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EDITORIAL: The power sector circular debt has crossed the Rs 2.5 trillion mark and is growing. None of the political parties that came to power in the last decade or so have had any idea how to solve this problem. Every few years the government of the day kept on clearing the circular debt payments by parking the liabilities elsewhere.

Finance minister Ishaq Dar did this kind of book-keeping exercise in the early days of his last stint as finance minister in the last Pakistan Muslim League-Nawaz government.

Now there are talks about another similar exercise – both in the power and gas sectors. There must be an end to such cosmetic policies. Recently, the finance minister formed a committee to resolve the circular debt in the gas sector which has now become an acute pain.

The idea has been on the table for two years now that dividends will be given by oil and gas companies through their accumulated profits and the government will not receive any dividend and rather use the amount to pay in settlement of receivables. That is essentially shifting the risk to oil and gas companies’ books.

The committee is to assess the exact amount and then execute the plan to pay the stock. Some losses will be incurred by exploration and production companies of the government. The PSO (Pakistan State Oil) and gas companies will be rewarded by passing on some of the government assets in power generation.

That is how the cash flows stuck in the circular debt is to be cleared. However, without solving the flow problem, the stocks of debt will grow again. Just like it has been happening in the power sector. And, after making the structure of the gas sector circular debt, the next step is to do something similar in the power sector as well.

The real issue is to arrest the creation of debt that remains on tap unless there is a radical redesign of the price policy in both the power and gas sectors. Here the issue of governance is paramount.

The more hyped issue is of lucrative deals in the IPP (Independent Power Producer) structure, which are based on take-or-pay, and returns are dollar indexed. Then IPP structure was used to be cost plus and some say that IPPs have inflated the project costs to exaggerate the returns. There is no forensic audit ever conducted. Most of the time, IPPs are being criticised to hide the government’s own governance issues.

Another knotty issue is governance of Discos. There is no real progress on lowering the transmission and distribution losses. In fact, these have increased after the recent increase in the power tariffs. There is also a significant dent in recovery of billed amounts.

All these are adding to the circular debt. However, none of the governments worked on deregulation or privatisation of Discos. And these kept on adding the circular debt. There is a big variation of losses in various Discos; yet the burden is shared by all. There is no pressure on the worst ones to improve and there is no reward for good ones to keep on doing a better job. This skewed structure needs to be altered.

The problem is also in the petroleum sector where freight equalization is grossly misused and there is no incentive for petroleum distribution companies to make the transportation efficient to lower the cost. This sector must regulate and especially the equalization margin must end.

In the gas sector, the obsession of providing heavily subsidised piped gas to a one-third of the country households (mostly privileged) does not make any sense. The pipeline infrastructure maintenance is high. Not enough is being spent on it. The infrastructure is eroding and is adding to the losses. There is no economic sense to continue and expand. Yet it is happening.

All these issues are contributing to the circular debt woes. There are cross subsidies in the power and gas sector. These have to end. There are huge variations of effective energy prices in various sectors, which are enticing consumers to misuse. All this must end. Without doing so, the book-keeping exercise of parking circular debt to continue, and time is not far that there would be no place left to park.

Copyright Business Recorder, 2023


Comments are closed.

Abdul Razzaque Jan 02, 2023 12:56pm
According to the data of the Central Power Purchasing Authority (CPPA), circular debt stood at Rs 2467 billion by March 2022. However above is mentioned 2.5 billion please explain this one
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Haq Jan 02, 2023 01:30pm
Immediately declare financial emergency, cancel all IMF / WB sponsored agreements (IPPs, O&G, etc), reduce ministers / advisors, shut ministeries / govt dpts / loss making SOE, curtail perks of beauracracy, judges, generals, tax agricultural landlords, recover loans from elites, arrest looters / corrupts (including who fled overseas), smugglers (drugs, dollars, autos, gold, etc), hoarders, black marketers, terror financers / mentors. For the sake of Nation, establish rule of all based upon equality...
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Sarosh Jan 03, 2023 01:09pm
@Abdul Razzaque, 2,467 billion = 2.467 trillion ~ 2.5 trillion as mentioned in the article
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