cross this particular limit by three percent, it would cause a loss of Rs30 billion. Furthermore, late payment surcharge would also cause loss amounting to Rs30 billion.

According to the approved Budget Strategy Paper, the power sector’s subsidy policy aims at transition from general subsidy to targeted subsidy for gradually phasing out subsidies to the sector.

As per government’s official paper, the focus is on ensuring sustainable financial flow through full cost recovery and curtailing losses in the system. The tariff structure is being simplified so that it reflects the cost of production per unit of electricity. Meanwhile, timely payment of TDS is being ensured along with subsidies to the KESC, Federally Administered Tribal Areas and independent power producers (IPPs) on a monthly basis.

Rationalisation of the tariff structure, improved efficiency in the system through reduced transmission and distribution losses and a better fuel mix, automated payment mechanism, improvement in receivables of distribution companies are the strategic policy initiatives suggested to curtail build up of circular debt. The government has been implementing structural reforms in the power sector under the Power Sector Reform Plan, 2010, and Power Sector Recovery Plan, 2011.

The plans have pursued reforms under improved governance structure, supportive legal framework, financial sustainability, supply side and demand side management and promoting private sector participation in the sector.

Implementation of the government’s plans has pushed structural reforms forward in the last five years. A cumulative increase in average tariff of more than 100 percent has taken place for full cost recovery. The tariff differential gap increased upto Rs3.25 per unit (45 percent) during FY10, which was reduced to Rs1.73 per unit (22 percent) in FY11 due to tariff rationalisation. There is a need to maintain the minimum determined tariff (MDT) and keep the tariff differential at Rs3.08 per unit to avoid additional fiscal burden. For this, tariff adjustment should be carried out to pass any tariff differential beyond Rs3.08 per unit. The government has paid over Rs1.4 trillion in subsidies (2008- Feb 2013) to ensure lower cost of electricity generation and meeting its responsibility of paying the tariff differential.

A continued reduction in line losses from 20.4 percent (June 2010) to 19.4 percent (June 2012) has been witnessed. Under the reforms, capacity addition (2008- June 2012) of 3,400 MW from IPPs (fuel-based), nuclear, public-owned thermal generation companies rehabilitation and a small percentage of hydel has been made.

In order to do away with the subsidies to the power sector, measures need to be taken to move towards a financially sustainable level of cost recovery.