Why Circular Debt Burgeons in Pakistan's Power Sector

INDIVIDUAL RESEARCH PAPER
Senior Management Wing, National Management College,
Lahore
13th
Senior Management Course (SMC)
18th
March to 02nd
August, 2013
Why Circular Debt Burgeons in the Power
Sector?
by
Musaddiq Ahmed Khan
A write-up for the IRP submitted to the Faculty of the Senior Management Wing,
National Management College, Lahore in partial fulfillment of the requirements of the 13th
Senior Management Course.
The contents are the end product of my own efforts and reflect my own personal
views and are not necessarily endorsed by the Senior Management Wing, National
Management College.
Signature………………….
Date: 15th
July, 2013
Paper supervised by: Mr. Toaha Hussain Bugti,
Directing Staff

i
PREFACE
Individual Research Paper (IRP) is one of the salient activities and requirements for
successfully completing the Senior Management Course (SMC) conducted by the Senior
Management Wings Lahore and Karachi, under the auspices of the National School of Public
Policy (NSPP). IRP‟s importance lies in the fact that it provides participants of the SMC an
opportunity to brush up their analytical and critical reasoning skills besides getting a flavour
of the procedures and modalities for carrying out a structured research work. Besides that,
each participant respectively benefits from a profound insight into the issue assigned for the
research work.
Prior to working on my IRP, I had the impression that the „circular debt‟ is a consequence of
only the subsidy that the Government gives to the consumers. During the course of this work,
I have realised that „circular debt‟ accrues due to a number of other factors, mainly the gap
between billing of the energy and the recovery of bills, power theft, etc. I also came to know
that despite a couple of good analytical reports in this regard, the Government does not lay
emphasis on addressing all sources of „circular debt‟, rather it relies just on raising the tariff
and does not have a comprehensive strategy to balance out this huge and perpetuating
liability.
I am thankful to the designers of SMC who included this type of an exercise in the
curriculum. I also acknowledge with gratitude the supervisory patronage provided by Mr
Toaha Hussain Bugti, Directing Staff, at each stage of this assignment. I am also grateful
to all staff at SMW Lahore who extended secretarial, library and IT facilitation.

ii
EXECUTIVE SUMMARY
Pakistan‟s power sector is currently suffering from very serious problems. The situation has
become so severe that some analysts have started equating Pakistan‟s energy security with
national security. Circular debt is a single issue that has crippled the power sector and the
fiscal management of the economy. Circular debt‟s gravity is evident from the fact that the
power sector received subsidies worth Rs. 1.3 trillion during the period 2008-12. Besides this
subsidy, the outstanding liabilities of PEPCO towards power producers and fuel suppliers
stand at about Rs. 670 billion as of 31.12.12. According to some estimates this deficit grows
at humungous Rs. 30 billion per month i.e. Rs. 360 billion annually on an average at current
prices.
This paper analyzes the causes for the accrual of the circular debt and after identifying the
same, suggests immediate, short, medium and long term measures to get the power sector rid
of the circular debt. Circular debt is in more precise terms an inter-corporate debt. This means
that the cost of power generation does not get recovered through revenues and thus the
liabilities of one entity towards the other keep on accruing to the extent that the cash flow
breaks down resulting in stoppage of power producers, reduction in power generation and
consequent power outages.
The paper identifies disregard of power producer efficiencies while ordering power
generation; delays in determination of transmission and distribution and fuel price
adjustments by NEPRA; 8% power theft; 22.6% loss in recovery of electricity bills;
untargeted subsidy on consumer tariffs; inadequate budgeting of tariff differential subsidy by
Ministry of Finance; de-rated power generation by public sector generation companies and
high cost of power generation due to heavy reliance on expensive generation through furnace
oil and diesel, etc. as the reasons of burgeoning circular debt in the power sector.
The paper shows that by addressing these factors in the immediate to short term, Rs. 485
billion can be saved/recovered annually. In the medium to long term the situation will further
improve when the public sector generation companies get converted to coal and new projects
based on coal and hydel generation get into the system, whereby the fuel mix will improve in
favor of cheaper power generation.

iii
GLOSSARY OF TERMS
AJK Azad Jammu & Kashmir
AEDB Alternative Energy Development Board
AMR Automated meter reading
ARE Alternative/Renewable Energy
CCI Council of Common Interest
CEOs Chief Executive Officers
CPGCL Central Power Generation Company Limited
CPPA Central Power Purchasing Agency
DISCO Distribution Company
ENERCON National Energy Conservation Centre
FATA Federally Administered Tribal Areas
FESCO Faisalabad Electric Supply Company
FO Fuel Oil/Furnace Oil
FPA Fuel Price Adjustment
FY Fiscal Year
GDP Gross Domestic Product
GENCOs Public Sector Thermal Generating Companies
GEPCO Gujranwala Electric Power Company
GoP Government of Pakistan
GST General Sales Tax
GW Giga Watt
GWh Gigawatt Hour
HESCO Hyderabad Electric Supply Company
HSD High Speed Diesel
IEA International Energy Agency
IESCO Islamabad Electric Supply Company
IPP Independent Power Producer
JPCL Jamshoro Power Company Limited
KESC Karachi Electric Supply Company
KPK Province of Khyber Pakhtunkhwa
kWh Kilo Watt Hour
LESCO Lahore Electric Supply Company
LPS Late payment surcharges
MEPCO Multan Electric Power Company
MoF Ministry of Finance
MoW&P Ministry of Water and Power
MTB Medium-term Bonds
MW Mega Watt
NEPRA National Electric Power Regulatory Authority
NPGCL Northern Power Generation Company Limited
NTDC National Transmission and Despatch Company
O&M Operations & Maintenance

iv
PAEC Pakistan Atomic Energy Commission
PCRET
Pakistan Council of Renewable Energy
Technologies
PDP USAID Power Distribution Program
PEPCO Pakistan Electric Power Company
PESCO Peshawar Electric Supply Company
PIB Pakistan Investment Bonds
PPA Power Purchase Agreement
PPHC Pakistan Power Holding Company
QESCO Quetta Electric Supply Company
RFO Refined Furnace Oil
RPP Rental Power Project
Rs Pakistani Rupee
SEPCO Sukkur Electric Supply Company
T&D Transmission & Distribution
TDS Tariff Differential Subsidy
TESCO Tribal Areas Electric Supply Company
TFC Term Finance Certificate
TOU Time of Use
WAPDA Water and Power Development Authority

v
CONTENTS
EXECUTIVE SUMMARY .......................................................................................................ii
INTRODUCTION .....................................................................................................................1
Statement of Problem.............................................................................................................1
Significance and Scope of Study............................................................................................2
Literature Review...................................................................................................................2
Methodology ..........................................................................................................................5
Organization of the Paper.......................................................................................................5
SECTION I ................................................................................................................................6
WHAT IS CIRCULAR DEBT?............................................................................................6
SECTION II...............................................................................................................................9
POWER GENERATION ......................................................................................................9
SECTION III............................................................................................................................17
TARIFF DETERMINATION, TRANSMISSION AND DISTRIBUTION LOSSES .......17
SECTION IV ...........................................................................................................................26
ROLE OF MINISTRY OF FINANCE & PROVINCIAL GOVERNMENTS ...................26
SECTION V.............................................................................................................................30
IMPACT ON INDUSTRY & EXPORTS...........................................................................30
CONCLUSION........................................................................................................................31

1
INTRODUCTION
Since 2007-08, Pakistan has been suffering from frequent load shedding. It‟s advocated by
the power sector managers that these power outages are a compulsion because of a growing
gap between supply and demand of power electricity. This gap is not only because there is no
capacity to generate power but also due to unavailability of all installed generation capacity.
The reasons for unavailability of whole of the installed generation capacity need to be
diagnosed and addressed as soon as possible because it may be easier to address these in the
immediate to short term than adding more generation to the system. Power sector managers
feel that the installed generation capacity is not available fully because primarily the
stakeholders concerned do not make full recovery of revenues. This shortfall between the
power generation cost and revenues perpetuates and takes the shape of an insurmountable
debt liability and trap. It is therefore felt that there is a need to verify this claim as well as
comprehensively analyze whether there are other reasons as well for the accrual of the
circular debt in the power sector of Pakistan.
Statement of Problem
The circular debt is crippling the power sector, resulting in periodic financial injections by
the Government to sustain the generation of power. This is a vicious cycle, whereby the more
power is generated, the greater this burden grows. The purpose of this research work is to
identify the root causes of the scourge of circular debt and to analyze whether there is a
feasible way to arrest it.
While carrying out this research, the following aspects will be explored as well:
i. Inability of power producing companies to pay fuel bill to the oil and gas companies,
ii. Role of NEPRA in determining tariffs and performance of its role as regulator of the
power sector,
iii. Financial mismanagement in the entire process,
iv. To what extent the issuance of term finance certificates (PIB and GoP bonds has been
helpful?
v. To what extent Provincial Governments are committed in resolving the issue?
vi. Impact on the industrial sector and exporters to meet the export targets.

2
Significance and Scope of Study
Pakistan has been facing the mismanagement and consequent losses in Public Sector
Enterprises (PSEs) viz. power sector (PEPCO), Pakistan Railways (PR), Pakistan
International Airlines (PIA), Pakistan Steel Mills (PSM), Utility Stores Corporation (USC),
Trading Corporation of Pakistan (TCP), Pakistan Agricultural Storage & Supplies
Corporation (PASSCO) as well as the National Highway Authority (NHA) for quite some
time. During the last five years i.e. 2008-13, the Federal Government has spent Rs. 2.3
trillion on providing subsidies to the PSEs.1
The canvass of reforming the sick PSEs (that require persistent provision of subsidies) and
plugging the black holes in the power sector (which is confronted by the circular debt) is very
vast. While both issues require urgent and concrete steps for sustainable redress, the general
public suffers more by the inefficiencies in the power sector due to prolonged and
unscheduled power outages. Accordingly, the scope of this paper is restricted to identifying
the causes of accumulation of circular debt in the power sector and exploring possible
solutions.
Literature Review
Circular debt is a very technical matter that plagues the Power sector of Pakistan. It is
distinctly different from the subsidies that Government of Pakistan provides to the PSEs.
Therefore only newspaper articles and a few technical reports are available on this subject.
Salient among these reports are Pakistan Economic Survey, NEPRA State of the Industry
Report, Annual Report of the State Bank of Pakistan and presentations/ internal reports of the
Planning Commission and the Ministry of Water and Power.
Pakistan Economic Survey 2012-13 states that circular debt, weak financial position of
energy companies, falling gas production, high dependence on oil/gas (over 80%), low
exploitation of indigenous coal and hydel resources and unutilized power generation capacity
are some of the significant constraints leading to severe energy shortages. The critical issue
however according to NTDC is that the annual electricity demand growth rate is forecasted to
hover around 5 to 6 percent over next ten years. With current position of expansion, it seems
1
Dr Noor Ul Haq, Mushir Anwar & M Nawaz Khan, “Pakistan‟s Response To Internal Challenges”, IPRI
Publications, 15.12.11, (http://www.thenews.com.pk/Todays-News-9-76727-Counterculture-of-governance)

3
that crisis will not be over which in turn will effect economic growth of the country. The
Survey indicates major issues at the macro level but does not go deep into identifying the
operational and tactical level issues that are the cause of the circular debt.
NEPRA‟s State of the Industry Report 2012 identifies that the major reasons for continued
increase in circular debt are:
i. Non-payment/delayed payment of tariff differential subsidy,
ii. Poor recovery of energy billed by DISCOs,
iii. Distribution losses, due to pilferage/theft,
iv. Inability of DISCOs to pass on entire monthly fuel charge adjustment impact due to
large number of cases pending before the Honorable High Courts of Pakistan,
v. Due to the relief granted by the Honorable Lahore High Court for non-recovery of the
fuel charge adjustment from residential consumers up to 350 units, the financial gap
widened,
vi. Increase in receivable from provincial government's departments and agencies. The
receivables from the provincial government department and agencies can be adjusted
through the Central Adjuster while making disbursements to the provincial government
under NFC award.
The Annual Report 2011-12 of the State Bank of Pakistan while dilating upon energy issues
in detail states that the circular debt stems from: (i) higher transmission losses than allowed
by NEPRA; (ii) low recoveries of billed amount; (iii) non-payment by public sector entities;
(iv) high differential between generation cost and notified tariff; (v) delays and lag in
determination of Fuel Price Adjustment by NEPRA, and recovery by DISCOs; (vi) payment
of GST upfront on the billed amount; (vii) theft and distribution parked against TESCO and
other DISCOs; (viii) delay in release of Tariff Differential Subsidy; (ix) abrupt disruptions in
gas supply, which increases the cost of generation. Put simply, circular debt refers to a
situation where one entity in the power supply chain – having inadequate cash-flows – is
unable to discharge its obligations to its suppliers, and withholds payments. This results in
cash-flow problems for other players in the sector, none of whom are then able to function at
full capacity, causing unnecessary load shedding.
It further elaborates that the payments received by CPPA for the sale of electricity by
DISCOs comprise of two parts: (i) consumer bill payments; and (ii) Tariff Differential
Subsidies (TDS) by the government. Therefore, if DISCOs do not receive full payment for

4
the sale of electricity (due to non-payment of bills by power consumers and/or delays in
government subsidy payments) this leads to a buildup of receivables at the distribution stage.
These receivables then cascade as circular debt across the power supply chain (since one
firm‟s payables are its supplier‟s receivables), constraining electricity generation. To see
how, consider a DISCO that is unable to pay NTDC for the electricity it had purchased. This
means that NTDC, in turn, is unable to keep up payments to power producers (e.g., IPPs),
from whom it purchased the electricity. Consequently, IPPs are forced to delay or withhold
payments to Pakistan State Oil (PSO), the fuel supplier.
Faced with persistent delays in payments for the sale of electricity, IPPs become heavily
reliant on bank borrowings to maintain plant availability (as required under their Power
Purchase Agreements (PPA) with NTDC). However, banks are reluctant to increase their
exposure to power sector clients beyond assigned credit limits. This leaves IPPs faced with
severe liquidity constraints (as was the case in FY12), and ultimately means that PSO is
unable to procure sufficient furnace oil to meet the requirements of the power sector. These
fuel shortages, as a result, force power plants to remain idle or produce below capacity.
Unsurprisingly, this situation translates into lower power generation, and adds to load-
shedding in the country. The challenge of circular debt thus continues because of the
structural issues highlighted above. This explains why, even though one-off settlements by
the Federal Government ease liquidity constraints in the power sector temporarily, the
circular debt issue continues to persist. The Report however falls short of suggesting any
precise remedial measures to be undertaken at each relevant level and for each role player to
tackle the circular debt problem, which is understandable as it does not fall under the domain
of that Report.
A commendable effort by the Planning Commission of Pakistan was to engage USAID to
carry out an in-depth assessment to identify the reasons of creation and uncontrolled growth
of the circular debt and to prescribe measures to resolve it. The report “Pakistan Power Sector
Circular Debt Report: The Causes and Impact of Circular Debt” was commissioned in
December 2012. This report discusses the issue of circular debt at length and concludes that
the primary reasons for the circular debt in the Power sector are poor governance, delays in
tariff determination and notifications, fuel price adjustments, poor revenue collection, non-
payment of tariff differential subsidy by Ministry of Finance, impact of high transmission and
distribution losses and non-payment by KESC. Among the secondary causes it holds thermal
inefficiencies of GENCOs, inadequate budgeting of subsidies, impact of unfavorable

5
generation mix and high generation cost, impact of court decisions, late payment surcharges
for IPPs, neglect of demand-side management, energy efficiency, renewable energy, legacy
payments and payables to CPPA for power purchased. In a nutshell, it is a very elaborate
report and deals the issue from all perspectives comprehensively. However, perhaps due to
brevity constraints its recommendations to resolve the issue are more prescriptive in nature
and do not tell how to achieve the objectives.
This research paper will rely on all of these four reports but concentrate more on how to
achieve the objectives recommended in all of these reports.
Methodology
This paper is based on qualitative and quantitative analysis with descriptive approach. The
data used for analysis has been obtained from primary sources like the Ministry of Water and
Power, State Bank of Pakistan, Ministry of Finance, etc. A number of publications, news
items and other resources as reflected in the bibliography have been relied upon.
Organization of the Paper
This paper is organized in six sections. In Section I, the term „Circular debt‟ is explained in
detail. In Section II, generation of power in Pakistan is dilated upon. Section III deals with
tariff determination and losses in the system network. Section IV deals with the role of the
federal Ministry of Finance and the Provincial Governments. Section V throws some light on
the impact of power shortfall on the industry and exports. Finally the conclusion and
recommendations based on the analysis under the aforementioned sections is presented.

6
SECTION I
WHAT IS CIRCULAR DEBT?
The State Bank of Pakistan, in its Annual Report FY 2011-12 explains the circular debt as
follows:
“Essentially, „circular debt‟ refers to cash-flow problems in the power
sector that arise due to the factors like non-payment of electricity bills by
consumers (public and private), transmission losses, and delays in subsidy
payments. This build-up of unpaid bills (or receivables) at the
distribution stage, then cascades across the power supply chain and
constrains the ability of power plants to make timely payments to fuel
suppliers. Fuel shortages, in turn, result in idle power generation
capacity, and exacerbate load shedding in the country.”
The installed generation capacity in the system is 20,443 MW, whereas at any given time the
available capacity remains less than 14,000 MW. This is due to lack of payments to
generation companies for buying the expensive fuel oil, forcing them to curtail their outputs.
Besides that, technical availability and efficiency of generation plants is compromised due to
lack of timely maintenance and rehabilitation, resulting in a curtailment of 1,500 to 2,000
MW.2
Another around 1,500 to 2,000 MW always depends on the water in dams, as depicted
in the graph below:
Figure 1: Seasonal Variation in Hydel Generation 2007-083
2
NEPRA, State of the Industry Report 2012
3
Muhammad Latif, Chief Energy, Planning Commission of Pakistan, “Pakistan Energy Crisis and Solution”,
2011

7
The gap between supply and demand in the PEPCO's system goes over 6,000 MW in
summer, and remains around 4,000 to 5,000 MW for most part of the year. This gap and
losses in the transmission and distribution networks force rural electricity consumers to
remain without electricity over a twenty hour period.4
On the financial side, the power sector received subsidies worth Rs. 1.3 trillion during the
period 2008-12, so that it could bridge the gap between the cost of power generation and the
revenues collected.5
Besides this subsidy to the power sector, the outstanding liabilities of
PEPCO towards the power producers and fuel suppliers stand at more than Rs. 670 billion as
of 31.12.12. Consequently the fiscal deficit during the FY 2011-12 increased to 8.5% of the
GDP. This size of the fiscal deficit is not sustainable as it is contributing to inflation;
squeezing out private investment; impacting the balance sheet of commercial banks; and
could push the country into a debt trap.6
According to Planning Commission of Pakistan, as a
result of the losses from power and gas shortages, the GDP reduced by 3 to 4% in the year
2011-12. 7
According to the Ministry of Water and Power, the total liabilities of the power sector stood
at Rs. 670.72 bln as of 31.12.12. A category wise break up of this liability is as follows:
4
National Transmission & Despatch Company, Power System Statistics 2011-2012
5
http://dawn.com/2013/03/11/outright-privatisation-or-gradual-reforms/, (accessed on 28.5.13)
6
State Bank of Pakistan, Annual Report FY 2011-12
7
NEPRA, State of Industry Report 2012

8
(Rs.in million)
Sr. # Type Balance on 31.12.2012
1 GAS 36,919.96
2 OIL (PSO) 16,378.24
2aIPPs (RFO) 174,964.11
2bIPPs (GAS) 63,675.07
2cIPPs (Nuclear & SHYDO) 22,053.67
3 Sub Total: (IPPs)(2a+2b+2c) = 260,692.85
3aGULF RENTAL POWER (RPP) 621.06
3bKARKEY RENTAL POWER (RPP) 2,740.76
3cMISC. (GENCOs & etc.) 19,950.56
3dNTDC (Project, Custom‟s duty & Markup) 8,092.88
3eWAPDA Hydel 85,322.53
4 Total: (RPP & Others)(3a+3b+3c+3d+3e) = 116,727.79
Total: (Gas, Oil, IPPs, RPP & Others) 430,718.84
Loan arranged by PPHC for DISCOs 240,000.00
G/Total (Gas, Oil, IPPs, RPP, PPHC & Others) 670,718.84
Table 1: Statement showing liabilities as on 31.12.2012
The preceding discussion and the debt as reflected in Table 1 clearly demonstrate that the
capacity to generate is not the real issue at least for short term. Indeed it is the inter-corporate
or circular debt which has plagued the power sector of Pakistan. The data in Table 1 also
shows that the liability against the IPPs is Rs. 260.7 billion as of 31.12.2012. This liability
accrues due to the fact that at present the sole buyer from the IPPs is PEPCO under the
sovereign guarantee of the Government of Pakistan. After clearing this current liability, one
option for future can be to promote multi buyer multi seller model in the power sector. Under
such a model, any power producer can identify customers for itself and supply power to them
through the DISCO distribution network by paying it the Use of System Charges (UoSC). In
this way, the IPPs will be better off because they will have assured customers who will make
timely payments and GoP will be better off because it will not accrue fresh liabilities in this
regard.8
8
Barrister Asgher, DG Legal PPIB, interview with author, June 2013.

9
SECTION II
POWER GENERATION
1.1.Sources by fuel type
Total installed generation capacity is 20,443 MW as of June 2012 (excl. that of KESC).9
The
shares of each source of fuel used to generate this capacity are shown in the chart below:
Figure 2: Shares of fuel type in Power generation
64% of generation is through fossil fuels (gas, RFO and HSD), only 33% is based on hydel
and 3% through nuclear fuel. The thermal based power is generated from furnace oil, diesel
and natural gas. The share of oil based generation is 36% and that from natural gas is 28%.10
A comparison with India and Bangladesh reflects that India relies mainly on power
generation through coal and negligibly on oil. A source-wise comparison is shown in the
table below:
Gas Oil Coal Hydel, Nuclear or import
India 9.20% 0.80% 71.00% 19.00%
Bangladesh 73.00% 20.40% 3.40% 3.20%
Pakistan 29.00% 35.00% 0.10% 35.70%
Table 2: Comparison of electricity generation by sources, 201211
9
National Transmission & Despatch Company, Power System Statistics 2011-2012
10
ibid
Thermal (Pub)
4,785 MW 23%
Hydro
6,627 MW 33%
Nuclear 650 MW 3%
Thermal (Pvt)
8,381 MW 41%

10
Average costs of power generation from different fuels during the year 2011-12 are shown in
the table below:
Hydro Coal HSD RFO Gas Nuclear Import Mixed Wind
GWh 28,643 66 1,474 30,662 23,431 4,413 296 730 6
% Share 31.93 0.07 1.64 34.18 26.12 4.92 0.33 0.81 0.01
Cost
(Mln. Rs.)
4,660 206 27,848 488,617 99,340 4,978 2,662 9,331 51
Cost
(Rs./kWh)
0.16 3.12 18.89 15.94 4.24 1.13 8.99 12.78 9.12
Table 3: Average Costs of Units Delivered to DISCOs (2011-12)12
A number of factors can be noted from the data in Table 3. The average fuel component of
generation cost on furnace oil was around Rs.16 per kilowatt hour in 2012. The cost for
generation through hydro is less than half a rupee. It is very important to note that the
marginal cost of hydel power is so low since the power plants are in public sector and have
recovered the initial costs of investment; therefore this cost is just the cost incurred on
operation and maintenance. The new tariffs given by NEPRA for the hydel projects in the
private sector range between 7-8 cents per kWh. Again in case of nuclear power the cost
shown above is the O&M cost. Nevertheless, coal, hydel, gas and nuclear based power
generation is far cheaper than that through fossil oils. This implies that the coal, hydro,
natural gas and nuclear shares in the electricity generation should be increased to improve the
fuel mix and therefore reduce the power purchase costs of DISCOs and consequently the
consumer bills.
As reflected in Table 4 below, WAPDA is executing, on priority basis, the projects such as
969 MW-Neelum Jhelum, 1410 MW-Tarbela 4th Extension, 7100 MW-Bunji, 4320 MW-
Dasu, 740-MW Munda Dam and most mentionable 4500 MW Diamer Bhasha Dam projects,
to cope with the increasing demand of power. Almost 96 percent work on the main dam at
Mangla, spillway and allied facilities has been completed and resettlement work is in
progress.13
11
National Transmission and Despatch Company, National Power System Expansion Plan 2011-30
12
NEPRA, State of the Industry Report 2012
13
Ministry of Finance, Pakistan Economic Survey 2011-12

11
S# Project
Estimated
Cost (Rs.
Billion)
Storage
(MAF)
Capacity
(MW)
Status
1
Neelum
Jhelum,
AJK
84.502 RoR 969 49% Nov 2016
2
Tarbela
4th Ext.–
Swabi
88.825 - 1,410
World Bank agreed to finance the project.
Prequalification of Civil and E&M
bidders in process.
3
Diamer
Basha –
Kohistan
894.00 8.1 4,500
Ready for Construction. WAPDA is
arranging financing.
4
Bunji –
Astore
646.00 RoR 7,100
Feasibility study completed. Design &
Tender Documents under finalization.
5
Munda –
Mohmand
Agency
133.1 1.3 740
Feasibility Completed. Consultants
mobilized for Detailed Engineering
Design to be completed by May 2014.
6
Dasu –
Kohistan
570 RoR 4,320
Feasibility study completed. Detailed
engineering design and tender documents
will be completed in Feb 2014.
Total 9.4 19,039
Table 4: WAPDA's Mega Hydel Projects14
In the private sector, Laraib Energy Limited has commissioned 84 MW hydroelectric power
generating complex known as the New Bong Escape Hydroelectric Power Complex on the
Jhelum River in Azad Jammu and Kashmir (AJ&K).
Finally, the United States and Pakistan signed implementation agreements to upgrade three
Pakistani thermal power stations at Jamshoro, Muzaffargarh, and Guddu. It will restore
approximately 305 MW of lost power generation capacity.
On the nuclear side, under construction nuclear power plants C-3 and C-4 are of 340 MW
each and are expected to start generation in 2016 and 2017, respectively.15
As far as coal is concerned, Pakistan has approximately 186 billion tons of coal reserves most
of which remain untapped. The largest reserves, 175 billion tons of lignite coal, are located in
the Thar desert of Sindh. Thar coal has a heat content of 11,000 BTU/lb (dry basis); however,
14
WAPDA, Hydro Potential Brochure 2013
15

12
Thar coal is yet to be developed for mining and power generation despite the huge potential
of 100,000 MW. There are plans to increase domestic coal production from 4.5 to 60 million
tons/year over the next 5 years. Assuming 50 million tons/year of coal production can be
diverted for power generation, there is a potential to install coal-based power generation
capacity in the range of 9,000-10,000 MW. This, however, would require a huge capital
investment of over $30 billion plus associated transmission networks.16
The Private Power and infrastructure Board (PPIB) is a „One Window” facilitator to the
private investors in the fields of power generation on behalf of the Government of Pakistan
(GoP). PPIB is currently processing twenty six (26) multiple fuel (oil, coal, gas, cogeneration
and hydel) Independent Power Producer (IPP) projects with a cumulative capacity of around
8,050 MW.
The government in its bid to diversify its energy mix, has been giving due attention to fast
track the development of Alternative / Renewable Energy (ARE) resources in the country.
The Alternative Energy Development Board (AEDB) and the Pakistan Council of Renewable
Energy Technologies (PCRET) are facilitating power generation through solar, micro-hydel,
wind, bagasse, biomass etc.
AEDB has issued Letters of Intent (LoIs) to 43 IPPs pursuing development of wind power
projects at different times till 2010. Out of these, 19 IPPs with a cumulative capacity of
approx. 950 MW are at various stages of development in Gharo Keti Bander wind corridor.17
Pakistan produces a huge amount of municipal waste (up to 50,000 tons/day) and agricultural
waste in the form of biomass, cotton sticks, and rice husk etc. Converting this waste into
energy can generate power.
AEDB has also issued a LoI to set up a 12MW biomass to energy power project in Sindh to
SSJD Bio Energy. Another LoI has been issued to M/s Lumen Energia Pvt Ltd. to set up a
12MW power plant at Jhang based on agricultural waste like cotton stalk, rice husk,
sugarcane trash, biogas, wheat chaff and other crops as multi-fuel sources. M/s Pak Ethanol
(Pvt) Ltd. is vying to set up a 9 MW biogas power project at Matli, Sindh.18
16
Friends of Democratic Pakistan, Integrated Energy Sector Recovery Report & Plan, Oct 2010
17
Alternative Energy Development Board
18
ibid

13
As Pakistan has a population more than 180 million, out of which 65 to 70 percent are
associated with agriculture & livestock, so biogas production is the best and only way to
meet energy as well as power needs of the rural population.19
In the micro-hydel sector, Productive Use of Renewable Energy (PURE) Project is being
implemented to install 103 small hydro power plants in Khyber Pakhtunkhwa (KPK) and
Gilgit Baltistan (GB), with the total cost of US$ 19.5 million. Another project for 250 plants
is under preparation for the same areas. Eight hydro projects with a total capacity of 80MW
have been initiated under the Renewable Energy Development Sector Investment Program
(REDSIP) with the support of the Asian Development Bank (ADB).20
In Solar Energy, 6 LOIs for cumulative capacity of 148 MW on-grid solar PV power plants
have been issued by AEDB till 2012. Additionally 3 LoIs of 70 MW capacities have been
issued by Punjab Power Development Board (PPDB).21
Pakistan has immense solar
resources, suitable for both Photovoltaic (PV) and thermal i.e., Concentrated Solar Power
(CSP) applications.
Following the Government Policy of duty/tax exemption, import / installation of equipment
for solar technology has increased manifold. Following is the trend of import of solar panels:
Figure 3: Year-wise Import of Solar Panel Capacity (MW)22
Similarly the trend of import of solar geysers is also on the rise:
19
Aleem Malik, “Biogas a good alternative to meet energy deficit”, 24.5.2013;
weeklypulse.org/details.aspx?contentID=3668&storylist=16, (accessed 28.5.13).
20
Alternative Energy Development Board.
21
NEPRA, State of Industry Report 2012.
22
Ministry of Finance, Pakistan Economic Survey 2012-13;
0.14 1.00
5.53 2.58
9.35
26.97
54.77
0.00
10.00
20.00
30.00
40.00
50.00
60.00
2007 2008 2009 2010 2011 2012 2013

14
Figure 4: Import of Solar Water Geysers23
1.2.Generation losses & efficiencies of power plants
The net capacity factor of a power plant is the ratio of its actual output over a period of time,
to its potential output if it were possible for it to operate at full nameplate capacity
indefinitely. To calculate the capacity factor, the total amount of energy the plant produced
during a period of time is divided by the amount of energy the plant would have produced at
full capacity.
For the hydel power generation under WAPDA, the average capacity factor was 41% during
2012, which is quite good comparing with the international average capacity factor of 44% in
2009.24
For the thermal power stations, it is more informative if their efficiencies are evaluated in
terms of their „heat rates‟. The heat rate is defined as the amount of fuel consumed for each
unit (kWh) generated. Over time, as efficiencies of generating units have declined, heat rates
have increased. The higher the heat rate of the plant, the greater the amount of fuel consumed
per unit of electricity generated. The Table 5 below shows that the heat rates of different
thermal units have increased by 2-19% over time as compared to the NEPRA benchmarks.
This means that generation through oil based thermal plants is expensive not only due to the
increase in price of oil, as discussed above, but also due to decrease in efficiencies of the
thermal plants.
23
ibid
24
“Electric Power Annual 2009”, http://www.eia.gov/electricity/annual/archive/03482009.pdf; (accessed
30.6.13)
260
743 2,396
6,848
11,060
13,294
14,981
0
2000
4000
6000
8000
10000
12000
14000
16000
2007 2008 2009 2010 2011 2012 2013

15
GENCOs NEPRA Actual Diff
CPGCL (GENCO I)
Block 1 8,533 9,153 7%
Block 2 9,481 10,200 8%
Block 3 11,377 13,109 15%
Block 4 12,189 14,041 15%
NPGCL (GENCO III)
Unit 1-3 (TPS Muzaffargarh) 10,788 11,677 8%
Unit 4 (TPS Muzaffargarh) 10,692 11,087 4%
Unit 5-6 (TPS Muzaffargarh) 12,158 14,164 16%
Units 1-2 (SPS Faisalabad) 14,368 * *
Units 1-4 (GTPS Faisalabad) 15,366 17,708 15%
Units 5-9 (GTPS (Faisalabad) 11,701 * *
Unit 1-3 (Multan) 14,114 16,169 15%
JPCL (GENCO II)
Unit 1 (Jamshoro) 10,655 11,505 8%
Units 2-4 (Jamshoro) 10,862 12,930 19%
Unit 1-2 (Kotri) 21,813 22,353 2%
Units 3-7 (Kotri) 10,564 11,902 13%
Table 5: GENCO Heat Rate Comparison25
In view of the above discussion, it is very important to carry out reliable heat rate audits of all
public sector generation companies and undertake necessary maintenance or conversion to
coal to improve the efficiency of power generation.
As far as IPPs are concerned, the National Power Control Centre (NPCC) maintains a merit
order of the power plants on the basis of their respective power generation efficiencies (heat
rates). Based on this merit order the NPCC is required to direct power generation from the
IPPs starting with the most efficient first.26
However NPCC does not follow the merit order
25
USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012.
26
Mr. Masood Akhtar, ex-GM System Operations, National Power Control Centre (NPCC), NTDC, interview
by author, May 2013.

16
of the power plants and therefore incurs an annual loss of Rs. 60 billion.27
Mr. Masood
Akhter, ex-GM System Operations NPCC refuted this claim and said that NPCC is at times
constrained to select less efficient power plants due to unavailability of fuel with the more
efficient ones. Based on these contradictory claims, a realistic way forward can be to paste
the merit order of power plants on the website of NTDC along with the daily „despatch order‟
(i.e. instructions by NTDC to generate power) and daily release of payments to the IPPs. This
measure, though very small, will ensure a lot of transparency in the whole operation of power
despatch and payments.
27
Presentation by Kohinoor Energy Ltd during Local visit of 13th
SMC, July 2013.

17
SECTION III
TARIFF DETERMINATION, TRANSMISSION AND
DISTRIBUTION LOSSES
It is the role of the power sector regulator, National Electric Power Regulatory Authority
(NEPRA) to determine the tariffs for generation companies, whether in public or private
sector; as well as those for the National Transmission and Despatch Company (NTDC) and
the Distribution Companies (DISCOs). The procedure for tariff determination entails that the
applicant files a tariff petition before NEPRA stating all expenditures and cost of loans etc.
and then NEPRA after public hearing of the petition determines the tariff for that case. Same
procedure is followed in case of NTDC and DISCOs. The only difference is that in these
cases the petitions reflect the assets and operational expenses of these companies. NEPRA
then keeping in view the O&M expenses and the return on assets for these companies gives
the transmission/use of system charges for NTDC and the tariff at which the DISCOs can
charge the different type of consumers besides keeping a small margin for the DISCOs called
the „distribution margin‟. Besides these, NEPRA hears petitions for fuel price adjustment
(FPA) in all tariffs every fortnight since the price of fuel keeps on changing.28
3.1.Role of Regulator (NEPRA)
NEPRA was created through the Act called the Regulation of Generation, Transmission and
Distribution of Electric Power Act, 1997 on 16th
December, 1997 as part of strategic power
sector reforms program envisaged by Government of Pakistan (GoP).
The mandate given to Authority includes provision of affordable electric power, promote
competitive environment, grant licenses for Generation, Transmission & Distribution of
electric power, determine tariff, etc.
Currently NEPRA‟s tariff determinations include:
i. Quarterly determination in respect of 9 Distribution Companies including KESC.
ii. Monthly Fuel Price Adjustment in respect of 9 Distribution Companies including
KESC.
28
Mr. Zargham Eshaq JS Ministry of Water & Power, Mr. Zia ur Rahman MD NTDC, Mr. Nisar Bazmi GM
Planning Power NTDC, interviews by author, Islamabad and Lahore, 2013.

18
iii. Fortnightly Fuel Price Adjustments in respect of GENCOs, IPPs etc.
Tariff for generation companies is determined on rate of return (cost plus basis) in most
cases; tariff of NTDC and DISCOs is determined on annual cost plus basis where, in addition
to the costs, certain return on equity or assets is allowed.29
3.2.Generation Tariff
Power plants that produce electricity (e.g., IPPs, private; and GENCOs, Wapda Hydel, etc.,
public), have Power Purchase Agreements (PPAs) with a single purchaser, the National
Transmission and Dispatch Company (NTDC). This PPA specifies a two-part tariff structure
which includes (i) Capacity Charge: to cover the fixed costs of maintaining power plant
capacity (e.g., operating and maintenance expenses (O&M), debt servicing, and return on
equity, etc.) that are to be paid regardless of dispatch; and (ii) Energy Charge: to cover
variable costs, mainly fuel (based on a benchmark for fuel prices by NEPRA), and variable
O&M costs, that depend on the amount of electricity actually sold. Fuel costs above or below
the NEPRA benchmark are passed onto consumers as Fuel Prices Adjustments (FPAs). 30
3.3.Transmission Tariff
NTDC purchases power from generation companies to sell it onwards to distribution
companies (DISCOs). For providing this service, it receives a Use of System Charge
(UOSC). It includes a fixed component (which depends on a particular DISCO‟s maximum
power demand during a billing period); and a variable charge which is the average price of
electricity procured from the generation companies (adjusted for NEPRA approved power
losses incurred during transmission).31
29
NEPRA, NEPRA ACT No. XL of 1997, NEPRA Rules, NEPRA Regulations and NEPRA Codes.
30
State Bank of Pakistan, Annual Report FY 2011-12.
31
Ibid.

19
3.4.Distribution Tariff
Each DISCO has a separate tariff approved by NEPRA. This is because in addition to the cost
of power procured from NTDC, it includes a Distribution Margin. This margin covers the
costs associated with use of the DISCO‟s infrastructure (e.g., O&M expenses, depreciation,
return on assets, etc.), and an adjustment for power losses incurred during distribution. Since
these losses vary widely across DISCOs, this would mean that consumer tariffs too would
vary across the country. However, in order to ensure uniform consumer tariffs across the
PEPCO system, the government provides a Tariff Differential Subsidy (TDS) at this stage.
Therefore, while DISCO tariffs are determined by NEPRA; the rates that consumers pay are
notified by the government.32
Delays in tariff determination and notification contributed Rs. 72.19 billion to the circular
debt for FY 2012. Tariff determinations for all nine DISCOs were delayed for nine months
and it took an additional month for the notification to be published. Consumer tariffs in 2011-
12 were largely based on 2010-11 values when the actual fuel cost for 2012 was 52% higher
than the previous year. Without new tariff values from NEPRA and the GOP, the DISCOs
had no chance to receive the necessary cash required to meet their monthly wholesale power
cost.33
3.5.Fuel Price Adjustments (FPAs)
In addition to the foregoing, consumer tariffs are adjusted fortnightly/monthly by NEPRA for
variation in generation fuel costs, against approved benchmarks through Fuel Price
Adjustments (FPAs). These can be driven by variation in the actual fuel mix versus NEPRA‟s
reference mix (e.g., gas shortages that force power plants to substitute gas with more costly
High Speed Diesel) and/or changes in fuel prices on global markets (e.g., furnace oil). Either
of these can automatically increase (or decrease) generation costs, and is passed on to
consumers through FPAs. These charges appear on consumers‟ electricity bills separately
based on units consumed in the previous month. It is the pass-through of these adjustments
that experiences delays.34
32
ibid
33
USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012, 10.
34
Mr. Zargham JS MoW&P, interview by author, May, 2013;
USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact of Circular Debt, 2012.

20
Delays in NEPRA‟s application of the Fuel Price Adjustment (FPA) mechanism contributed
Rs. 33.19 billon to the circular debt in 2012.35
In view this analysis, the timely processing of tariffs and FPAs by NEPRA needs to be
revamped so that the delays contributing significantly towards the circular debt are removed.
3.6.Impact of Tariff Determination on Consumers
Like India, Pakistan‟s government subsidizes the cost of electricity by paying distribution
companies the difference between the cost of production and the intended price, as shown in
Table 6. The fiscal burden of maintaining a subsidy for all end consumers has become
substantial.36
The PPP-led Government struggled to keep up with its pledges to make subsidy
payments, which in turn left distributors in arrears to suppliers. The upshot has been that the
complex network of government-managed and private energy suppliers, generators and
distributors has become weighed down by intra-corporate debt.37
A solution to the problem would be to reduce the subsidy and bring prices in line with actual
costs. This is a politically sensitive issue however, and efforts to do so in the past have caused
protests and cost the Government political support. For instance, in June 2011, the
Government was forced to abandon plans to reduce the subsidy when the MQM withdrew
from the ruling coalition in response chiefly due to political reasons.38
Consumption
(Units)
NEPRA
Tariff
(Avg Rs)
GoP
Tariff
(Avg Rs)
Subsidy
Rate
(Avg Rs)
Amount of
annual
subsidy (Rs.
Mln)
Domestic up to 50 3 2 1.0 2,300
Domestic 01-100 9.9 5.8 4.1 54,200
Domestic 101-300 13.1 8.1 5.0 55,000
Domestic 301-700 15.5 12.3 3.2 12,300
35
ibid, 11.
36
Although heavier users generally receive a lower rate of subsidy, there is no system of cross-subsidization,
whereby certain types of consumer pay over the odds to subsidize the prices paid by others. A World Bank
report found that the richest 20% in Pakistan benefitted most from power subsidies.
37
House of Commons Library “Pakistan in 2013”, Research Paper 12/76, 06 December 2012
38
Foreign Policy, “Uh-oh. Pakistan can‟t pay its electric bills”, 10 May 2012

21
Domestic > 700 (inc.
load > 5Kw)
17.2 15.1 2.1 2,800
Commercial 14.4 11.4 3.0 12,400
Industrial 12.9 10.3 2.6 54,000
Bulk supply 13.1 10.3 2.8 4,000
Agri. Tube well 12.6 9.4 3.2 28,000
Others 14 10.8 3.2 7,500
Total 12.57 9.55 3.02 232,500
Table 6: Tariff Differential Subsidy, 201239
Table 6 very clearly shows that the GoP gives subsidies of 24% on an average to consumers
under different categories. The issue of concern is that this subsidy is enjoyed by even those
consumers and those categories of consumers who can afford the price of electricity. This
subsidy is called the Tariff Differential Subsidy (TDS) and is a distortion in the whole tariff
notification process; this is why the international funding organizations and IMF keep on
pressing the government to rationalize the power tariffs. Based on the discussion above, a
rational determination of TDS is to remove the subsidy given to domestic consumers using in
excess of 700 units and from all other categories except the agriculture tube wells. However,
this rationalization of TDS must be carried out in six monthly phases so that the consumers
adjust to the change accordingly. This rationalization will save almost Rs. 110 billion
annually at 2012 tariffs.
3.7.Transmission and Distribution Losses
The electric power physical network comprises four distinct interfaces where the electric
power changes hands from one stakeholder to the other. At the first interface, the power
generation companies sell energy to NTDC at different generation tariffs that are determined
by NEPRA; these tariffs comprise two components i.e. energy purchase price and the
capacity purchase price; the tariffs are linked to the USA consumer price index as well as
39
Power Finance Wing, Ministry of Water & Power.

22
inflation and therefore keep on changing.40
NTDC owns the main backbone of the physical
network and transmits this energy over 500/220 kV levels to the „common delivery points‟
(CDPs), which is the next interface where the energy is purchased by the DISCOs from
NTDC. The DISCOs maintain the distribution network and step down this energy to 11kV
level (third interface) for sale to the consumers at the fourth interface. The voltage level at
this interface is either 440V or 220V. A schematic diagram of this network is as below:
Figure 5: Schematic Diagram of the Electric Power Network41
Figure 5 shows the first three interfaces marked as A, B and C. The losses due to
inefficiencies in generation have been discussed in the earlier sub-section. The difference in
the energy values between the points B and A are the losses that occur while transmitting the
energy to the threshold of DISCOs and are technically called „transmission losses‟. The point
B designates the CDPs and the DISCOs are billed by NTDC in accordance with the energy
drawn by each DISCO at the corresponding CDPs. The „distribution losses‟ are those that
occur between the points C and B. Beyond point B, the technical losses are very minimal.42
Therefore, if the energy billed to all consumers in the area of a particular DISCO is less than
the energy recorded at point C during that period then it means that this shortfall is due to
„administrative losses‟, a euphemism for power theft.
NEPRA allows 2.5% as transmission losses and up to 10% as distribution losses. While
determining the tariffs for NTDC and the DISCOs, NEPRA incorporates these values as a
pass through to the consumers. According to NTDC, the transmission losses during the year
2010 were 3.15% and the auxiliary parasitic consumption in the power generation premises
40
NEPRA and PPIB.
41
Mr. Masood Akhtar, ex-GM System Operations, National Power Control Centre (NPCC), NTDC, interview
by author, May 2013
42
Mr. Nisar Bazmi, GM Planning Power, NTDC, interview by author, May 2013
GENERATION
DISCOs
NTDC
TRANSMISSION
500/220kV
COMMON DELIVERY
PTS. 220kV
11kV FEEDERS
A B C

23
was 2.03%.43
This makes a total loss of 5.18% before the energy reaches point B. During
discussions with the senior management at the National Power Control Centre (NPCC), it
was revealed that while allocating the quotas of electric power to the DISCOs, the NPCC
deducts 5% from the generated power and distributes the remaining power among the
DISCOs at present.
It is important to note that the readings from point A in Figure 5 get communicated to the
NPCC in real time through Supervisory Control and Data Acquisition (SCADA) system. The
readings from meters at point B and C are however not available to any agency in real time;
neither to the NPCC nor to the respective DISCOs. Accordingly, there is no means to
ascertain the exact losses between these points in real time or at any one instant in time. The
situation gets further aggravated by the fact that at many locations the meters are of old
analogue type and the recording from those meters are manually done by duty staff. In this
scenario, an alternative measure was adopted i.e. the billing data was acquired from the
Pakistan Information Technology Company (PITC), which is a subsidiary of the PEPCO and
maintains all data for the power sector. Based on these calculations, the total distribution loss
was 18% in 2012.44
This implies that the total loss from generation end to the interface C turns out to be 23%
which is greater than the total 12.5% allowed by NEPRA. The excess loss is 10.5% out of
which 2.5 % is before the energy reaches the DISCO and 8% within the DISCO network.
This 8% excess distribution loss is not only due to the lack of degradation of the distribution
network but also includes power theft. This 8% of excess loss in the distribution system
translates into almost Rs. 75 billion by extrapolating the data provided by PITC for 10
months of FY 2012. There is another view that the annual theft amounts to almost Rs. 100
billion.45
However, at present due to lack of real time reliable metering at points B and C, it is
difficult to segregate the real excess distribution technical losses and the theft. In the absence
of such metering tree, another way of ascertaining the power theft is to carry out a technical
audit of all distribution networks but the same has not been carried out due to vested
interests.46
The way forward is that the real time communication through reliable meters is established at
all CDPs, which are about 480 metering points. NTDC has invited tenders to establish real
43
NTDC, “Power System Statistics 2011-12”
44
NTDC, “Power System Statistics 2011-12”
45
Mr. Munawar Baseer, ex-MD PEPCO, presentation to 13th
SMC, 15th
July, 2013.
46
Mr. Shahid Khan, ex-GM Technical NTDC, interview by author, June 2013.

24
time communication after installing meters at these points to the National Power Control
Centre and all DISCOs under the „Secured Metering System‟ (SMS) Project. Nevertheless,
NTDC is causing a lot of delay in evaluating the received bids. It is required that the bids be
evaluated at the earliest and contract awarded.47
As far as 11kV metering point C is concerned, USAID is sponsoring a project for installing
about 6,000 meters that will have the capability of communicating power load data to NPCC
and DISCOs at 5 minute refresh cycle. The project is expected to be commissioned in
August, 2013.48
3.8. Billing and Recovery Position:
The following table gives billing and recovery position for all the DISCOs
Jul 2012-Apr 2013
Quantitative Data (MkWh)
Units Purchased by DISCOs 65,227.59
Units Sold 53,831.67
Units Lost 11,395.92
(A) Losses %age 17.47
Computed Assessment (Mln. Rs.)
Govt. 74,678.03
Private 525,464.29
(B) Total 600,142.32
Current Collection against (B)
Govt. 44,270.25
Private 420,461.57
(C) Total 464,731.82
Arrears Receivables
Govt. 960,804.05
Private 2,198,571.20
(D) Total 3,159,375.25
Arrears Collection
Govt. 7,278.10
Private 57,030.39
(E) Total 64,308.49
Current Collection %
47
Mr. Daud, Consultant Planning Power NTDC, interview by author, June 2013.
48
Mr. Robert Kolling, Adviser Distribution, USAID PDP, Ministry of Water & Power, email exchange by
author.

25
Govt. 59.28
Private 80.02
(F) Total 77.44
Arrears Collection %
Govt. 0.76
Private 2.59
(G) Total 2.04
Table 7: Energy purchase, Billing and Recovery Position49
The data in Table 7 shows that the performance of DISCOs has been very dismal as far as
recovery of arrears is concerned. Regarding the recovery of current bills it is an overall
77.44%. This means that on top of the transmission and distribution losses, another 22.6%
was lost during the first 10 months of the FY 2012-13. It is beyond understanding to sustain
stable power generation, which requires continuous supply of funds to purchase oil and gas,
in the face of such heavy deficit in recovery of the billed energy. This 22.6% turns out to be
Rs. 135 billion when extrapolated over the whole financial year.
It is also believed that the DISCOs park some units of energy in the form of excessive billing
to conceal theft. In return such practice adds to the less recovery of bills.50
Based on the above analysis, almost Rs. 210 billion is lost to excess distribution losses
(technical + theft) and non-recovery of billed amount. A remedy for eliminating this loss is to
implement the SMS project at the earliest so that actual theft becomes visible and DISCOs
are held accountable for recovering the stolen energy amount as well as full billed amount. It
is also extremely important to carry out financial audits of the DISCOs the determine whether
there are any questionable practices in issuing the bills in the first place.
49
Pakistan Information Technology Company (PITC)
50

26
SECTION IV
ROLE OF MINISTRY OF FINANCE & PROVINCIAL
GOVERNMENTS
4.1 Payment of TDS, PIBs & TFCs
In order to incentivize banks to continue lending to power sector clients – and keep the
supply chain running – the government struck two key deals with commercial banks in FY12.
These deals reduced banks‟ outstanding power sector exposure by swapping it for
government securities. Essentially an asset adjustment on banks‟ balance sheets, this entailed
a significant cost: the first swap increased the fiscal deficit by around 1.5 percent of GDP.
This swap alone accounts for nearly 45.0 percent of total government borrowings from
commercial banks in FY12. 51
Deal 1: Banks had been lending to PEPCO under government guarantees to offset unpaid
tariff differential subsidies. In 2009, the government set up the Pakistan Power Holding
Company (PPHC) to acquire PEPCO‟s outstanding debts. By FY12, banks‟ exposure to
PPHC had risen considerably. In order to encourage banks to continue lending to the power
sector, these assets were swapped for sovereign debt. In effect, the government borrowed Rs
391.0 billion from commercial banks by issuing MTBs and PIBs in November 2011, and
swapped Rs 313.0 billion (around 1.5 percent of GDP) worth of government securities for
PPHC‟s liabilities. This cleared banks‟ balance sheets of exposure to the publicly owned
power sector and converted it into direct lending to the government.52
Deal 2: Even after this, banks still had significant exposure to the IPPs, which had been
borrowing from banks for working capital requirements. However, as IPPs exhausted their
assigned credit limits, banks were unwilling to extend additional loans. As a result, cash-
strapped IPPs were finding it difficult to procure fuel to maintain power generation. To
address banks‟ reluctance, PPHC-issued securities worth Rs 136.0 billion were swapped for
bank loans in February 2012. By freeing used-up credit lines, this created room for fresh bank
lending to IPPs.53
51
State Bank of Pakistan, “Annual Report 2011-12”, Sub-section 4.1.
52
Ibid.
53
Ibid.

27
Notwithstanding these efforts, the power sector remains vulnerable to global oil prices given
a heavily skewed fuel mix towards thermal generation – particularly imported furnace oil.
This burden will have to be borne either by the government through subsidies, or consumers
through higher tariffs. Since the government has already spent a total of Rs 464.3 billion (or
2.2 percent of GDP) on power sector subsidies and swap deals in FY12, further financial
support in the form of subsidies will pose great fiscal burden. Furthermore, as discussed
earlier, the bulk of this spending was financed by borrowing from banks. Such borrowings, to
keep the power sector running, have implications for commercial banks‟ operations – it has
already skewed their balance sheets towards sovereign debt.
Finally, such financial instruments provide only a momentary relief and cannot address the
systemic and structural factors that create the circular/inter-corporate debt. Rather such
instruments add to the financial liabilities of the power sector.
The GOP‟s annual budgeted line item for this subsidy totaled Rs. 50 billion for FY 2012,
while the DISCOs claims for the same period amounted to Rs. 156 billion. The outstanding
balance of the TDS to be paid by the Ministry of Finance was Rs. 106.02 billion at the end of
2012, which adds to the circular debt.54
This implies that proper budgeting for the TDS by the
Ministry of Finance and timely release to the CPPA NTDC can reduce the gap in cash flow.
4.2 Role of Provincial Governments
At the provincial level, governments are generally not proactive in the resolution of issues
such as the reconciliation of electricity bills, payment of tube well subsidy arrears, arrears of
provincial departments, and arrears due to court orders. In addition, the failure to accept
responsibility for the problems stemming from the allocation of power shortages to different
provinces is another reason behind it.55
The lack of interest of the public sector in clearing its dues against electric power is reflected
in the Table 8 below:
54
55
Ibid, 8.

28
SR. No. CATEGORY RECEIVABLES (Rs. Bln)
1 Federal Government 7.096
2 AJ&K Govt 22.925
a Punjab 8.693
b KP (Inc FATA) 19.997
c Sindh 43.749
d Balochistan 6.102
3 Total Prov. (a+b+c+d) 78.541
4 TOTAL (1 To 3) 108.562
5 FATA Domestic Consumers 18.545
6 Agri. T/Wells in Balochistan 1.217
7 KESC 44.541
8 G-TOTAL (4+5+6+7) 172.865
Table 8: Receivables from public sector as of April 201356
The data in Table 8 reveals very important information. The receivables are Rs. 173 billion.
Had the DISCOs been able to make these recoveries, the circular debt could have been
decreased to a large extent.
The federal government is also blamed that it has not adequately attended to a comprehensive
legislation needed to improve governance and reduce electricity and fuel theft. The
Government of Pakistan needs to develop a comprehensive policy for effective governance of
the power sector, including reducing the number of GoP entities involved in the sector, which
often have overlapping or ill-defined authority and often lack the capacity to effectively
perform their designated functions. For example, lack of political consensus on hydropower
development and generation planning has led to increased dependence on imported fuel or
furnace oil and, as a result, an unbalanced power generation mix that has necessitated
customer subsidies. As subsidies were not allocated appropriately, benefits extend to those
beyond the targeted customer sector.57
In view of the losses that occur due to theft, non-recovery of billed amounts and non-payment
by the public sector, the whole power sector cycle i.e. from generation to consumer suffers
from a deep cash-flow deficit. To address this component of the total deficit, a workable
option is to give all DISCOs under the management of the respective provinces under the
arrangement that the payment for energy purchased by the DISCOs will be the liability of the
56
Power Finance Wing, Ministry of Water and Power
57
Aleem Malik, “Dynamics of circular debt in Pakistan”, 5.4.2013,
weeklypulse.org/details.aspx?contentID=3463&storylist=16, (accessed 2.6.13)

29
corresponding provincial government. If any provincial government does not clear its due for
any month, the dues will be deducted at source from its National Finance Commission Award
share. This mechanism will ensure that the federal government does not encounter cash
shortfall for generation of the available capacity. The provinces will also become a
stakeholder in the sense that it will be in their interest to improve the performance of DISCOs
in curtailing theft and recovery of billed amounts.

30
SECTION V
IMPACT ON INDUSTRY & EXPORTS
62% of Pakistanis have access to electricity, although those that do face chronic shortages. In
the face of rising consumer demand, the problem of load-shedding (planned power cuts) has
intensified in recent years and an unreliable supply remains a major obstacle to economic
growth and competitiveness. In the summer of 2012, cuts of up to 20 hours per day led to
street protests in Peshawar, Jhelum and Lahore.58
Figure 6: Relationship between GDP Growth and Electricity Generation59
There exists a strong relationship between GDP growth and electricity growth as shown in
Figure 6 above. It can be easily deduced that periods of low or negative electricity growth
have witnessed low GDP growth rate, while periods where electricity growth picked up there
is increase in GDP growth rate.60
Power outages are estimated to cut growth by 2 percentage annually, making it unlikely that
Pakistan will be able, without significant reform, to move toward the 7 percent growth rate
needed to generate adequate employment and meaningful poverty reduction.61
58
“Protesters go on rampage in Punjab, KP”, News, 30 July 2012
59
Hydrocarbon Development Institute of Pakistan
60
61
Khurshid Ahmad, “Power sectors arrears hamper growth, economy suffers”, April 26, 2013;
weeklypulse.org/details.aspx?contentID=3552&storylist=16, (accessed 28.5.13)

31
CONCLUSION
The management of the current circular debt and to ensure that it does not crop up again is
not an impossible task. It is a result of a number of reasons that can be grouped under poor
governance of the power sector, lack of ownership and accountability. This deficiency of
governance from power generation to tariff determination, irrational tariff subsidies, technical
losses, theft and shortfall in revenues results in a gap between the cost of generation and
recovery of that cost in the form of electricity bills from the consumers. This gap translates
into a trap that is periodically addressed through cash injections without tackling the
structural issues that cause that trap, therefore the circular debt keeps on perpetuating.
Unless the government addresses these structural issues, one time injection of cash in to the
sector to clear liabilities will not eliminate the circular debt, since it will start accruing again
from the very next day.

32
RECOMMENDATIONS
In view of the foregoing discussion and analyses under each section, salient measures that
can effectively reduce the volume of the circular debt and preempt it from growing again are
as follows:
1. Merit order of all power plants should be posted on the website of NTDC along with the
daily „despatch order‟ (i.e. instructions by NTDC to generate power) and daily release of
payments to the IPPs. This measure, though very small, will ensure a lot of transparency
in the whole operation of power despatch and payments and save Rs. 60 billion annually.
2. Processing of transmission, distribution tariffs and FPAs by NEPRA needs to be
revamped so that the delays contributing significantly (Rs. 72 billion and Rs. 33 billion
respectively) towards the circular debt are removed.
3. To eliminate theft of 8% (Rs. 75 billion annually), the way forward is that the real time
communication through reliable meters is established at all CDPs, which are about 480
metering points under NTDC‟s „Secured Metering System‟ (SMS) Project. USAID
sponsored AMR meters at about 6,000 points on 11kV feeders must be installed as soon
as possible. After commissioning of these two metering projects, the DISCOs must be
held responsible for any loss in excess of that shown by these meters.
4. It is extremely important to carry out independent financial audits of all DISCOs for
verifying their billing processes and to detect any overbilling or parking of units. The
DISCOs must be made responsible for recovering all of the current bills. A workable
option is to give all DISCOs under the management of the respective provinces under the
arrangement that the payment for energy purchased by the DISCOs will be the liability of
the corresponding provincial government. If any provincial government does not clear its
dues for any month, the dues will be deducted at source from its National Finance
Commission Award share. This arrangement will make Provincial governments take
ownership of the whole revenue recovery of bills thus curtailing the current 22.6% loss in
bill recovery amounting to Rs. 135 billion.
5. Ministry of Finance must budget adequately for the TDS and its timely release to the
CPPA NTDC can reduce the gap in cash flow.
6. A rational determination of TDS is to remove the subsidy given to domestic consumers
using in excess of 700 units and from all other categories except the agriculture tube

33
wells. However, this rationalization of TDS must be carried out in six monthly phases so
that the consumers adjust to the change accordingly. This rationalization will save almost
Rs. 110 billion annually at 2012 tariffs.
7. It is very important to carry out reliable heat rate audits of all public sector generation
companies and undertake necessary maintenance or conversion to coal to improve the
efficiency of power generation.
8. Multi-buyer Multi-seller private sector energy market needs to be promoted. Under this
arrangement, the IPPs will have the option of identifying power purchasers and sell them
directly instead of the government. This initiative will relieve the load of payment from
the government and enable the IPPs to get payments from the private customers in time.
9. The coal, hydro, natural gas and nuclear shares in the electricity generation should be
increased to improve the fuel mix and therefore reduce the power purchase costs of
DISCOs and consequently the consumer bills.
These recommendations are transformed into an improvement imperatives matrix showing
short term, medium term and long term categorization of these imperatives:
ACTIONS DURATION
1.Merit order of all power plants should be posted on the website of NTDC along
with the daily „despatch order‟ (i.e. instructions by NTDC to generate power)
and daily release of payments to the IPPs. This measure, though very small, will
ensure a lot of transparency in the whole operation of power despatch and
payments and will save Rs. 60 billion annually.
Immediate
to one
month.
2.To eliminate theft of 8% (Rs. 75 billion annually), the way forward is that the
real time communication through reliable meters is established at all CDPs,
which are about 480 metering points under NTDC‟s „Secured Metering System‟
(SMS) Project. USAID sponsored AMR meters at about 6,000 points on 11kV
feeders must be installed as soon as possible. After commissioning of these two
metering projects, the DISCOs must be held responsible for any loss in excess of
that shown by these meters.
Six months.
3.Ministry of Finance must budget adequately for the TDS and its timely release
to the CPPA NTDC can reduce the gap in cash flow.
One year.

34
4.A rational determination of TDS is to remove the subsidy given to domestic
consumers using in excess of 700 units and from all other categories except the
agriculture tube wells. However, this rationalization of TDS must be carried out
in six monthly phases so that the consumers adjust to the change accordingly.
This rationalization will save almost Rs. 110 billion annually at 2012 tariffs.
One year.
5.Processing of transmission, distribution tariffs and FPAs by NEPRA needs to be
revamped so that the delays contributing significantly (Rs. 72 billion and Rs. 33
billion respectively) towards the circular debt are removed.
Short term.
6.It is extremely important to carry out independent financial audits of all DISCOs
for verifying their billing processes and to detect any overbilling or parking of
units. The DISCOs must be made responsible for recovering all of the current
bills. A workable option is to give all DISCOs under the management of the
respective provinces under the arrangement that the payment for energy
purchased by the DISCOs will be the liability of the corresponding provincial
government. If any provincial government does not clear its dues for any month,
the dues will be deducted at source from its National Finance Commission
Award share. This arrangement will make Provincial governments take
ownership of the whole revenue recovery of bills thus curtailing the current
22.6% loss in bill recovery amounting to Rs. 135 billion.
Short term.
7.It is very important to carry out reliable heat rate audits of all public sector
generation companies and undertake necessary maintenance or conversion to
coal to improve the efficiency of power generation.
Short term.
8.Multi-buyer Multi-seller private sector energy market needs to be promoted.
Under this arrangement, the IPPs will have the option of identifying power
purchasers and sell them directly instead of the government. This initiative will
relieve the load of payment from the government and enable the IPPs to get
payments from the private customers in time.
Short term.
9.The coal, hydro, natural gas and nuclear shares in the electricity generation
should be increased to improve the fuel mix and therefore reduce the power
purchase costs of DISCOs and consequently the consumer bills.
Medium to
Long term.

35
BIBLIOGRAPHY
Ahmad Khurshid, “Power sectors arrears hamper growth, economy suffers”, April 26, 2013;
Akhtar Masood, ex-GM System Operations, National Power Control Centre (NPCC), NTDC,
interviewed by author, May 2013
Asgher Barrister, DG Legal PPIB, interview by author, June 2013.
Daud, Consultant Planning Power NTDC, interview by author, June 2013.
Dr Haq Noor Ul, Mushir Anwar & M Nawaz Khan, “Pakistan‟s Response to Internal Challenges”,
IPRI Publications, 15.12.11, (http://www.thenews.com.pk/Todays-News-9-76727-Counterculture-of-
governance).
Electric Power Annual 2009”, http://www.eia.gov/electricity/annual/archive/03482009.pdf; (accessed
30.6.13).
Eshaq Zargham, JS Ministry of Water & Power, Zia ur Rahman MD NTDC, Nisar Bazmi GM
Planning Power NTDC, interviews by author, Islamabad and Lahore, May 2013
Foreign Policy, “Uh-oh. Pakistan can‟t pay its electric bills”, 10 May 2012.
Friends of Democratic Pakistan, Integrated Energy Sector Recovery Report & Plan, Oct 2010.
Government of Pakistan, Ministry of Finance, Pakistan Economic Survey 2011-12
Government of Pakistan, Ministry of Finance, Pakistan Economic Survey 2012-13,
Government of Pakistan, National Transmission & Despatch Company, Power System Statistics 2011-
2012
Government of Pakistan, National Transmission and Despatch Company, National Power System
Expansion Plan 2011-30
Government of Pakistan, NEPRA, NEPRA ACT No. XL of 1997, NEPRA Rules, NEPRA Regulations
and NEPRA Codes
Government of Pakistan, NEPRA, State of the Industry Report 2012
Government of Pakistan, NEPRA, State of the Industry Report 2012.
Government of Pakistan, NTDC, “Power System Statistics 2011-12”
Government of Pakistan, Power Finance Wing, Ministry of Water & Power
Government of Pakistan, State Bank of Pakistan, Annual Report 2011-12, Sub-section 4.1.
Government of Pakistan, State Bank of Pakistan, Annual Report FY 2011-12.
Government of Pakistan, WAPDA, Hydro Potential Brochure 2013
Government of USA, USAID, Pakistan Power Sector Circular Debt Report: The Causes and Impact
of Circular Debt, 2012
House of Commons Library “Pakistan in 2013”, Research Paper 12/76, 06 December 2012.
http://dawn.com/2013/03/11/outright-privatisation-or-gradual-reforms/, (accessed on 28.5.13).
Hydrocarbon Development Institute of Pakistan.
Khan Shahid, ex-GM Technical NTDC, interview by author, June 2013.

36
Kolling Robert, Adviser Distribution, USAID PDP, Ministry of Water & Power, email exchange by
author.
Latif Muhammad, Chief Energy, Planning Commission of Pakistan, “Pakistan Energy Crisis and
Solution”, 2011
Malik Aleem, “Biogas a good alternative to meet energy deficit”, 24.5.2013;
Malik Aleem, “Dynamics of circular debt in Pakistan”, 5.4.2013,
NEPRA and PPIB
Pakistan Information Technology Company (PITC)
Protesters go on rampage in Punjab, KP”, News, 30 July 2012
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