The Hows and Whys of Cir­cu­lar Debt

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The cir­cu­lar debt is­sue is a very se­ri­ous one for the Pak­istan power sec­tor. Cir­cu­lar debt is the amount of cash short­fall within the Cen­tral Power Pur­chase Agency ( CPPA) that it can­not pay to power sup­ply com­pa­nies. This short­fall is the re­sult of ( a) the dif­fer­ence be­tween the ac­tual cost of pro­vid­ing elec­tric­ity in relation to rev­enues re­al­ized by the power dis­tri­bu­tion com­pa­nies ( DIS­COs) from sales to cus­tomers plus sub­si­dies in­suf­fi­cient pay­ments by the DIS­COs to CPPA out of re­al­ized rev­enue as they give pri­or­ity to their own cash flow needs.

This rev­enue short­fall cas­cades through the en­tire en­ergy sup­ply chain, from elec­tric­ity gen­er­a­tors to fuel sup­pli­ers, re­fin­ers, and pro­duc­ers; re­sult­ing in a short­age of fuel sup­ply to the pub­lic sec­tor ther­mal gen­er­at­ing com­pa­nies ( GENCOs), a re­duc­tion in power gen­er­ated by In­de­pen­dent Power Pro­duc­ers ( IPPs), and an in­creases in load shed­ding.

Cir­cu­lar debt at the end of Fis­cal Year ( FY) 2011 was es­ti­mated to be Rs537 bil­lion. At the end of FY 2012 it was es­ti­mated to be Rs872 bil­lion2 rep­re­sent­ing ap­prox­i­mately 4% of the na­tional nom­i­nal Gross Do­mes­tic Prod­uct ( GDP). Cir­cu­lar debt, if con­tin­ued un­abated, will in­creas­ingly con­strain the avail­abil­ity of elec­tric­ity and slow down eco­nomic growth.

The pri­mary causes of cir­cu­lar debt in­clude: • poor gov­er­nance; • de­lays in tar­iff de­ter­mi­na­tion by an in­ad­e­quately em­pow­ered reg­u­la­tor com­pounded by in­ter­fer­ence and de­lay in no­ti­fi­ca­tion by the Gov­ern­ment of Pak­istan ( GOP); a fuel price method­ol­ogy that

• de­lays in­fu­sion of cash to the power sec­tor; poor rev­enue col­lec­tion by the DIS­COs; de­layed and in­com­plete pay­ment by the Min­istry of Fi­nance ( MOF) on Tar­iff Dif­fer­en­tial Sub­sidy ( TDS) and Karachi Elec­tric Sup­ply Company ( KESC) con­tract pay­ments; pro­longed stays on fuel price ad­just­ments ( FPAs) granted by the courts; and trans­mis­sion & dis­tri­bu­tion ( T& D) loss im­prove­ments that can­not be achieved based on the reg­u­la­tor’s tar­gets in the tar­iff. The fed­eral gov­ern­ment re­tains the au­thor­ity for ap­prov­ing cus­tomer tar­iffs, but is in­flu­enced by a legacy sys­tem that sup­ported a sin­gle postage stamp rate for all con­sumers and a sin­gle gen­er­a­tion cost for all power pro­duc­ers.

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