The monster of circular debt | Pakistan Today

The monster of circular debt

Pakistan’s power sector shows that the nation experiences transmission losses, high tariffs, absence of planning and improper policies. These escalate the energy crisis. This crisis in Pakistan is the immediate aftereffect of institutional and administration governance failure in the form of reckless energy policies. This demands an answer to a question that what has been the effect of the ventures from the China-Pakistan Economic Corridor (CPEC), with its highly invested power projects, on the energy crisis? There are 22 CPEC energy projects, of which many have become operational now. The previous regime has taken the nation out of this long prevailing energy shortfall but the miscarried policies of the incumbent regime are leading us to the past again. I believe that the liquidity constraints in the energy sector, is one of the main reasons which have led to fall in power generation. Power generation companies are managing their cash flows by reducing their output and increasing the tariffs to a higher level.

At the point when the PTI government took the charge, the circular debt was at Rs 1.1 trillion after the caretaker government completed its tenure. However, it was just less than Rs1 trillion when the PML(N) government completed its tenure with Shahid Khaqan Abbasi as prime minister. It has now swelled to nearly Rs 2.1 trillion. This shows that the sitting government has piled up more than Rs 1 trillion in circular debt which belies all the claims of the government. It has almost increased twofold the circular debt accumulated in the last 72 years. The IMF has also expressed its sheer dismay over the massive increase of circular debt, even though the current regime itself is working on IMF dictations.

THE reasons behind the increasing circular debt are many but a few crucial ones will be discussed. FIRSTLY, the main reason of circular debt in power sector is that power purchase cost is a passthrough item. Various governments at different points have not allowed the power purchase cost to be recovered from consumers. This pass-on has resulted in the gap in electricity bill and payment made, for example, quarterly adjustment & FPA cost to be passed. This part in circular debt is caused by discrepancies between the government-notified tariff and market rates caused by delays in government adjustments to the tariff and fuel price adjustments. Secondly, the other key reason is unpaid subsidies from federal/provincial governments to DISCOs (power distributing companies). As a result, distributors are unable to pay producers, who further find it difficult to pay for the fuel cost and the process keeps on going amounting to huge burden on GENCOS and DISCOS.

By curbing all discussed issues, we would able to reduce electricity prices. It would benefit us in the global market. It would pave the way for a reduction in the cost of doing business and make Pakistani products more competitive in the global market. Addressing the circular debt issue, we can restore a part of the loss in the power generation sector

Thirdly, the gap of tax collection is increasing because the GST is collected on the basis of billing and recovery of the sector is far below 100 percent recovery. Furthermore, the Federal Board of Revenue (FBR) has made a practice of always keep on making cases on trumped-up charges and then to effect recoveries in these cases by attaching accounts of the DISCOS. Dilatory practices in FBR have equally affected the DISCOS’ finances as FBR has not refunded their tax refund claims. Fourthly, transmission and distribution constraints are also causing high losses in certain areas. Until these constraints of distribution networks are lowered and distributions mechanisms are upgraded, the energy crisis is unlikely to ease.

This regime seems not in control of the situation and is leading us to a power crisis again. If one accumulates the data, he/she would find that around 2 percent of Pakistan’s economic growth shrinks by power crisis annually. The successful projects of CPEC initiated by the PML (N) regime, in which the significant share of the investments was allocated toward reinvigorating Pakistan’s electric power sector, are nowhere in the priority list of the PTI regime. They should be carefully monitored by the incumbent government so that their success cannot be undermined.

Since the PTI government came into the power, electricity tariffs have been expanded by around half. Sick policies have led to accumulation of circular debt and regrettably nobody is attempting to control the danger. Once a energy-starved country, industrial consumption of units has actually dropped in the last two years, where demand projections have slowed due to the economic situation of the country, resulting in a capacity trap.

At various instances the Minister in charge had announced to bring down the circular debt to Rs 100 billion by June 2020. The PTI had announced reforms in this sector, but there is absolutely zero movement toward any reform agendas. As the outcome, this hazard has put more weight on consumers by way of frequent upward revision in electricity tariffs. Besides, there is massive electricity theft and apart from individuals, industrial and commercial sectors, some institutions are also involved in the crime in certain areas of Pakistan. By curbing all discussed issues, we would able to reduce electricity prices. It would benefit us in the global market. It would pave the way for a reduction in the cost of doing business and make Pakistani products more competitive in the global market. Addressing the circular debt issue, we can restore a part of the loss in the power generation sector.

Ihsaan Afzal Khan

The writer is a business executive with exposure in health, education, power distribution and manufacturing.



One Comment;

  1. Sheharyar Hasan said:

    I would like to mention another factor for accumulation of circular debt, that

    Pakistan’s electricity production capacity is higher than distribution capacity and demand of electricity.

    State through CPPA (previously NTDC) had entered into take or pay agreements with IPPs under power policy 1994 and 2002. Under, take or pay agreements government has to pay for minimum production capacity as agreed under power purchase agreements with the IPPs. Recently issued report on IPPs reveal that in last year Rs. 28 Billion were paid to IPPs for electricity not even used.
    From time to time NEPRA issues merit order of power plant based on their fuel efficiency and CPPA then purchases electricity from IPPs ranked higher based on their efficiency. But it has to pay capacity payments to all the IPPs.

*

*

Top