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Circular debt in the energy sector is a mystery which no government could so far unfold. Over the last two decades it has rolled over from one government to the other, wherein, each tried to arrest it through subsidies, tariff increase and superficial financial maneuvering. Nothing worked and each time it ballooned more.

Circular debt had its hay days during the tenure of the PPP government of 2008 and the government of PML-N of 2013. With each roll-over the debt increased and so did its bite on the national economy. Today, its bites have crippled the economy with the circular debt at the end of January 2024 standing at Rs 5.7 trillion, with the power and gas sectors accounting for Rs 2.703 trillion and Rs 3.022 trillion, respectively. The gas sector had being sucked into the system by a woefully ill-performing power sector.

As talks begin between the IMF and Government of Pakistan resume, one of the major subjects of the talks is going to be around the solution for the mounting circular debt. The government is reported to have prepared a well thought-out plan to be presented to the IMF to resolve the issue.

The new plan relates to addressing the circular debt by rationalising tariffs, eliminate cross subsidies, and inject cash into the system. The proposal involves injecting Rs 645 billion into the system, which will be provided by the Ministry of Finance (MoF) as a supplementary grant.

The focus is to salvage from financial ruins the public sector enterprises in the gas and oil sectors, notably, Sui Southern Gas Company (SSGC), Sui Northern Gas Pipe line Ltd (SNGPL), Pakistan State Oil (PSO) and others. They were all blue chip companies till hit by the menace of the circular debt.

In the past, budgeted grants were used to settle the receivables which were piling up. The new plan will create a dual solution to the problem by addressing liabilities and receivables of the company at the same time. The budgetary grants will adjust the receivables and will also make sure that these grants go towards the power sector.

The new plan is more of the same as the governments has been doing since the last many years, viz, tariffs and subsidies adjustments and injection of the cash into the system.

To realistically comprehend the subject one has to go to the root cause and origin of the circular debt crisis and find out how it built up over the years.

Circular debt buildup primarily started with the rampant induction of Independent Power Producers (IPPs) on the landscape of power sector of Pakistan and its collateral effects on the entire energy sector of the country. Before that the terminology of circular debt in the energy sector was not much heard off.

The agreements made with the IPPs were neither sustainable nor viable as stand-alone. They were presumably driven by greed, vested interests and incompetence of the public sector. In the guise of power shortage in the country and the hype created out of it, the IPPs were pushed into the system while ignoring their financial viability and understanding at what cost the power would be available to the consumer. Added to the financial burden of the IPPs was the financial burden of the loss-making public sector enterprises in the power sector. The compounding of the two financial burdens sucked in the remarkably good performing gas and oil public sector enterprises in the supply chain, notably, SSGC, SNGPL and PSO.

Today, the whole supply chain in the energy sector is severely compromised, stressed and questionable - starting from the procurement, storage and distribution of fuel to the power plants in the public and private sector, the conduct and competence of the power transmission and distribution companies and the conduct of the consumer itself. Circular debt emerged from the flaws in each of the nodes of this seamless supply chain.

The sustainable solution to circular debt crises lies in recognizing and addressing each of the gaps in the system.

The policy and opinion makers in the energy sector off and on expose the flaws in the system and recognize the main causes of circular debt; notably, the inadequate sector governance, theft and pilferage in the system, delays in tariff determination, lag in fuel price adjustments, insufficient revenue recovery from both government and private consumers, high transmission and distribution (T&D) losses, outstanding receivables in the books of multiple companies in the supply chain, including fuel suppliers, generation companies and transmission companies and the frustration of being stuck with the IPPs.

While the new plan may provide timely financial relief but the tangible gains lie in recognizing the inherent flaws in the energy sector supply chain and addressing them by inducing good governance and competence at every node of the energy sector supply chain.

Copyright Business Recorder, 2024

Farhat Ali

The writer is a former President, Overseas Investors Chamber of Commerce and Industry

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KU Feb 12, 2024 12:56pm
Economic loss from SOEs or IPPS or perks of 3 million Baboos, anyone care? Besides, no one talks about the cost-benefit of loans from local banks who make billions and serve the politicians in kind.
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