Oct 18 - 24, 20

As if a mismanaged and inefficient power sector was not enough to destroy the national economic prospects, there has appeared a new dimension to the power crisis with creation of something out of nothing - the circular debt.

According to an Indian analyst, Sachidanand Singh, if it is really a circular debt and the circle has been completed, then apart from some technicalities there should be no problem in resolving the issue once and for all.

"What I am suggesting is a typical stock exchange clearing house arrangement. These clearinghouses consider the claims and liabilities of scores of brokers and after canceling out circular claims determine net liabilities/claims of each broker. It appears simplistic, it indeed is; but if we have real circular debt issue, I think it should be an effective and inexpensive way of tackling it.

I, however, feel we do not have a circular debt problem. The problem seems to be the one we have in India power theft, inefficient (corrupt) distribution companies, and non-payment of power charges by many of those consumers who are not stealing. Tackling it, like in India, it will require political grit."

And political grit we have in abundance. But we rarely use it to solve our national problems. We cannot construct dams despite having the gift of monsoon rains. We cannot boost our agriculture as it calls for an honest policy offensive against the feudal lords. We cannot use the bounty of coal as it does not suit the local and international vested interests. We cannot resolve the circular debt issue problem, as it is not meant to be resolved. The problem keeps the government functionaries busy in such pursuits as creation of power holding company, assumption of circular debt liabilities by this company, payment of these liabilities through commercial banks' assistance in the shape of TFCs, bonds etc at a high interest rate (that might well include the cuts of consultants, arrangers, market makers, etc.). The recurrence factor is quite strong to rule out the possibility of a deliberate nurturing of the issue.

At the end of April 2010, the net debt was reduced to Rs104 billion which has now bounced back Rs235 billion. The debt has been mounting with a monthly average increase of Rs26 billion.

The diagnoses are varied, ranging from non-increase of tariff during 2003-07 to the spiking of fuel prices from $70 to $147 a barrel, from inefficient distribution systems to high line losses, and from theft to high generation cost. If there was no tariff increase during 2003-07, then a series of tariff hikes have taken place since 2008 to offset that trend. These hikes have not only proved back breaking for the common person, but have also choked the economic growth. The non-increase in tariff during the said period was made possible by the absence of IMF intrusion in economic policies. We saw during that period a comparatively happier common person and a burgeoning economy. The abrupt political change washed away those benefits throwing the country back into the lap of IMF. The successive and blatant increase in power charges at IMF's behest brought social and economic unease. Linking the current debt crisis to the non-increase in tariff during 2003-07 is hogwash. Moreover, if there was no circular debt crisis during low-tariff years, then how it surfaced when the tariff stood revised upward?

The unprecedented rise in oil prices would have been a genuine reason had the oil prices stabilised around $140, or so, a barrel. But, we all witnessed the prices tumbling down to less than $40 a barrel and then stabilising around $75, the level prevailing prior to the damaging price hikes. With prudent inventory management policies, it should have evened out at the end of the day. So, blaming the debt issue on unusual but temporary oil price hike is not tenable. Theft, heavy line losses, inefficient distribution, and obsolescence factor in transmission systems are the realities of Pakistan's power sector. But they have not surfaced overnight.

The power sector claims to further increase in tariff are preposterous as the already hiked-up energy prices are having a killer effect on the economy. The power sector companies should focus on removing their inefficiencies while the government should help them by providing legislative cover for the recovery of payment from defaulters.

In many cases, power generation companies are found avoiding generation using high cost input, furnace oil. This widens the demand and supply gap and leads to increased load shedding. The situation on production front is not going to improve unless cheap hydropower and coal-based energy is produced. Another factor giving rise to circular debt problem is the lack of investment in power, oil and gas sectors. Refineries that are said to be working at 60 per cent capacity as a result of debt problem, also suffer from the lack of fresh investment.

During their heydays, both oil companies and refineries have benefitted from the favorable petrol pricing mechanism and have earned huge profits in the process. PSO appears to be the major sufferer of circular debt disease. Its receivables and payables stand around Rs145 and Rs130 billion respectively. Its major debtors are the power sector companies while it owes money to local refineries and foreign suppliers. The financial strength it enjoys, despite being a public sector entity, demands a better presentation of company's financial issues. Instead of threatening the government with dire steps like revocation of L/Cs opened for the import of oil or declaration of 'force majeure', it should come up with some concrete proposals for the resolution of debt crisis. In purely financial terms, PSO has a net receivable position of Rs15 to 20 billion only. A Rs182 billion company with sales revenue of more than Rs875 billion should not put extra burden on the government by magnifying its financial issues. This does not absolve the government from its responsibility of taking concrete steps to fix up the long outstanding issue. Whatever plans the government comes up with, PSO is definitely going to be the starting point in the chain of corrective actions. But, does the government really want to fix the problem? We have become used to seeing it play with issues like NRO, swiss cases, fake degrees, judges' appointment etc. etc.