Circular debt: the way forward

The importance of inducting new technologies in the power sector is underappreciated

Circular debt: the way forward


ue to some in-built inefficiencies, the power sector in Pakistan is doomed to a financial collapse. The main outcome of a ruined energy generation, transmission and distribution system has been an inter-corporate circular debt, threatening its viability.

The perpetual failure to contain the circular debt has been a manifestation of the fact that reasons behind a distorted system have not been addressed effectively. Hence, the power sector circular debt has reached Rs 2.5 trillion. If the trend continues, it may balloon to Rs 2.53 billion by June, showing a 10 percent growth over the last fiscal year.

No doubt, the rising cost of primary energy has contributed to the accumulation of circular debt during 2021-22. However, a variable fuel cost would not cast a lasting impact on the size of the circular debt, rather it is the intrinsic inefficiency of the power sector that is a constant factor challenging its sustainability.

In simple terms, the ‘circular’ debt can be described as the difference between the cost of power generation and transmission and the subsequent revenue collection at the distribution level. The power distribution companies have miserably failed to collect what is due from the consmers.

The so-called technical and commercial/ financial losses form the very basis of mounting circular debt. Technical losses, according to an assessment, however, stand at 15-20 percent of the total losses incurred at the distribution level.

Circular debt should not be a quagmire for policy makers in today’s technologically advanced world. The power managers at the federal level can ensure gradual but enduring cut in the circular debt by adopting short and medium-term multi-faceted innovative approaches in a bid to control power losses, apart from taking long-term steps for reducing the cost of generation for making energy affordable.

Most of the losses are recorded on the financial side and mainly comprise electricity theft abetted by power distribution companies coupled with a lack of recoveries due to corrupt and incompetent management. Let’s focus on this persistent bottleneck in the power sector.

Had the power distribution companies been able to achieve their revenue collection targets, says an expert, there would have been no buildup of the circular debt.

Let’s take an example of how a typical power distribution company works for the collection of revenues in this part of the world. If an otherwise dutiful consumer fails to pay his or her monthly power bill, the utility quickly disconnects electricity supply, forcing the customer to pay the outstanding amount. However, habitual power thieves, with the help of the staff of distribution companies, are immune to such actions. They continue to steal electricity at will without paying its cost, resulting in loss-making power utilities.

‘Circular’ debt can be described as a difference in the cost of power generation and its transmission, and subsequent revenue collection at the distribution level. The power distribution companies have failed miserably to collect the charge for the service they provide.

Electricity theft has been made possible through flawed loss-calculations at the feeder level of a power distribution company. By doing so, for instance, a power utility like the Lahore Electric Supply Company (LESCO) freely cross-funds stolen units of a power thief to an honest consumer living in another area by issuing an inflated bill.

Such cross-funding of the power revenue is also being done across various consumer categories, meaning that a whole cluster of domestic consumers in various feeders ends up paying for units consumed by commercial or industrial consumers in connivance with corrupt officials.

How to control this menace is not a million-dollar question. There are technologies already being used worldwide, and in this region, for controlling commercial losses at the power distribution level. Installation of smart meters at the division, subdivision and feeder levels has been considered as one of the most effective ways to check the losses by drawing comparison between bulk electricity supply and consumption by end consumers.

Prepaid power meters are another means of ensuring timely payment by electricity customers. These are part of cost-effective innovative measures for turning a power utility into a vibrant and profit-making distribution company. Initially, these smart power meters should be installed for consumers in the public and commercial sectors.

There are several reasons for power theft, formally known as Aggregate Technical and Commercial (AT&C) losses, which include metering related problems. As per a study, prepaid system of metering minimises inefficiencies in collection, while sophisticated features in the prepaid smart metering allow real-time identification of loss pockets, while also giving consumers the freedom to plan their electricity use according to their needs and resources.

This can help substantially reduce the AT&C losses and address the problems of consumers regarding wrong billing, getting easily reconnected after disconnection due to non-payment of bills and alleged unauthorised use of electricity in case of mere on-paper disconnection. For the power sector, prepaid meter is a perfect recipe to ensure hundred percent revenue collection even before the electricity is consumed.

This intervention is not based on an emerging technology. As per an announcement made by the Indian government in February 2022, some 3.73 million smart prepaid meters have already been installed across various states. Bangladesh is also making strides towards introducing cutting edge smart technologies in the power sector.

In India, smart meters are being installed under various federal schemes as well as by the state utilities themselves. The Indian government is providing funding to states for the implementation of smart metering in order to incentivise it. Under some arrangements, the Centre is making the initial capital expenditure and power distribution companies (DISCOs) are paying back on a monthly rental basis.

The importance of inducting new technologies to curb losses remains under-appreciated in Pakistan.

The writer is a senior reporter based in Lahore

Circular debt: the way forward