CAPPING POWER DEBT

IMPACTS OF IMF’S LOAN

1) Why revision?
THE suggested revision in the Circular Debt Management Plan, (Answer)which aims to cap
the flow or addition of new debt to the power sector’s existing debt stock of over Rs2.3tr by June
2023, seeks to avoid or at least delay an increase in electricity prices that has been agreed with
the IMF for resumption of the Fund’s $6bn programme. The proposed hike of Rs4.50 per unit in
the price will raise average power tariffs from Rs16.50 to Rs21.
The power sector debt management strategy has many planks: the negotiated purchase of
old, inefficient private generation plants, the closure of rundown public-sector generation,
fresh capital investments in the distribution infrastructure etc.
The government intends to renegotiate the contracts with sponsors of the generation plants built
or being built by Chinese investors for restructuring their project debt tenures over a longer
period than the existing 10 years. It has already renegotiated deals with sponsors of IPPs set up
under various pre-CPEC power policies since 1990 for reduction in their tariffs.
The return on equity for the new public power companies has also been slashed. Once
implemented, the proposed plan is expected to significantly cut system losses, improve bill
recoveries and reduce the burden of capacity payments, ultimately capping the debt flow in
addition to minimising the need for hiking electricity tariffs. The government estimates the
existing circular debt stock to double to Rs4.6tr in two years in case no action is taken. It is
claimed that the renegotiated power purchasing contracts with the non-Chinese IPPs have
already saved consumers Rs1 per unit in tariffs.
Important
Prima facie, the strategy, which the government should share with the people for the sake of
transparency and debate. Reneging on its promises will further dent the government’s credibility
— trust is a prerequisite for seamlessly implementing the plan.