Circular debt and citizens’ woes

Policy reforms can only be launched by a democratically-elected government with a fresh mandate from the people

Circular debt and citizens’ woes

Technical line losses due to poor conductors, aged grid, transmission and distribution infrastructure, infrequent maintenance; and resistive losses (due to resistance, atmospheric conditions and heat) have reached 20 percent. Studies reveal that Pakistan’s overall circular debt could reach Rs 4 trillion by 2025 if these losses are not handled and controlled.”Controlling Circular Debt by Mohd Sheroz Khan Lodhi, The News

Energy is a fundamental and indispensable element of any economy, playing a crucial role in both domestic and commercial operations. As the global population and economy continue to expand, demand for energy has surged significantly. Hence, it is imperative that the supply of energy and its cost structure are optimised and aligned with the economic requirements.

Unfortunately, for many years, like some other aspects of governance, Pakistan’s energy sector has faced significant challenges. The persistent issue of load shedding, unheard of in developed economies, remains a commonplace occurrence in Pakistan.

It is disappointing that after 76 years of independence Pakistan has been unable to attain the necessary balance between energy demand and supply. A particularly distressing period started under Gen Pervez Musharraf, who during his almost nine years in power, ignored this sector. After his exit, the nation started experiencing severe load shedding with major urban centres remaining without electricity for up to 12 hours a day.

From 2014 onwards, Pakistan entered into a collaborative effort with China to address this challenge, successfully bridging the energy deficit. In a forward-thinking approach, provisions were made for additional energy capacity to accommodate anticipated future demand. However, following 2018, a combination of local political upheavals and the global pandemic, disrupted the growth trajectory, resulting in an oversupply of energy capacity compared to the actual demand. In its wake surfaced the major challenge of circular debt. The problem stems from multiple factors, encompassing but not restricted to under-utilisation of assets, commitments related to capacity payments and return on equity, delays in tariff adjustments, subsidy disbursements, transmission losses and revenue recovery shortfalls.

According to State of Industry Report 2022 of the National Electric Power Regulatory Authority (NEPRA), in the fiscal year 2021-22, the distribution companies (DISCOs) were given a transmission and dispatch losses ceiling of 13.4 percent but the actual losses amounted to 17.1 percent. This discrepancy resulted in a financial loss of approximately Rs 113 billion.

Moreover, in the fiscal year 2021-22, receivables amounted to approximately 90.51 percent, in contrast to NEPRA’s revenue determination estimate of 100 percent. This difference resulted in a deficit of Rs 230 billion in relation to the billed amounts. Considering both the additional transmission and dispatch losses and reduced revenue recovery, the cumulative impact amounted to Rs 343 billion.

This situation contributes to an escalation in the circular debt, which continues to scale new heights with every passing day. By the end of the fiscal year 2017-18, this figure stood at approximately Rs 1.12 trillion. Fast forward to the end of June 30, 2022, it had doubled to reach Rs 2.25 trillion. According to a press report, the circular debt is projected to increase by another Rs 545 billion by March next year despite a surge in electricity prices as foreign loans pegged with the so-called power sector reforms are limited to only increasing prices and ignore other critical issues.

Currently, a primary obstacle faced by every individual and business in Pakistan is the high cost of electricity. This hurdle is impeding the country’s overarching goal of sustainable development.

The state of Pakistan’s energy sector according to the most recent Country Report (No. 23/260) of the International Monetary Fund is as follows:

“The energy sector’s long precarious situation has become acute, with severe liquidity pressures now adding to the continued over-accumulation of unsustainable payment arrears (circular debt). This situation has built up over the past decade on the back of slow reform to address deep-seated deficiencies that create operational losses and raise generation costs, aggravated by a political reluctance to pass-through international commodity prices, currency depreciation and financial and other costs to tariffs, and repeatedly granting new unbudgeted, untargeted subsidies.”

The nine-month $3 billion standby arrangement (SBA) approved by the executive board of the IMF for Pakistan on July 12, also requires the timely synchronisation of power tariffs with the levels required for cost recovery. The IMF staff has emphasised the importance of regular tariff adjustments, encompassing an annual rebasing, four quarterly tariff adjustments, and twelve-monthly fuel price adjustments.

The government must not only recognise the critical need for ensuring accessible and reliable electricity to facilitate sustainable economic growth, it must also demonstrate this commitment through its actions and policies.

The provision of energy and the pricing structure should be in harmony with the essential requirements of both individuals and businesses, irrespective of their social status. The under-utilisation of capacity-based payment arrangements is adversely affecting the end users. Currently, a primary obstacle faced by every individual and business in Pakistan is the high cost of electricity. This hurdle is impeding the country’s overarching goal of sustainable development.

Endeavours aimed at addressing challenges spanning generation, transmission, distribution, and other aspects of the supply chain are not yielding the anticipated results. Persistent devaluation of the rupee has raised the expenses associated with imported fuels.

To address this issue effectively, the government should employ a multifaceted strategy, which includes negotiations with generation companies to reduce capacity payment obligations. Investing in renewable energy sources, such as solar and wind power is a crucial step forward.

Power theft is another factor causing huge losses to the national exchequer. Smart metering should be enforced in high theft areas in line with the agreement reached between the IMF and the Pakistan Tehreek-i-Insaf government.

These actions can help reduce the circular debt accumulation and alleviate the strain on electricity bills paid by the citizens. However, it is essential to point out that such policy reforms can only be launched by a democratically-elected government.

Considering the caretaker government lacks the authority for policy reforms and the elections are unlikely to be held soon, the hardships faced by the people of Pakistan are expected to persist.

Dr Ikramul Haq, writer and an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Circular debt and citizens’ woes