Circular debt settlement: we’ve been here before – BR Research

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Thus, power stocks rallied on the Pakistan Stock Exchange (PSX) as another effort to clear the stock of circular debt is underway. The idea is to disburse IPPs Rs 450 billion in cash and kind in three tranches throughout the year. This takes us back to the beginnings of the last PML-N government, when a similar amount was settled with the IPPs for the same purpose of ending the threat.

What should not go unnoticed is that the current settlement plan is quite different from that adopted by the previous government. There is an element of savings resulting from the negotiations with the IPPs, which proposes to change the structure of payment of the capacity via changes in the indexation of the currencies. Good job done on this front, but this should not be confused with a step that will stem the flow of circular debt.

The government’s inability to announce tariffs in a timely manner has long been a major cause of accumulation of arrears. The political will remains absent for one reason or another. Of course, the higher cost of power generation plays a significant role, and efforts to mitigate this to some extent by renegotiating IPP contracts are to be welcomed. But that alone will not serve the purpose. The Rs 450 billion payment is the carrot to attract IPPs and should not be seen as a step that could in itself stem the flow of arrears accumulation.

While one could go on and on about how ability payouts are the elephant in the room, but there may also be other similarly sized animals in the room. Unfunded grants have been reduced to some extent, which is a job well done. But the ills of public distribution companies remain, and the status quo in the disco business would not magically lead to an end to the circular threat of debt.

It’s been said many times before, but it can’t be said enough that distribution companies are at the heart and center of the power industry’s woes. Years and years of snail-paced progress in nightclubs means that while everything else is taken care of, from rate rationalization reflecting full cost recovery to the timely announcement of rate adjustments, the industry will still face a colossal annual loss north of Rs 200 billion. , At the beginning.

Nightclubs lose 18.5% of transmission and distribution losses per year. But this is not the biggest concern in terms of tariffs, as the regulator allows 15.5% of consumer tariffs to be covered. The real deal is the bill collection rate, which is assumed to be 100% by Nepra – but the actual recovery is close to 90%. This is where the disparities begin and nightclubs fail to pay the CPPA, which in turn struggles to pay the IPPs, which withhold payments from fuel suppliers.

What needs to be done to resuscitate nightclubs may be partly a technical debate. But the biggest part is that the government stands firm and makes the right decisions. Privatization may be one solution, but not the only one. The incentive to underperform should be removed and replaced with repercussions for underperformance. Without it, the payment to PPIs every five years will go by different names, without actually addressing the root cause. The consumer may not directly pay for government inefficiency through electricity bills, but the amount is still paid for with taxpayers’ money. Standalone, it hasn’t worked in the past and won’t work in the future.

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