After taking over the rein of this country in May 2013, the largest challenge for PML-N leadership was to fulfill their pre-election promise of solving the prevailing energy crisis at the earliest. More than three years have passed and PML-N is yet to fulfill its promise made to the masses. This is unlikely to happen till the chronic circular debt crisis is resolved. The accumulation of circular debts has made generation of electricity difficult, resulting in increased supply shortages and power outage.
Soon after holding office in 2013, Prime Minister Nawaz Sharif ensured to work on war footings for reforms in energy sector in order to let this sector perform. Soon after, within two months, his government settled all outstanding circular debt of Rs 503 billion through a cash injection of Rs 480 billion.
Circular debt crisis appeared for the first time in 2006 during the dictatorial regime of Pervez Musharraf, when oil prices in the international market were increased. The electricity tariffs were not revised upwards on political grounds, resulting in a debt amounting Rs 111bn. This debt later on reached a historic high of Rs 503bn that was settled by PML-N government after coming into power. This debt kept on increasing, despite huge price rise in last three years, and crossed Rs 684bn in August 2016, pushing the government back to the situation where it was standing three years ago.
Circular debt is said to be rising in the situation where a series of debtors and creditors exists in such a fashion that the net final payable in the thread is the receivable of the first creditor. Every member of the series is a debtor and creditor at the same time. In case of energy sector, this phenomenon reflects the difference between the high power generation cost and low electricity bill charged from customers, resulting in a deficit accumulating over time.
A glance at the energy sector shows that the supply chain consists of power generation (GENCOs) and distribution companies (DISCOs). GENCOs (WAPDA and IPPs) purchase oil from oil marketing companies (OMCs) to produce electricity which in then distributed to consumers via DISCOs at a price.
The problem arises when price charged by DISCOs doesn’t match the actual cost of production (Charged by GENCOs) and is slightly lower. This retards their ability to pay GENCOs, which ultimately are unable to pay OMCs for oil purchase, resulting in accumulation of an inter-corporate debt. This debt impedes production of GENCOs giving rise to supply shortage and load shedding.
Circular debt has paralysed the economy with reduced industrial output, closure of many industries, reduced imports and increased unemployment. This situation requires urgent measures to be taken to prevent further worsening of the situation.
Government can minimize this power sector debt through tariff hike and increasing the allowance of losses in tariff adjustment. There is a need to recover the full cost of power production and distribution from customers and bridge the gap between NEPRA determined price and government notified price. This gap is somehow bridged through surcharges levied in the name of tariff rationalisation.
An alternative plan could be the privatisation of power distribution companies and use its proceeds to retire this debt. The privatisation plan of three distribution companies — Islamabad, Lahore and Faisalabad — is already underway and is expected to be completed within a year or two.
Better management and efficiency of transmission and distribution companies on account of infrastructure, theft control and recovery can further improve the situation by reducing losses up to 20-25 percent.
Utilising alternate sources of fuel including hydel, solar and wind can also help reduce not only cost and debts but these are sustainable and environment friendly as well.
Circular debt and resulting power outage, if left unattended will further affect production activities, industrial output and economic growth. Urgent measures should be taken to remedy the situation and prevent accumulation of further debt. Otherwise this will further threaten the economic survival of the country and paralyse the whole power system.