GOVT FAILS TO RESOLVE CIRCULAR DEBT ISSUE
SHABBIR H. KAZMI
Oct 18 - 24, 2010
When one looks at ongoing load shedding of electricity, inter-corporate debt - commonly termed as circular debt ñ seems to be the mother of all evils. With the passage of time, the situation has gone from bad to worse. The recipe of transferring debt of energy sector to financial sector is likely to create more problems. Some of the sector experts term energy sector receivables bad debts, which will have to be written off one day. They also say that sooner the government finds a sustainable solution for the circular debt the better it will be or be ready to face a complete collapse of the system.
The quantum of inter-corporate debt is estimated more than half a trillion rupees. Out of these around Rs350 billion stands as term finance certificates transferred to the financial institutions and around Rs200 billion debts are still owed by the energy chain.
The net result is entities like SSGC, SNGPL, PSO, refineries, and exploration and production companies face virtual default. Though the government keeps on injecting billion of rupees, in an attempt to save these entities from committing actual default no sustainable solution has been found.
The circular debt arises when electric utilities do not pay to fuel supplying companies, which withhold payment to refineries, which are unable to settle liabilities owed to exploration and production companies. The mother of this evil is distribution companies. The situation is further aggravated when power generation companies opt for running power plants on lower capacities to save fuel and go for higher purchases from independent power producers, withhold their payment and pay interest on the outstanding amounts.
Many of the experts suggest hike in tariff the ultimate solution but it is only wishful thinking not a sustainable solution. They fail to understand that people pilfer electricity because it is too expensive and with every hike in tariff theft incidence rises. Though the distribution companies claim transmission and distribution (T&D) losses are around 40 per cent, experts say its is fudging of data. The actual losses are more than 50 per cent, which are brought down to 40 per cent by issuing bills on average (without being supported by actual number of units used by the consumers).
Though the distributors claim they are striving hard to reduce these losses, the percentage speaks louder about their failure and/or massive corruption. The actual technical losses of distribution companies should not more than five per cent and rest of it is blatant theft going on for decades with the connivance of staff of the utility companies.
The role National Electric Power Authority (Nepra) is playing is also disappointing. Never in its history, it has fixed the permissible limit of transmission and distribution losses nor has penalised the utility companies for their bad performance. Over the years, it has been doing one duty very religiously, allowing hike in tariff. It has been failing in protecting the interest of those consumers who make timely payment of their bills. As against this, Oil & Gas Regulatory Authority (Ogra) has fixed the maximum permissible limit of UFG and is also penalising gas marketing companies for not meeting the benchmark. Last year it disallowed above the benchmark UFG charges, which cost Rs3 billion to SSGC.
It is often said that distribution companies are unable to recover the full cost. Ironically, even International Monetary Fund (IMF) and other multilateral financial institutions support this fallacy by insisting on hike in tariff in the name of recovery of full cost and withdrawal of subsidies being given to agriculture sector and small consumers. However, it is necessary to point out that subsidy provided by the government is least because of cross subsidy policy being followed by the electric utilities. One segment of consumers is paying the cost of supplying electricity to another group at lower cost.
Added to this is the failure of government offices, semi government entities, autonomous bodies, and even industrial and commercial consumers to discharge their liabilities. The problem is further aggravated because supply of electricity and gas of many bulk consumers just cannot be disconnected. Generation companies operating in the public sector and KESC owe billions of rupees to fuel supplying companies but stopping fuel supply is not allowed by the government.
Ideally speaking, the circular debt issue can be resolved if power generation companies make timely and full payment to fuel supplying companies. However, they can't do this unless distribution companies making timely payment, which put the blame of their failure on consumers. Recovery from the consumers can't be assured without the support of law enforcing agencies and judiciary. Electricity pilferage can be stopped by removing illegal connections, which can't be done without the support of law enforcing agencies. Some of the localities are notorious for pilfering electricity but nothing could be done because of ethnic concentration fully supported by the political parties.
One of the reasons cited for the increase in pilferage is refusal of electric utilities to provide legal connections. Therefore, the first step is to regularise all the illegal connections to enable the users to pay the bill rather than filling the pockets of linemen and/or other staff of the utilities. The guiding principal should be 'guaranteeing uninterrupted supply of electricity at afford able cost'. This objective can't be achieved without enhancing power generation and upgrading T&D network.
It is on record that consumers of certain areas have been using electricity for decades but never bothered to pay a paisa. This has happened only because the elected representatives of these areas have been telling the government that any attempt to recover cost of electricity could lead to law and order, which could lead to anarchy and civil disobedience. This practice has to be stopped because nothing comes free in this world. If one does not pay, others will have to bear the burden of his defiance. Why should a few be allowed cost free electricity?