Rescuing Pakistan

For over three decades, Pakistan’s energy sector has grappled with the persistent issue of circular debt, casting a long shadow on the nation’s economic growth and prosperity.

The intricate web of financial challenges, particularly in the power and gas sectors, has become an ever-growing burden on the back of the government, necessitating a closer examination of the root causes and proposed solutions.

In the power sector, the ominous presence of circular debt is epitomized by the Central Power Purchasing Agency (CPPA) withholding payments due to a cash flow deficit. This not only creates a cash crunch for CPPA but also triggers a ripple effect throughout the supply chain.

The primary culprits behind circular debt include insufficient revenue recovery (read theft/line losses), inadequate sector governance, delays in tariff determination, lag in fuel price adjustments, and rapidly ageing infrastructure.

The domino effect of these issues manifests as outstanding receivables in the books of various companies within the supply chain, encompassing fuel suppliers, generation companies, and transmission entities. Compounding the challenge is the burgeoning gas circular debt, which has seen a surge in recent years.

Initially attributed to natural gas, the debt’s composition has evolved, now encompassing a significant share of Regasified Liquefied Natural Gas (RLNG). The differential margin, resulting from disparities between government-approved tariffs and those recommended by OGRA, further compounds the mounting debt.

Unaccounted for Gas (UfG) and gas theft contribute to the increasing burden on distribution companies. Subsidized tariffs, coupled with delays in subsidy release, weaken the capacity of distribution companies to repay the E&P companies and RLNG suppliers such as PSO and PLL.

The historical lack of proper gas pricing exacerbates the issue, where revenues generated fail to cover the costs of services provided.

The incumbent caretaker government has been trying to address this issue since it took over last year. Beside regularly revising the prices of gas as per OGRA determination, it has also come up with a plan to address the circular debt issue, whereby the initial cash injection by the government will trigger a payment clearance system wherein the Sui distribution companies will get their receivables settled triggering an onward payment to exploration and production companies who in turn will release dividends to the shareholders (majority government) thus recouping the initial cash injection.

The new plan primarily targets the gas sector, aiming to rationalize tariffs, eliminate cross subsidies, and inject Rs 645 billion into the system through a supplementary grant by the Finance Ministry. This injection seeks to address both liabilities and receivables simultaneously, providing a dual solution to the persistent circular debt problem.

The numerical impact of this plan will result into generation of potential dividends that major entities like OGDCL and PPL could distribute, with significant portions flowing back to the government. The strategic injection of funds also aims to alleviate the financial burden of PSO by settling outstanding amounts related to RLNG purchases.

However, a critical evaluation of the plan reveals associated risks, including the IMF’s potential reservations and the historical failure of similar attempts over the past three years. The absence of comprehensive reforms across the energy value chain raises concerns about the plan’s efficacy in addressing the root causes of circular debt. The plan seems to address the financial health of companies involved in the production, purchase, transmission and distribution of gas in Pakistan.

This one-time cash settlement formula will address the receivable issues of these companies on temporary basis while the underlying reasons for accumulation of these receivables/circular debt is still the elephant in the room, which is conveniently invisible to everyone in the room.

We must introduce WACOG immediately and completely eradicate all cross subsidies both in the power and the gas/petroleum sectors. Why should we subsidize the piped gas for domestic consumers who are less than 30 percent of total households in the country? What financial support or relief is given to the vast majority of household consumers of LPG? The answer is nil.

This discrimination with huge financial implication cannot be allowed to continue. Lately, the government has lifted ban on new connections for housing societies on LNG cost basis.

This will further complicate the matter as an old housing society will be offering gas to its residents on existing/indigenous gas basis while the neighboring new housing scheme will be offering the gas to its residents at the whopping price of about rupees 4200 per MMBTU (as against rupees 500 per MMBTU for consuming up to 0.25 cubic hectometers of gas) to all segments of the domestic consumers with no relief for the so-called protected or lifeline consumers.

How can such discrimination be allowed in one country? Thus, all the more reason to go for WACOG to offer uniform prices of gas to all sections of consumers without any discrimination or price variation.

We must involve the provinces in recovering the cost of UFG/theft and electricity loss/theft by making them pay at least 50% of the cost of the gas and electricity stolen in the provinces. The remaining 50% must be recovered from the management of the gas and electricity distribution companies.

Unless we involve the skin of the provinces and the management of the companies we should forget about plugging the gapping hole of industrial scale theft of gas and electricity in the country. How long should the federal government or the bona fide consumers of these two utilities keep paying for the inefficiency and corruption of the management of these companies coupled with indifference of the provincial governments in enforcing theft control measure in their respective jurisdictions?

In these trying times when the out-of-control prices of these two commodities are seriously undermining the economic and social security of the country, hard and out-of-box solutions are necessary before it is too late. The new government must take on this hydra headed monster of energy sector circular debt with full force and determination right at the beginning of its tenure.

After introducing the above reform measures, the new government may use all its prowess to renegotiate the tenor of loans with the international and local investors of IPPs (independent power producers). We need to make sure that the prices of electricity are reduced to attract its consumption by the industrial sector in order to offset the capacity payments and to stem the tide of ever-decreasing consumption of electricity by the industry.

As Pakistan prepares for the transition to an elected government, resolving the circular debt crisis must become a top national priority. Any plan to address circular debt, whether through monetization of debt or swapping receivables with tradable government debt, must be executed urgently, coupled with a robust and aggressive plan for reforms across the energy supply chain in the country.

Copyright Business Recorder, 2024