In-Depth Arena

The vicious circle

Updated Dec 16, 2016 02:21pm

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Economists say the problem of circular debt started in 2007, when international oil prices increased exponentially from 40 dollars per barrel to 140 US dollars. The government at the time did not raise domestic oil prices or increase electricity prices to absorb the significant difference. Subsequently, there was a discrepancy between the electricity price paid by consumers and the cost of its generation and distribution. Over the last few years, there have been a number of corrective measures to address the difference — however, even now, the Pakistan Electric Power Company (Pepco) incurs a monthly loss of 17 billion rupees mainly due to the difference between the cost of producing electricity and its consumer price, says a senior government official.

The remainder of the circular debt accumulates as the government provides Pepco less money than it promises as subsidy to overcome losses. In the outgoing financial year, the government promised the company a subsidy of 190 billion rupees, but ended up paying only 81 billion rupees, says another senior official. Abdullah Yousuf, the chairman of the Independent Power Producers Advisory Council (IPPAC), says the amount of the subsidy and its timing both are inaccurate. “The government doesn’t pick up the liability straightaway or doesn’t pick it up in time.”

The subsequent cash-flow problems result in a failure to pay power producers for the electricity they generate. The power producers cannot pay for the fuel supplies they receive from the Pakistan State Oil (PSO) which, then, has to defer its payments to oil refineries and international suppliers. Essentially, it is the government’s failure to pick up the tab for the difference between the cost of production and consumer price that adds to the circular debt (see The Cycle of Circular Debt).

Over the last three years, economists, technocrats and bureaucrats have pinpointed the problems contributing to the circular debt. “The inefficiencies of the government-owned generation and distribution companies, cozy deals struck with providers of rental power plants, overstaffing and the free provision of electricity to Water and Power Development Authority (Wapda) employees costs consumers 10 crore rupees a day,” writes Shahid Kardar, the former governor of the State Bank of Pakistan in a recent article in Dawn. “The poor maintenance of power plants (and the use of) obsolete technologies, resulting in technical losses and corruption, contribute to circular debt.” Kardar adds that massive electricity theft in areas likePeshawar and Hyderabad and the poor collection of bills in regions like Quetta and the tribal areas also contribute to the problem. Provincial governments alone, he points out, owe more than 90 billion rupees in electricity bills.

A senior official at the Ministry of Finance acknowledges the grave impact of non-payment of bills on the circular debt. If Pepco ensures 100 per cent recovery of its dues from the public and private sector consumers, it will automatically lead to a resolution of the circular debt problem, he says. Yousuf says this is more than evident from Pepco’s account books — over the last three years, the company owed 280 billion rupees, while others owed 300 billion rupees. “Pepco recovers only 82 per cent of its dues from its consumers,” he says. The rate of non-recovered dues is as high as 40 per cent inQuetta, for instance. Pepco’s inability to recover 18 percent of all its bills is largely due to an inability to curb line losses or power theft. InHyderabad, for example, as much as 36 per cent of electricity is lost to line losses.

Officials and the media quote various figures for the total amount of circular debt, but all agree that it is greater than 200 billion rupees. In one of many attempts to end the debt, PSO proposed a novel solution in February this year. “The government needs to issue a pay order worth 29 billion rupees to Pepco which will pay to the Independent Power Producers (IPPs). The IPPs will hand the amount to PSO, which will give it to the refineries. The refineries can then return the amount to the federal government in lieu of taxes and other liabilities,” explains a PSO official, sharing the details of the proposal with the Herald. This way, the government will not have to pay a penny, and 29 billion rupees will be written off the books for each of the five stakeholders involved, he says. “The government will only have to invite all involved parties to a tea party in the federal capital,” he adds.

Others say a resolution to the problem is not as simple as PSO suggests. Yousuf says circular debt will not end with one-time write off. “If the government injects some money into the system and the existing circular debt is removed from the books, there is every reason to believe that the debt will accumulate again,” he says. Additionally, he tells the Herald that the government injected 120 billion rupees into the power sector in May 2011, when the money the government owed power generation companies stood at 204 billion rupees. In a few months since then, the circular debt has increased to 210 billion rupees once more, he points out. The problem lies with the power generation and supply system, he argues.

Many in the power sector believe that the difference between electricity’s cost of production and its consumer price is the primary reason for the persistence of circular debt. “We are selling electricity at a price which is less than the cost of generation … If we want to come out of the circular debt we will have to remove that difference,” says the owner of a private sector electricity company. The withdrawal of subsidies, an end to electricity theft, the efficient recovery of bills and transference of the high cost of fuel to the consumer are also essential to reducing the circular debt, say industry insiders — measures that require political will that the government seems to lack.


The writer is a journalist and works for DAWN TV.