Volume 22 Issue 3, March 2018


We have seen this before. Pakistan's mismanaged power sector is once again faced with a circular debt of more than Rs500 billion. When the current government came to power in June 2013, it cleared a circular debt of Rs480 billion accumulated owing to high losses and shortfall in recovery.

Some independent power producers (IPPs) and oil companies say they are on the verge of default as the government has failed to pay their dues.

The situation is going to have serious consequences for the government as it plans to increase power generation capacity in the coming years.

It has been more than 10 years now that the power sector has been faced with circular debt, but Pakistan’s institutions have failed to put in place a mechanism to address the issue once and for all. Ad hocism rules the roost, threatening the integrity of the energy sector.

Technical and financial audits to verify payments received and paid by a power purchaser do not exist. This non-transparency has been compounded by the fact that the role of the power purchaser changes from one public sector company to the other without a legal and contractual trail.

Moreover, there are no checks by regulators or independent sources to verify the number of total units billed and paid by consumers. There is also no mechanism to analyse power plant generation, transmission data and available resources to ensure checks and balances.

The National Power Tariff and Subsidy Policy guidelines of 2014 define circular debt as: “The circular debt is the amount of cash shortfall within the Central Power Purchasing Agency (CPPA), which it cannot pay to power supply companies. The overdue amount is a result of: (a) the difference between the actual cost and the tariff determined by National Electric Power Regulatory Authority (Nepra) which is the distribution company’s loss over and collections under that is allowed by Nepra, (b) the delayed or non-payment of subsidies by government, and (c) delayed determination and notification of tariffs. It is the government’s policy to reduce or limit to a certain amount which would be reduced over time and eliminate the causes of the circular debt.”

Simply put, circular debt is related to the power sector’s cash flows. The cash flows are collected from users who are charged as per the tariff set by the power sector regulator, i.e. Nepra, which determines 11 tariffs for consumers of as many power distribution companies.

Major drivers that lead to circular debt include poor governance of the power sector, delays in tariff determination and notification, delays in fuel price adjustment notification, poor revenue recovery from the public and private consumers and excessive transmission and distribution losses.

It is feared that the circular debt problem will result in load-shedding in the near future despite the availability of power. However, the government of the country hopes that there will be no power outages in the coming summer and the prime minister recently said that the country may not face power shortages until 2030.

Experts believe power demand may reach 40,000MW by 2025 based on the country’s economic growth of 7.2 per cent.
The current government has increased power production by 7,500 megawatts and plans to add 11,000MW by the next summer. So there will be no load-shedding due to short supply, but people may still face outages because of a liquidity crisis emerging from the rising circular debt.

The situation requires immediate measures from the government. The current stock of circular debt stands at Rs525 billion, which is apart from Rs430 billion already parked in the books of Power Holding Private Limited on behalf of power distribution companies.

In total, IPPs are owed over Rs228.119 billion as of Jan 15, 2018. Of this, Rs84.983 billion is owed to Hubco, Rs4.195 billion to K-Electric, Rs7.771 billion to AES (Lalpir), Rs10.473 billion to AES Pakgen, Rs14.460 billion to Uch-1, Rs9.036 billion to Rousch Power, Rs9.989 billion to Liberty, Rs5.486 billion to Habib Ullah and more than Rs77.336 billion to other independent power producers.

As of November 2017, the power sector receivables were above Rs850 billion against Rs730 billion by the end of June 2017. Furthermore, private sector receivables increased from Rs554.8 billion to Rs599 billion during the first five months of the current fiscal year.

Circular debt has also been identified as a major reason for slow investment in the country’s refinery sector as a major component of the debt is linked to furnace oil.

As the government is shutting down oil power plants to help the country save millions of dollars in imports, the refinery sector argues that oil will have its importance in the event of supply disruptions.

According to a report published recently by a think tank, one of the major failures of the incumbent administration was circular debt, in addition to failing to reduce current expenditure, bring the informal sector into the tax net and privatise power distribution companies.

“In the energy security sector no distribution company was privatised despite achieving significant progress in the privatisation process for some profitable companies,” said the report entitled ‘PML-N Economic Performance: Light at the End of the Tunnel’, launched by the Policy Research Institute of Market Economy or PRIME. “The promise to end cross-subsidy in the distribution companies was not carried out. Circular debt could not be curtailed posing serious challenges to energy governance. Tariff rationalisation in the gas sector was not done,” it added.

The federal government yet again plans to clear the circular debt in the coming days. Let’s see if it succeeds in implementing a workable solution

The writer is a journalist whose interests cover financial subjects.      
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