Nothing circular

The power sector in Pakistan is engulfed with structural issues and bogged down by policy lapses is like stating the obvious. However, the irony is that the debate is overshadowed by so-called trendy analysis about ‘circular debt’.

The term ‘circular debt’ itself is a misnomer and eclipses the mammoth Rs2,200 billion or so for what it actually is. Let us attempt to unveil in plain terms this so-called circular debt and offer some remedies for its resolution. The goal is to frame the right debate instead of focusing on an area which is a manifestation and not a cause of the system troubles. This will in turn help in offering solutions for the underlying problems.

Circular debt is essentially the payables of the power sector by the single buyer – the state of Pakistan, through the Central Power Purchasing Authority. Payables have accumulated over time and are principally the result of system inefficiency, incapacity and incompetence. The stock has gone up to more than Rs2,200 billion ($13 billion) – Rs1,200 billion in direct payables to power sector producers and another Rs1,003 billion parked in a special purpose vehicle- Power Holding Private Limited. The flow or leakage which causes the build-up has traditionally varied from a low of Rs10 billion to a high of Rs50 billion a month. At the moment, it appears to be hovering at its monthly high accumulation.Make no mistake, this accumulation casts a dark shadow on the economy and can potentially debilitate the country’s budget estimates. They are ballooning by doubling every few years. Payables directly impinge on the availability of power as financials deteriorate and payments to power sector producers get constrained. The payables are against receipt of electricity sold by government-owned generating companies like the GENCOs fuelled by gas and Heavy Fuel Oil (HFO), government-owned hydel and nuclear plants and a host of 78 IPPs operating on gas, diesel and HFO.

In all fairness, an attempt to rescue the power sector was made from 2013 on-wards when Rs480 billion of payables was cleared and under an IMF program targets and benchmarks were set for three years. Despite improvements, a holistic solution remained elusive as neither privatization or corporatization of DISCOs, nor a well-oiled regulatory setup took hold, nor a functioning market took shape.

The crux of the accumulation issue is: first, recovery of billing remains 10-15 percent less than the billed amount costing around Rs160 billion a year. Second, transmission and distribution losses at 3-5 percent higher than allowed by the regulator in tariff costing about Rs40 billion a year. Third, other permanent flow issues include non-recovery of GST payable to the FBR.

Fourth, AJK where electricity is being supplied at a concessional rate but the regulator charges a full rate as a historical Mangla agreement has run its course – the difference of tariff amount is unsettled which the state has been partly footing for many years. And, five, tied to these issues is government subsidy which has traditionally remained under-budgeted and further widened during the year as new tariff sets in after the budget is passed.

The more transient issues relate to delays in yearly base tariff implementation, quarterly tariff pass-through and more recently over-riding automaticity of Fuel Price Adjustment by the government. All these policy and structural issues create a loss of up to Rs50 billion a month and a traditional weak governance capacity which is unable to resolve them.

It is an unfortunate truth that, although the payables are a matter of the moment, the other side of the balance sheet is lost in obscurity. A more pressing concern – but kept at the back-burner – is what is owed to the state through the DISCOs – a whopping amount of Rs1,178 billion ($7 billion) as of early 2020. There are two key reasons for the back-burner treatment of the $7 billion owed to the state. It is to cover-up amounts of over-billing which are incorrectly parked in bills and showing up as recoverable, and also due to a mindset of its insolvability.

The first place to start a resolution of payables is to resolve the receivables. These receivables are monies owed by the public-sector entities, the federal, provincial and AJK governments to the tune of Rs.225 billion and over Rs800 billion by the private sector. A thorough analysis of running and permanently disconnected consumers can point to a realistic recovery campaign. The amount recovered from the receivables can help pay down the stock of payables and the rest can be settled by long-term bond issuance.

The tariff and performance of the power sector then must ensure that further accumulation is avoided. It must be made mandatory that consumers over and above 5 Kwh connections install prepaid smart meters to resolve the issue of loss of 15 percent in recovery, saving Rs160 billion a year. In this context, high loss feeders should be outsourced for recovery.

An independent technical audit of DISCOs can help in line losses and an international operator may be engaged in this regard. Following this, a line loss program can be orchestrated to save the Rs40 billion loss a year. All the others are policy issues and are parked at the door of the government to resolve. The AJK agreement and entrusting tariff authority to Nepra to directly pass yearly and monthly tariff to consumers are measures which will resolve to a large extent, the ongoing bleeding.

There were three thoughts in penning down this piece: one to unmask the non-circular nature of the payables; two to highlight the other side of the balance sheet – the receivables; and three to offer some solutions. The suggested corrective reforms in solving the stock through recovery, and flow or leakage through policy actions can go a long way in resetting the obscure nature of financial distress. A more structural plan which hovers around the managerial debate or divestment in some form is a topic for consideration, but left for another day.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

Email: khaqanhnajeeb@gmail.com