The Hows and Whys of Circular Debt
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.