Circular debt and power theft

The government, instead of addressing the root cause of circular debt, has been resorting to ad hoc measures to resolve the problem

Circular debt and power theft

The power sector is the Achilles’ heel of our economy. Our capacity to produce power is greater than our need, still we resort to load shedding. Our power prices are the highest in the region but the sector is mired in huge losses.

Mismanagement is evident — from transmission to distribution and from billing to the recovery of bills. The government does not take kindly to criticism. Its economic managers act as if they are the only ones who know anything about how to steer this country out of trouble. After more than three years of autocratic rule, the economy of the country is in dire straits, worse off than it was at any time in our history.

Inefficient and incompetent management in the power sector has led to a huge circular debt. Circular debt refers to the debt prevailing among various departments of the government over the power use charges. The National Transmission and Despatch Company (NTDC) supplies power to all governments departments and to the Karachi Electricity Supply Corporation but these do not pay regularly or promptly for the power they use.

The NTDC, in turn, must pay to various independent power producers (IPPs) from whom it purchases the power; but as it doesn’t get its money, so it can’t pay to the IPPs. The IPPs, in turn, must pay to the oil companies to purchase fuel which they can’t pay. So, this is a near circle of debt due to which power production by the IPPs suffers.

The way it unfolds is: the power producers sell power to distributors who are unable to collect full payment from the power users. The distributors are then unable to make full payment to the producers, who fail to make full payments to the fuel suppliers. Fuel suppliers stop supplying fuel (furnace oil, etc) which leads to lower power production and widespread load shedding.

The circular debt, which is blamed for the long hours of power blackouts, is also intricately linked with the government’s financial difficulties. Despite frequently raising power prices, the government has been borrowing from banks to make partial payments to power producers to delay a further increase in electricity tariffs. This is a flawed approach. Instead of raising the tariff the state must eliminate corruption from the system.

According to the World Bank, the average global transmission and distribution loss is eight percent. Pakistan’s electricity sector has long been facing unprecedented challenges in this regard. It seems to be stuck in a bad equilibrium characterised by costly energy production, overloaded infrastructure, high transmission and distribution losses, extraordinary load shedding and mounting circular debt.

Despite frequently raising power prices, the government has been borrowing from banks to make partial payments to power producers to delay a further increase in electricity tariffs. This is a flawed approach.

The US Energy Information Administration (EIA) estimates that electricity transmission and distribution (T&D) losses were about 5 percent of the electricity transmitted and distributed in the United States in 2016-2020.

No serious effort was made by successive governments to reduce the circular debt by making the system efficient and transparent. Attempts were made at the power distribution companies’ level but fizzled out because, barring a few, the entire distribution chain is involved in abetting theft against some rent.

This rent is distributed from bottom to top in each power zone. On assuming power, the current government took the issue seriously for a while. The strategy it adopted appeared to have rich dividends as theft was effectively checked and circular debt accumulation in the power system came down from Rs 30 billion per month to Rs12 billion per month.

The government encouraged the bureaucracy to bring corrupt officials in the power sector to the book. The strategy had early success beyond expectations and the government declared that the circular debt accumulation would be brought to zero by December 2020.

The campaign against power theft was led by then secretary for water and power who enjoyed full supported of the minster, Omar Ayub. He said the circular debt accumulation declined because many power thieves were nabbed and the officers conniving in theft were removed and punished.

The sub-divisional officers (SDOs) were warned that any leniency towards thieves would result in their removal from service.

In many cases, the power thieves resisted detection raids. The resolve of the Water and Power Ministry was tested by an influential landlord in Sindh. His employees caught the SDO taking a photograph of a tampered meter. They took him inside the house and beat him up. The matter was taken up with higher authorities.

The SDO was afraid and did not want to initiate action against that influential consumer. The relevant police station too refused to register the FIR. The ministry approached the Sindh Police inspector general but sill failed to get the FIR registered. The chief minister was informed and the IG was summoned to Islamabad. The matter was brought to the notice of the prime minister as well; finally, the FIR was registered.

There was a clear message that the government meant business. Many private sector entrepreneurs were also apprehended in Sindh, the Punjab and the Khyber Pakhtunkhwa. The theft started thus receding and so did the circular debt accumulation. But the operation to eliminate corruption could not be sustained. Some of the officers insisting on merit were removed and requests by influential people for posting of friendly officers were accepted.

The circular debt accumulation then started rising again. Today, it is building at more than double the rate at which the past government had left. An excellent initiative has fizzled out. At some point in the process the secretary was transferred.

The circular debt and power crisis are interlinked. These issues cannot be resolved unless all stakeholders - consumers, power generation businesses, distribution companies and the government – agree on comprehensive measures.

The problem of inter-corporate circular debt has grown chronic. It has affected the power generation capacity available in the country. It arises partly because several public sector commercial entities, including the Pakistan Railways, Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and government departments default on payment of electricity bills. The outstanding power dues against private sector consumers are even higher than the unpaid power bills of the public sector.

The government, instead of addressing the root cause of circular debt, has been resorting to ad hoc measures to resolve the problem. These measures include borrowing billions of rupees from commercial banks to make partial payments.

The writer is a senior reporter

Circular debt and power theft