How would Pakistan's circular debt plan work?

The Pakistani government is working on a comprehensive plan to address the mounting circular debt in the power sector, with a proposal to finance PKR 1.5 trillion through a combination of new loans and budgetary allocations.

The plan involves securing PKR 1.25 trillion in new loans from banks, while PKR 250 billion has already been allocated in the federal budget.

According to a report by Rao Aamir Ali, deputy head of research at brokerage Arif Habib Limited, a major component of the strategy includes rescheduling Power Holding Ltd.’s (PHPL) PKR 683 billion loan with an adjusted interest rate from KIBOR+2% to K-0.9%. Additionally, PKR 821 billion will be allocated to power generation companies. The entire PKR 1.25 trillion will be recorded under the books of the Central Power Purchasing Agency (CPPA).

To finance this debt, the government plans to utilize an additional surcharge of PKR 3.23 per kilowatt-hour (KWh), already levied on power consumers. It is projected that by selling 106 billion KWh in the upcoming fiscal year, the government will generate PKR 342.8 billion in revenue through this surcharge.

Impact on electricity tariffs

A sensitivity analysis conducted by Arif Habib Limited as part of the report suggests that tariff adjustments will depend on the percentage of savings used for principal repayment. If all savings are directed toward repaying the debt, tariffs will remain unchanged. However, if only a portion is used, power tariffs could be reduced by as much as PKR 1.92 per KWh.

The report further highlights that as of November, Pakistan's circular debt stood at PKR 2.4 trillion, with PKR 1.7 trillion owed to independent power producers (IPPs) and government-owned generation companies (GENCOs), and PKR 683 billion attributed to PHPL.

Sector-specific payments and implications

The planned circular debt payments include PKR 683 billion for PHPL, PKR 292 billion for nuclear power plants, PKR 232 billion for coal plants, and PKR 218 billion for RLNG-based plants. The RLNG plants, which procure gas through Sui Northern Gas Pipelines Limited (SNGPL) and imports managed by Pakistan State Oil (PSO), will use the received funds to clear outstanding dues in the LNG supply chain.

The coal-based power sector is expected to benefit from PKR 232 billion in payments, with key listed beneficiaries including Lucky Electric (LEPCL), Hub Power (CPHGC, TEL, and TNPTL), FFC (TEL), Engro Power (EPTL), and Thal Limited (TNPTL). The report notes that power generation companies currently account for both sides of late payment surcharges (LPS) in their financial statements, meaning any waiver of LPS would have a neutral impact on these firms.

Government’s tariff reduction efforts

The government has already taken several steps to ease the burden of high electricity costs. In October, it reached an agreement to terminate Power Purchase Agreements (PPAs) with five IPPs, saving PKR 60 billion and reducing power tariffs by PKR 0.57 per KWh. Additionally, it converted 18 IPPs from a "take-or-pay" model to a hybrid "take-and-pay" arrangement, which is expected to save PKR 72 billion and lower tariffs by PKR 0.67 per KWh.

Potential measures to further reduce tariffs

The report outlines additional steps the government could take to further lower power costs, which include redirecting gas from captive power plants to more efficient IPPs, increasing petroleum development levy collection, boosting power demand, extending repayment periods of debts owed to Chinese-backed power projects, and cutting transmission and distribution losses by 5% from the current 11.43% threshold.

If all proposed measures are implemented, power tariffs could see a cumulative reduction of PKR 11.11 per KWh, amounting to a 31.3% decrease from the current projected cost of PKR 35.50 per KWh in FY25, according to the report.