Circular debt becoming more menacing

Contrary to all the claims by the Finance Minister made a couple of months ago, the evil of circular debt has come out in the open again and is stronger than ever before. The resurrection of circular debt has led to a fresh round of debate circling around companies on the verge of defaults, threats of curtailing supplies and amending the pricing formulae of the concerned stakeholders.
The amount of circular debt, which was supposed to be clear once and for all after the last TFC issue, has gone up to a staggering Rs140 billion as of the week ending November 21. To make matters worse, the finance ministry has reportedly disclosed its constraints to finance the power sector in order to put an end to this problem.
Who is to blame for this? The answer, unfortunately, is not straightforward as there are a lot of entities who have to share the blame. But quite rightly so most fingers point towards the inefficient power generation and distribution companies.
The differential between cost of producing power and selling it is one of the major factors that impede the profitability of the power producers. But that is on continuous decline and is due to squeeze further as the government aims to do away with power subsidy by April 2010. So essentially its the inefficiency of their bills collection and distribution systems that triggers the vicious debt cycle.
The billing collection system of a vast majority of power producers is ineffective and considerably slow. This coupled with the inability to collect the entire amount and the delay in collection itself limits their ability to make timely payments to their fuel suppliers.
What causes greater trouble are the mounting transmission and distribution losses that are as high as 40 percent in some cases and average 35 percent, of which power theft nearly accounts for about two-third of all the losses. But then again, power theft is something beyond the control of distribution companies given its politically sensitive nature in most cases.
Add to this the state-run organizations such as Pakistan Railway, city governments, water board, which either run losses or do not bother paying their electricity dues add to the woes - thereby restricting IPPs ability to procure furnace oil, generate electricity and clear their outstanding dues.
The dicey situation has forced all entities involved in the debt chain to call for immediate government action to solve the problem. In response, the standing committee of Senate has formed a sub-committee to look into the matter, which is not enough as the finance ministry has expressed its inability to arrange yet another TFC to clear the circular debt.
If this situation continues for a couple of weeks more, it will compel the government to arrange a short term fix and it would likely inject some amount in the system to facilitate letters of credit for oil procurement and save the refineries and OMCs from defaulting.
But that would just be a short term measure as the cycle would start yet again and come to haunt back the system. Simply increasing the tariffs isn the only solution as well, considering that many of the losses stem from the power producers own inefficiencies.
What needs to be done is taking long term concrete measures to address the issue. Plugging the holes in the system and eliminating power theft, which requires a strong political will. The recently announced US plan that energy will be under spotlight in relation to its aid to Pakistan is also a step forward but it needs to be implemented in its true spirit and quick.