Circular debt capped!

The Federal Secretary for Finance, Dr Waqar Masood, informed the Public Accounts Committee that the government has committed to the International Monetary Fund that the energy sector circular debt would be capped at 250 billion rupees for next fiscal year. What Dr Masood did not, however, highlight was the following disturbing acknowledgements by the government in the 12th March 2015 Attachment to the Letter of Intent titled Memorandum of Economic and Financial Policies: technical and financial audit of the energy sector finalised in early May 2014 identified the stock and flow of payables at all levels of the energy sector (including Power Sector Holding Company Limited). Two main components of this circular debt are (a) payables of 298 billion rupees out of which only 80 billion rupees constitute current payables while the remaining refer to (i) disputed claims by Independent Power Producers, (ii) distribution companies non-recovery and penalties on past non-payment and (iii) distribution and transmission losses not recognised by the regulator; and (b) the stock of past arrears including PHCL in the syndicated term finance facility increased to 335 billion rupees by end January 2015 on which a surcharge has been levied to pay for the interest on the facility.

The memorandum also notes that the Central Power Purchasing Agency Guarantee has been established, a statement that was a bit premature as the CPPAG was created in the third week of April. Be that as it may, the government also admitted it took advantage of the “room created due to falling oil prices” and disturbingly revealed that “policy guidelines were issued for incorporating the out of system costs and actual system technical losses into the FY2014/15 tariff. This has resulted in arresting a major portion of the build up of the circular debt and improved cash flow of the system.” Analysts maintain that because the onus is on consumers (to pay for interest on loans to retire the circular debt as well as for technical losses) there is little if any pressure on the sector itself to improve governance.

The failure of the power sector reforms to date is patently evident given the continued severe liquidity problems and the periodic demands by Pakistan State Oil (PSO) for release of funds to enable it to open the letters of credit. In January this year, the two-week-long petroleum crisis in Punjab and Khyber Pakhtunkhwa was a reflection of unprecedented poor governance even by our standards leading to the release of 17 billion rupees by the cash-strapped Ministry of Finance though PSO had demanded 27 billion rupees.

Thus any decision to contain the circular debt must be fully supported as the rising circular debt is considered a major contributor to the inability of the energy sector to generate at full capacity of around 21000MW – close to demand even during peak summer months that would have necessitated only one- to two-hour loadshedding. The other major reason for loadshedding is the obsolete transmission lines that have the capacity to transport only 15000 MW electricity according to former Secretary of Water and Power.

The solution to our energy problems therefore must focus on improved receivables, and for this purpose the Council of Common Interest is the appropriate forum that, through consensus building, would ensure that federal and provincial governments/departments utility bills are cut at source through a federal adjustor. Disturbingly post-2013 the number of defaults by large private sector purchasers of electricity has risen and there is a need for their electricity to be disconnected. As matters stand today, power supply to an individual householder who does not clear his bill is high is disconnected though the large non-payers are not being dealt with.

To conclude, the power sector continues to perform poorly and by ladling the burden of interest on past loans as well as transmission and distribution losses onto the tariff while ignoring the rising stock of receivables is the reason for sustained heavy loadshedding. Focusing on multi-billion dollar energy projects makes good headlines but the short- to medium-term measures should have focused on ensuring capacity generation and transmission which remains a pipedream nearly two years after the PML-N government took over power.