Payment of Discos’ funds to Wapda be stopped

The government has agreed with the Asian Development Bank (ADB) that disbursement of Discos’ funds to the Water and Power Development Authority (Wapda) was illegal and this practice should be stopped, official sources told Business Recorder here on Sunday.
The proposal has also been backed by Pakistan Electrical Power Company (Pepco) head Munawar Baseer Ahmad and Managing Director of Sui Southern Gas Company Limited (SSGC), they said. Sources said that Discos’ financial woes were discussed by an ADB team on proposed multi-tranche financing facility for power distribution enhancement draft aide-memoire from January 28 to February 8.
They said that financial autonomy of each Disco underpins discussions concerning (a) direct control of customer collections vis-à-vis remittances to Wapda and Pepco and (b) subsidy payment mechanism (standard, operating procedures) by the government. They said that the government and the mission agreed on subsidy payment mechanism and a well thought out billing and payment procedure was developed and was now under implementation, as the government was paying subsidy to some of the Discos from October 1, 2007.
Regarding revenue collection from Discos’ customers, the government and Pepco agreed that the flow of funds needed to conform to current corporate structures. “All payments to Wapda should be discontinued, unless it performs specific functions for which it should be paid on presenting an invoice,” sources quoted ADB, Finance Ministry and Pepco as agreeing with the proposal.
Sources further said that with re-emergence of Pepco as the co-ordinator of power sector reforms, Discos are to pay management fee to Pepco on submission of invoice.
This coordinating function also relates to the establishment of CPPA, funds flow arrangements and detailed attention to development and implementation of a roadmap to resolve the power sector unbundling issues.
Currently, the revenue requirements of the Discos are determined through the tariff setting mechanism by Nepra, but the government’s stance was that the power sector customers were not able to cover the entire revenue requirement of the Discos and, accordingly, notifies a unified tariff lower than the determined tariff by Nepra to finance the revenue gap through subsidy payments.
The mission had calculated the current annual subsidy requirement close to Rs 55 billion for 2007-08 which has also been accepted by Pepco and Ministry of Water and Power.
The February 2007 tariff determination was a milestone event for the power sector as each Disco received its first individual tariff. One of the critical financial issues to be addressed was the payments of subsidy by the government to each Disco on current (monthly) basis which comes out to be nearly 22 percent of total revenue of all Discos.
For 2007-08, the government confirmed that an amount of Rs 25 billion was budgeted for this purpose, whereas the Ministry of Finance informed the mission that about Rs 21 billion had been paid in subsidies to three Discos–Iesco, Lesco and Mepco–and that Rs 4 billion was scheduled to be paid shortly. Overall, this left a difference of 12 percent, approximately Rs 30 billion, of the Discos total revenue requirement as the estimated funding gap for 2007-08.
Sources said that ADB was further informed that debt overhang was Rs 152 billion by the end of 2006, and the audited accumulated figures for 2007-08 stands at Rs 199 billion.
Finance Ministry agreed that this debt overhang needed to be isolated from day-to-day operations of both the Discos and the NTDC and due to its enormity a financial restructuring plan needs to be developed.
The mission offered ADB’s assistance to develop the financial restructuring plan together with Ministries of Finance and Water and Power as the government requires time to undertake internal discussions, but agreed to the overall approach of resolving the financial burden of the debt overhang.

Copyright Business Recorder, 2008