Cutting Gordian Knot of Circular Debt

Circular debt, a very heated debate among economists of Pakistan, is becoming a colossal issue on every coming day. It is cross-indebtedness of parties in the energy supply chain, a situation in which every party in the circle is both a debtor and a creditor owing to the cash recovery problems of the party lying at the bottom of the hierarchy, which ultimately propagates upwards in the payment chain to other parties.

Presently, the circular debt has soared to more than Rs2.3 trillion. The country faced its crippling power crisis in 2007 when production fell by 6,000 Megawatts and massive blackouts occurred, creating severe problems for the household and industrial units. At that time, power sector in Pakistan was facing three major issues: high cost of electricity, a titanic imbalance between electricity demand and supply and reliance on high-priced fuel from global market. Pakistan had to bear the brunt because of shift from hydel to expensive oil and gas based power generation and rapid devaluation of Pakistan Rupee against anchor currencies. To counter the effect, the power regulators recommended an increase in electricity prices, however, the government did not pass this on to the consumers and took major initiative to curtail the dreadful crisis of electricity load shedding by drafting power policies with the Independent Power Producers (IPPs) at very promising terms vis-à-vis insulation from the underlying economic risks and downturns via long term Power Purchase Agreements (PPA) spanning over 25-30 years with take-or-pay contracts and supported by government guarantees and fixed capacity payments thus alluring them to invest hefty sums of money into electricity generation. It would be unfair to overlook the significance of those policies in narrowing the blackout period in Pakistan but at the same time those initiated the formation of a devastating iceberg for the economic ship of Pakistan, circular debt.

In Pakistan, Water and Power Development Authority (WAPDA) is entrusted with the authority and responsibility to ensure proper management of hydel and electricity projects. Since 2007, monolithic WAPDA is split into two entities: one to look after hydel affairs and the other entity which comes under its ambit is Pakistan Electric Power Company (PEPCO), which is responsible for the management of corporate affairs of nine Distribution Companies (DISCOs), four Generation Companies (GENCOs) and a National Transmission Dispatch Company Limited (NTDCL). In order to accelerate the working of NTDCL, Central Power Purchasing Company-Guarantee Limited (CPPA-G) was established back in 2015; one of the core functions of CPPA-G is the power procurement and its subsequent settlement on behalf of DISCOs. CPPA-G procures electricity from four major sources: IPPs, GENCOs, hydel power producers and foreign power producers.

The rigmarole starts with credit power purchase by DISCOs which builds a receivable balance on IPPs’ balance-sheets, this then drives its way to the entities in the supply chain up to the balance sheets of Exploration and Production (E & P) companies. Thermal powered IPPs and GENCOs source their fuel needs from domestic fuel providers i.e. Oil Marketing Companies (mainly Pakistan State Oil) which in turn fulfil their demand by purchasing from local refineries and foreign market. These procure crude fuel from foreign market as well as domestic E & P companies mainly Oil & Gas Development Company Limited (OGDCL) & Pakistan Petroleum Limited (PPL). The moot point is that state-owned enterprises (SOEs) like OGDCL, PPL, PSO, etc. in the supply chain provide revenue to the national exchequer, long outstanding receivables of these SOEs renders the government incapable of meeting its obligations towards IPPs against agreed subsidy payments, hence the debt oscillates in the circle.

Answering the question, “Why the DISCOs cannot clear their dues to IPPs?” helps in understanding the Gordian knot of circular debt. DISCOs are unable to clear their dues mainly due to huge line losses caused by primitive distribution system, electricity theft & partial recovery against utility bills, and most importantly due to delay in tariff notification National Electric Power Regulatory Authority (NEPRA) and subsidy payment agreed by government. The disastrous impact of this delay is not just in terms of opportunity cost. As such, it is woefully inadequate that the growing burden of the state’s inability to reform and recover for the power consumed is borne by compliant consumers. The repercussion is that with every IMF program and upwards revision in power tariffs, new surcharges and fees are added to already overburdened compliant consumers besides it is pertinent to mention the plight of E & P companies and refineries which had used their own cash to finance the liquidity crunch since they stood at the very top of this totem pole – energy supply chain. Consequently, this affects their growth strategies; which is likely to handicap state’s ability to meet its future energy needs.

So, what is the magic bullet to overcome this dilemma? It’s need of the hour to introduce legislations and revise existing PPAs by incorporating aspects of competitive regulatory market structure with regard to power generation, transmission and distribution to the benefit of taxpayers, without dampening the investors’ confidence who stepped forward to the rescue of drowning power sector. The central government should control power losses, thefts and avoid duplication of efforts by working hand in glove with provinces and private partners in establishing law and order situation. Political think tanks should make efforts to divert fuel dependency of power plants to indigenous cheap renewable sources like solar, nuclear or wind, which would not only provide shield against foreign currency fluctuations but would also enhance the ability of state in meeting its growing future energy needs. Initially, the power plants were installed by anticipating the increased energy demand, however, targeted demand was not attained partly due to pandemic and inefficiencies of the state departments, so a well devised master plan needs to be implemented to stimulate domestic electricity demand by tapping true potential of manufacturing industry hence offsetting the adverse impact of fixed capacity payments. State departments need to come out of their ivory towers and demonstrate professionalism coupled with determination in cutting the Gordian knot of circular debt head-on rather than sweeping it under the rug. It’s never too late!!!

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