Govt mulls privatising power companies as circular debt reaches whopping Rs2.3tr

• Govt mulls over transfer of management control for 20-25 years.
• Gas sector's circular debt has surpassed that of power sector.
• Minister shares govt plans to transfer 4 power-generation plants.

ISLAMABAD: Frustrated by persistent circular debt and line losses, the caretaker government is mulling over two potential strategies — privatising both power generation (Gencos) and distribution companies (Discos) or transferring management control to private entities for a period of 20 to 25 years, The News reported on Tuesday.

This shift in policy direction can be attributed to the challenge posed by the power sector's circular debt, which has now escalated to an alarming Rs2.3 trillion, endangering the sector's sustainability. Consequently, the government is moving away from being directly involved in business operations.

Significantly, the gas sector's circular debt has surpassed that of the power sector, amassing a total of Rs2.8 trillion, comprising Rs2.1 trillion in principal amounts and up to Rs700 billion in late payment surcharges. When merged, the circular debts of the gas (Rs2.8 trillion) and power sectors (Rs2.3 trillion), reached a whopping Rs5.1 trillion, equivalent to over $17 billion.

Caretaker Energy Minister Muhammad Ali, during a briefing to journalists, disclosed that the government is considering the transfer of four power generation plants under a long-term concession agreement, in addition to the 10 state-run distribution companies (Discos).

This agreement would entrust management responsibilities to private entities for a potential period of up to 25 years, allowing for investments and infrastructure enhancements.

"We are also in discussion with the World Bank's International Finance Corporation (IFC) for long-term concession agreements,” he added.

Among the power generators under consideration are the RLNG-fired 1,230 MW Haveli Bahadur Shah and 1,223 MW Balloki power plants. Also on the list are the Guddu Power plant (747MW) under GENCO-II and the Nandipur Power plant (425MW) under GENCO-III.

The energy minister highlighted the existence of three options, which encompass handing over power distribution companies to their respective provincial governments, complete privatisation, or the delegation of management to private investors through a long-term agreement. Currently, the latter two options are under discussion with the Privatisation Commission, with plans to seek cabinet approval for the chosen model.

The minister stressed ongoing efforts to enhance the management of these Discos, noting that their boards’ restructuring is already in progress. However, the government is determined not to delay privatisation or management transfer until these improvements fully materialise.

After privatisation or management handover to the private sector, uniform tariffs might no longer be obligatory. Different companies could potentially adopt varying tariff structures with more efficient companies offering lower rates.

He cited the example of Karachi Electric (KE), a utility that was privatised years ago, yet still receives government subsidies to maintain uniform tariffs. Privatising state-run companies would alleviate the government’s financial burden, reducing the need for subsidies and losses.

The minister stressed the evaluation of board members, emphasising the need for the requisite skills and balanced boards.

Responding to queries, Ali mentioned the government’s consideration of public listing for companies but noted that only profitable entities would be listed. He underlined the importance of continuity in private sector management and the potential for economic growth, job creation and increased tax revenues through privatisation.

Responding to questions about the availability of gas for consumers during the upcoming winter, the minister indicated it would be similar to the previous year. On the matter of gas load-shedding, he confirmed that it would be implemented, and added, “Yes, like the previous year.”

He also stated that the government plans to raise gas tariffs, with nearly 60% of the population, mostly low-income domestic consumers facing potential monthly increase of up to Rs500. Meanwhile, affluent consumers in higher consumption brackets are expected to bear even larger hikes in their gas tariffs.

Regarding government-independent power producer (IPP) agreements, Ali stated that international investments preclude changes to these agreements, necessitating their continued adherence. “We will honour them,” he said.

The minister also discussed strategies for reducing circular debt in the gas and power sectors in the short term. These include interventions to lower costs, prolonging loan tenors, boosting local power generation, particularly from Thar-based coal, and upgrading the North-South transmission line. The Central Power Purchasing Agency (CPPA) has been tasked with developing a bulk energy market in six months to facilitate the trade of electricity of 1 MW or above.

The energy minister highlighted that the gas sector was experiencing annual losses of Rs350 billion, a concerning trend diverging from the power sector. He emphasised the daily increase in the gas sector’s circular debt stands at approximately Rs1 billion.

With local gas production dwindling, Pakistan’s reliance on imported gas has surged. Ali pointed out that the procurement of liquefied natural gas (LNG) at $13, while selling it to domestic and other consumers at $2.5 per million British thermal units (mmbtu), has resulted in substantial losses, contributing to the mounting circular debt in the gas sector.