NationalVOLUME 16 ISSUE # 12

The untamed monster of circular debt

There is bad news and more bad news for electricity consumers. As if the recent upward revision of power tariff was not enough, according to a report, the power sector’s circular debt build-up is projected to cross the Rs2.8 trillion mark by June 30 next. This implies an addition of a whopping Rs500 billion during the current fiscal year at an average rate of almost Rs42b per month. This means more burden will be put on hapless consumers in the coming days.

No doubt, the PTI government inherited the problem of circular debt from its predecessors, but it has signally failed to bring it under control. Many factors go into making the situation more complicated. These include inaccurate projections, poor management and inefficient operations, as well as non-payment by the public sector. It is estimated that the circular debt will increase by Rs152b in 2020-21 due to distribution losses (Rs35b) and under-recoveries (Rs117b). It may be added here that the last fiscal year ended with a circular debt of Rs2.15tr, with an annual increase of Rs538b. As of Nov 30, 2020, the total circular debt increased to Rs2.3tr, showing an increase of Rs156b in the first five months. During the same five months last fiscal year, the circular debt had increased by Rs179b at the rate of Rs35.8b per month.

A detailed analysis reveals that of the total of Rs2.3tr on Nov 30, 2020, Rs1.2tr is payable to the Independent Power Producers (IPPs) and Rs97b payable by generation companies to fuel suppliers. The payables to the IPPs are estimated to surge beyond Rs1.7tr by the end of the current fiscal year.

Despite all efforts, distribution and transmission losses continue unabated. The Power Division has projected that the circular debt will increase by Rs152b in the current fiscal year due to distribution losses (Rs35b) and under-recoveries (Rs117b). A total of Rs317b subsidy was required on the basis of existing tariffs. But the Ministry of Finance had budgeted only Rs144b, leaving an unbudgeted subsidy gap of Rs177b. Besides, there is an additional Rs97b on account of non-payments by K-Electric and Rs313bn due to the pending generation cost on account of quarterly tariff adjustments and fuel cost adjustments.

There are many slippages and controversies surrounding the circular debt. These include Rs144b of outstanding amounts of Azad Jammu and Kashmir (7pc), Rs306b of non-payment by Quetta Electric Supply Company’s agriculture tube-wells (15pc), Rs270b limitations and delays in regulatory approvals (14pc), Rs66bn payment of interest on the power-sector debt held by PHPL (3.3pc), Rs260b non-payment of subsidies (14pc) and Rs752b of operational inefficiencies (37.4pc).

It is a serious situation as the burden of the inefficiencies of the sector falls on the poor consumers. The settlement of outstanding dues with China-Pakistan Economic Corridor (CPEC)–related power projects is another headache made worse by economic depression. As for remedial measures, a reduction in the rate of return on equity of government-owned power plants and closure of inefficient Gencos should go a long way to relieve pressure both on the government and the consumer. Greater relief may accrue on account of the parking of some losses in other accounts, like replacement of ROE on hydropower plants from the WAPDA to the federal budget.

It has been suggested that the provincial governments should share a part of the accumulated losses by adjusting their budgetary allocations and raising revenue from local sources. The objective should be not to punish the honest and paying consumers in the shape of repeated tariff increases in various shapes and heads. But the government should legally empower power companies through the regulatory process to charge the cost of a little over 15pc losses in the tariff besides the cost of bad governance and non-payments in the shape of the financing cost surcharge, quarterly and monthly adjustments and taxes. It is time to put an end to these uncalled-for charges.

The long-term solution lies in reforming the sector which is long overdue. The non-paying public sector entities should be penalized and their supply cut. Similarly, provinces should be forced to take strict action against theft and pilferage and impose heavy penalties on the offenders. At the same time, a long-term plan should be chalked out to undertake technological interventions to reduce system losses and improve recoveries. As suggested, a meter-less smart metering system, which has been successfully tested and proved on the ground, should be introduced without further delay. Switching to non-conventional energy and hydropower should be our long-term goal to minimize the woes of the power sector.