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Circular Debt and Looming Energy Crisis in Pakistan

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Anisa Shamim

Pakistan has suffered a prolonged energy crisis since last many years. The unpredictable supply of electricity, with numerous and capricious loadsheding, disrupts the economic background of a country and also its social condition with respect to residential electricity consumers. The major aspect behind this prolonged energy crises is the circular debt. Circular debt has become a burning issue under the current scenario thus challenging the achievements and efficiencies of present Government in the power sector.

It has not only raised a big question mark on the improvement of energy situation in the country but at the same time has also highlighted the financial vulnerability of the Government. Currently, circular debt is hovering at around rs. 250 Billion and has created a crisis situation as the few IPPs and oil companies are on the verge of default due to non-payment of their dues by the government. This has also led few companies to knock the Court’s door for their rights and recoveries of their dues owed by the Government. at the time when government is claiming significant addition in power production capacity and has very aggressive plans for capacity addition in coming years, which is also evident from ongoing energy projects, alarming level of circular debt has become a matter of very serious concern for everyone and requires immediate measures from government to resolve it on permanent basis. This is important to mention here that circular debt has surfaced again and showing significant high figure of around rs. 439 billion although the present government made payment of circular debt for rs. 480 Billion when it came into power in 2013. This shows that despite constant focus on energy sector government failed to resolve the matter of circular debt, which is posing severe threat to permanent solution of energy crisis.

This requires immediate measures from government side which include power sector reforms, tariff rationalization, elimination of subsidies and focus towards cheaper energy sources. as per our current energy mix, major source of energy production is thermal, which is very costly as compared to hydro power production. Thermal power production not only increases the oil imports putting pressure on import bill of the country but that is also one of the most expansive source of energy production. With the increase of oil prices, cost of thermal power production increases and if the government doesn’t pass on its impact to end users, this leads to increase in circular debt. Currently when oil prices are hovering at around US Dollar 55 per barrel, circular debt is becoming uncontrollable and what would happen if this touches around US Dollar 90 to US dollar 100 as the oil prices also touches the historical high levels of US dollar 150 in the past. Pakistan electric Power Company(Pepco) and Pakistan State oil(PSo),the two state run organizations and Independent Power Producers(IPPs) are big stakeholders in the inter corporate circular debt. The amount keeps on fluctuating from rs.100 billion to more than 250 billion as the government keeps addressing the issue on a commercial basis from time to time. according to an estimate, Pepco’s daily build up of amount overdue is almost rs. 300 million because of a extensive breach between payments for power supplied and cost received.

In view of the above, there is a dire need to concentrate on cheaper energy sources like hydro power production as our country is blessed with huge natural water resources and said source of power generation is considered as the cheapest source of energy in the world. Though government is continuously working on these projects; however, these projects are time taking. This is also import to highlight the fact here that hydro power generation is considered as most environment friendly as compared to thermal power plants which have hazardous effects on environment.

Though government is claiming to cap circular debt at around Rs. 380 Billion; however, as per IMF circular debt is around 2 per cent of GDP i.e. around Rs. 600 Billion. This has huge burden on national exchequer and is posing a serious threat to the entire economic system of the country. Furthermore, this also leads to increased lodshedding, which subsequently hurts the industrial performance. Low industrial output affects the overall GDP of the country, which is happening for last number of years. It is vital for the country’s consistent economic growth to have uninterrupted energy supply. Industrial output has significantly affected during last few years due to severe energy crisis over the time and major reason for the lingering energy crisis is alarming level of circular debt and failure in its permanent solution.

Energy crisis as a result of circular debt has increased the overall cost of the industry as the majority of the industrial units have already shifted to energy alternates like energy production through captive power generation, coal, Liquefied Natural Gas (LNG) etc. This has not only increased the cost of doing business but at the same time, has also affected the competitiveness of the industry as currently Pakistan has the highest energy rates as compared to other regional countries. This has significantly affected the overall competitiveness of our manufacturers and exporters in the international markets. Currently China, India & Bangladesh have low energy rates as compared to Pakistan. Resultantly this has affected the overall exports of the country, which are currently at five years lowest level. On the other hand, due to increased oil imports, overall import bill of the country has increased, which has widened the overall trade deficit. Trade deficit is touching the historic levels due to widening trade gap. Though government is linking it with high import of power, textile machinery and other imports under (China Pakistan Economic Corridor) CPEC; however, this is a fact that exports are at alarming low level and government is badly failed in meeting its budgetary export targets for last few years. Government should diminish the cost of furnace oil for production of relatively less costly electricity for timely payment of bills by big consumers.

Circular debt is something which is manageable but needs concerted efforts by taking wide range of measures, which mainly requires power sector reforms to improve the generation & distribution system and improve the efficiencies of Generation Companies (GENCOs) and Distribution Companies (DISCOs). Power transmission system and distribution system needs immediate measures to remove the prevailing efficiencies. Privatization of distribution companies is also something very vital to improve the efficiencies and take the cost cutting measures. Government has badly failed in privatization of power companies, which is a big hurdle to resolve the circular debt issue. Privatization of said companies would not only improve the overall efficiencies but would also support the government through significant inflows, which can be utilized to eliminate the circular debt issues but can also help in improving the overall energy situation. It also requires the unbundling, corporatization and commercialization of the industries. Establishment of an independent regulatory agency, institutional strengthening in policy, governance and corporate areas and mobilization of resources from private sector to meet the power sector technical, financial and human resource need. The transmission and distribution losses have apparently been reduced to 17.9 per cent in 2015-16

There is a need to deregulate and privatize the power sector to bring in private sector investment and improve the system efficiencies and resolve the circular debt issue on permanent basis. Another important step that must be needed to get rid of circular debt issue is to eliminate the subsidies regime and there should be free mechanism for price fixation. Undue subsidies are big hurdle in removing the power sector inefficiencies. This is the main reason that circular debt is at the same alarming level despite lapse of so many years. Though low international prices remained blessing for quite last some time which has significantly cut the import bill; however due to failure in introducing the power sector reforms circular debt seems something unresolved at government, which has got the severe gravity as the government has high financial constraints due to its failure in achieving the budgetary fiscal targets? Revenue collection is lower than the budgeted one and as a result government cuts the industry incentives and sometimes hold their tax refunds etc thus increasing the difficulties of the industry, which is already facing number of challenges and its performance is not up to the mark. The world financial institutions like IMF, World Bank etc have already pointed out towards system inefficiencies, high subsidies and government’s failure in privatization of power companies. Any further casual attitude towards resolution of circular debt could be disastrous for the economy and can wipe out the benefits of capacity enhancement of power sector. The tariff differential subsidy has been reduced from Rs 350 billion in 2012-13 to Rs 171 billion in 2015-16

Line losses are the major causes of high circular debt in the country. Line losses are significantly high in major parts of the country especially in Sindh, Baluchistan and FATA. Without improving the line losses recoveries, circular debt issue cannot be resolved on solid footing. Line losses are mainly due to poor law and order situation and corruption prevailing in the system. Other one of the main reason behind high line losses is high receivables of power sector towards public entities like PIA, Pakistan Steel Mills, Railways and other non-performing units. These stuck up receivables increase the overall inefficiencies of the power sector and results into accumulation of circular debt. In order to resolve the circular debt, government also needs to revive the loss making public entities as the government is continuously spending huge amounts on these PSEs and even then there is no significant revival but this is only adding burden to national exchequer. Government needs wide scale reforms to improve its overall fiscal position, which would also ultimately improve the circular debt position. Line losses should be reduced from 40 per cent to a lower percentage.

(China Economic Corridor)CPEC is the game changer as per government’s claim, this includes mega infrastructure and energy projects to be completed with the Chinese support. Government has signed multiple agreements with the Chinese government and Chinese firms, which mainly includes road, railway and shipping infrastructure and also includes large number of energy projects which include hydro, coal, wind, solar and nuclear power generation. Government has offered very lucrative rates to Chinese firms under the CPEC. Tariffs offered by the government are very lucrative, which would enable the government to attract significant investment in the country; however, the issue of circular debt may even worsen due to high tariffs, weak fiscal position of the country and system inefficiencies. To coupe the circular debt issue, government needs to add more cheaper energy sources under CPEC and also needs to add projects like improvement of transmission & distribution system and also improvement of overall efficiencies of power sector.

Currently government is using adhocism to resolve the circular debt issue through increase in borrowing, which has substantially increased over the period since the present government has taken the charge. High borrowing is not the solution of the circular debt as government paid off 480 billion during 2014 and circular debt has again surfaced due to failure in resolving said issue on permanent basis. Due to these incapability’s of government, the IPPs and oil supplying companies are facing the default like situation, which can again lead to power crisis as well as oil supply crisis like the past.

This is the high time to take the drastic measures to address the circular debt issue, which would improve not only the overall energy situation but would also ease out the pressure on national kitty. Circular debt can be easily addressed through the measures like change of energy mix by focusing on cheaper energy sources instead of furnace based sources, large scale power sector reforms to improve the efficiencies and elimination of subsidies to convert the power sector into profit making sector for the government. Government needs to focus on minimizing line losses and privatization of public sector power companies to bring in efficiencies and bring turnaround in the power sector which has great potential of revival and can become highly remunerative segment for the government but all this requires sincere and concerted government efforts, policy making and implementation of reforms and remove the corrupt elements by ensuring fair power sector deals and discouragement of corrupt figures from the power sector departments.

At the end of above discussion, I suggest that circular debt which is the major cause of energy crises can be controlled at some level if Government of Pakistan should play its important role in the power sector to one as a policy designer on a national energy level and allow international best practices for improved corporate governance for each of its owned entities, with a goal to allow corporatization for confirmed economically sound entities. The government also needs to maintain a more competitive market structure and emphasize the professional and technical requirements for members and staff, and develop a wide-ranging capacity building and training effort initiated. Tariff and subsidy conflicts between the provincial governments and the DISCOs, need to be resolved, either by conciliation or negotiation. The selection criteria and tactic for appointment of DISCOs needs to be improved. All the members need to be highly qualified and technically capable, be independent of political pressure, have full power for decision making at the DISCOs and receive training to effectively supervise performance and enforce accountability of DISCOs management and staff. Different changes are required in all conditions of association of the DISCOs to improve director’s term of office and maintain institutional knowledge with proper rotation and replacement.

Eradication of the standardized tariff and progressively movement toward the regulator’s differential tariffs based on true costs. The regulator to enhance tariffs with targeted performance based tariff to all DISCOs and eliminate to current cross subsidy between the efficient and inefficient DISCOs. Policies should be adopted to promote hydro power and other domestic sources of energy that will assist in balancing the electricity supply. Implement a strong program of energy conservation and demand-side management. Besides all above given activities, efforts, ideas and suggestions  circular debt is not  wiped away up till now  and energy crises is also still a very serious issue.

For More Details visit www. educationist.com.pk/opinion
The writer is a Lecturer at Department of Economics in GCU Faisalabad.

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