FINANCIAL RE-ENGINEERING IN POWER SECTOR

By Aurangzeb Soharwardi (published daily Nation money plus magazine 14 december 2009)

Efforts are being invested to financially strengthen power sector so that it could generate and supply electricity more efficiently. One of the most pressing issue of power sector is the undesirable accumulation of huge  inter-corporate circular debt, Which surpassed an astounding figure amid issuance of Privately Placed Term Finance Certificates from the government and PEPCO respectively. With increased banks’ exposure towards financing circular debt of different entities., this  inter-circular debt of oil and power companies stood at Rs219 billion in FY09 as against of Rs184 billion during FY08, disrupting the whole supply chain.Banks’ outstanding exposure on selected public and private companies touched Rs44 billion up to August this year Figures of circular debt vary but some officials say it has swollen to well over Rs200bn in the last few months. It is not clear how the government intends to settle the remaining debt. As per the government claims, it has paid off the entire circular debt  which has risen to  Rs 500 billion, thus removing the bottlenecks for private power producers to resume power generation..The SBP data revealed that during FY09, though the government had removed the subsidy on oil prices, the stock of circular debt continued to grow as the year progressed. Indeed, the continued subsidies on energy and delays in settlement of electricity tariff claims from FATA caused liquidity shortages in a state owned power company, which in turn led to build up of large payables (both under fixed and variable tariff) to; (1) IPPs for the electricity purchased; and (2) fuel distribution companies for furnace oil and natural gas purchase. Resultantly, a chain of unpaid claims among different entities (such as IPPs, OMCs, public sector gas distribution companies and refineries) in the energy sector has grown in FY09.The liquidity constraints in refineries and OMCs, resulted mainly from circular debt issue, did not allow them to import sufficient crude oil necessary to operate at their usual capacity. As a result, a number of refineries and power industries were forced to produce below capacity throughout the year.The delays in the settlement of differential claims with government and the utilities forced some of the corporates to obtain short-term bridge finance from banks. Thus, demand for banks’ finance increased drastically during early months of FY09. This has not only caused immense pressures on banks’ liquidity but also increased banks’ exposures to these entities. Interestingly, although the advances to energy and petroleum sector have expanded robustly in FY09, this does not contribute significantly in the outstanding stock of non-performing loans (NPLs) in this sector. The explanation is that the large entities involved in the circular debt have short-term running finance lines with banks which were either rolled over, or in some cases, settled by these entities. It may, however, be noted that a few small IPPs reported problems in servicing their banks’ obligation and even recorded NPLs in the recent months. This situation arose mainly due to discontinuation of fixed tariff payments by a state owned power company in previous years which had grown in sizeable amount in FY09.Pakistan Electric Power Company gave the break-up of clearing the circular debt and  announced that the government had picked the entire liabilities of the Wapda and the Pepco amounting to Rs 338 billion. The liabilities of Fata dues, amounting to Rs 80 billion, had also been picked up and the government would pay the Fata dues to the Pepco directly on yearly basis. The government had earmarked Rs 10 billion in the budget in this regard. The amount has been provided to the PEPCO. Because of no liquidity issue, the smooth chain of fuel supply had been restored and all the thermal units are running at their full capacity. Independent Power Producers (IPPs), he added, were currently producing 4,500 MW and Pepco’s thermal plants were generating 2,500 MW, thus the total thermal power generation stands at 7,000 MW. Consequently, power plants are not able to make payments for fuel oil purchases from the Pakistan State Oil (PSO), which in turn delays settling the payables to refineries , as PEPCO  system required 706 million cubic feet of gas per day ,requiring timely payments.  PEPCO’ s distribution companies, also have about  RS/ 124 billion to recover out of which RS/104 billion  are on account of out standing payments by various public sector organizations and departments, as electricity charges. And Rs/ 20 billion from private sector which includes textile, furnace mills, steel mills, papers industries and chemical industries etc. Islamabad Electricity Supply Company`s Outstanding Arrears against Government, Public and Private Organizations amounted to Rs 4.051 bn by ending this October, Presidency, Parliament House , Intelligence Agencies, Govt of AJK and Federal Ministries are also among defaulters. Whereas LESCO had made public a list of 82 Federal, Provincial and Autonomous bodies, which owed the Company Rs 1,575.23 Million. GEPCO also served notices to 13 Govt Departments and asked to clear Outstanding Arrears worth Rs 520 millions. Whereas FESCO had asked the several Federal and Provincial Government Departments including -Police, Agriculture University etc to pay outstanding arrears Rs 77.4 Million according to given deadline. Subsequently, Tribal Area Electricity Supply Company (TESCO) had also asked the head of various Govt Departments in FATA and NWFP to clear their dues amounting to Rs 573.864 millions. Peshawar Electric Supply Company (PESCO) chief has also asked speedy recovery of Rs 26426 million outstanding arrears from govt and private defaulters. Such lists were never issued before, hence it shows the commitment and untiring efforts of PEPCO to recover huge amount through its defaulters… This recurrent problem often causes cash-flow shortfall in energy firms, which have to borrow from banks to meet their expenditures. Circular debt arises mainly because of power subsidies and blocked payments . While the government has removed some of the subsidies, the World Bank is pushing for deeper cuts as per commitments with the International Monetary Fund.. Power line losses and theft are rampant in many cities ,towns and villages of the country, something that scars financial statements of power utilities., Every bank has set a ceiling for lending to specific industries which they can not cross,. Banks have already overexposed themselves to the power sector. A special power holding company of the government had issued term finance certificates (TFCs) worth Rs85 billion in September to settle the circular debt. Negotiations with banks were held up for a couple of days as MCB Bank had opted out. The TFCs, which have a maturity period of five years, are priced at KIBOR plus 200 basis points. Out of the total amount, Rs40bn was cash injection and the remaining Rs44.9bn was used to settle banks exposure to various entities in the energy chain. Government-backed TFCs of Rs80bn were also issued earlier in March at a price of KIBOR plus 1.75 per cent. According to the State Bank of Pakistan (SBP), loan extended to the power sector in the last financial year was concentrated in top five banks. To ensure that the circular debt would not emerge in future, the government has reiterated that line losses would be reduced as per the international standards , efficiency and governance would be improved. In addition, the cash flows of distribution companies would be monitored on monthly basis and the difference would not be allowed to exceed the subsidy of Rs 55 billion that the government is extending in the current fiscal of 2009-10.The impact of price fluctuations of furnace oil in global market will be fully passed on to end consumers on monthly basis in the power tariff also under automatic fuel adjustment formula. The inter-corporate circular debt  had been affecting every part of the energy supply chainPakistan Electric Power Company (PEPCO) would  also release Rs 12 billion to Independent Power Producers (IPPs) to clear the circular debt. Out of Rs 180 billion circular debt, Rs 80b were retired in March and the remaining circular debt has  been cleared by end June. subsidy was being gradually reduced and added that there should be no subsidy because it had created problems like circular debt. PEPCO has formed the Revenue Task Force that will monitor the employees’ performance and efficiency for revenue power generation. old meters would be replaced with the new small meters that would be provided to the consumers free of cost. These meters would block the theft of electricity, thus contributing to reduce the debt. Managing Director Pakistan Electric Power Company PEPCO Tahir Basharat Cheema has urged CEOs of all DISCOs to take stringent actions against defaulters along with ensuring maximum recovery.  MD PEPCO  has announced that PEPCO is making special efforts to eliminate electricity theft through concerted efforts, which are being focused on developing extra vigilance. The load system is being managed against the demand Vs supply to meet present and future needs, comprehensive plan for augmentation, enhancement and modernization of distribution system on a priority basis. If the circular debt is controlled and outstanding dues are recovered , it may enhance the performance of power sector by making it financially viable for ensuring smooth supply chain management.

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