Circular debt – a vicious cycle of unpaid bills The Hows and Whys of Circular Debt
Arecent report of the State Bank of Pakistan has said the problems in the energy system have worsened as reflected in the persistence of load management and the re-emergence of inter-corporate circular debt. Circular debt, - a vicious cycle of unpaid bills running through the entire power-generation chain, has swollen to nearly 2.0 percent of GDP and is threatening the very functioning of the energy sector.
The government, in order to limit the accumulation of circular debt, has imposed a surcharge of Rs 0.30/ unit from October 2014 following soft crude prices. The adjustment implied an effective increase of 2.5 percent in electricity tariffs and the government is planned to make more adjustments in January and February 2015 to reduce electricity subsidies to 0.7 percent of GDP.
The current fiscal year started on a positive note, when the government settled circular debt of Rs 500 billion in June 2013. Furthermore, the Pakistan Muslim League’s government was also showed its commitment to resolve the root causes for the power crisis.
The government then vowed to implement a timebound plan to tackle price distortions; inadequate collections; costly and poorly targeted subsidies; governance and regulatory deficiencies; and low efficiency in the supply and distribution of energy.
Unfortunately, most of the needed reforms, including privatization of distribution companies; increase in household tariffs; price rationalization of CNG; and lower priority to households in gas allocations, either could not be initiated, or made very slow progress. The demandsupply gap hovered around 4,000 megawatts during the year and showed a marked deterioration.
Qasim Niaz, Chairman IPPs Advisory Committee (IPPAC), said the government has made some payments to the power producers to run their plants on maximum capacity as hydroelectricity fell in winters. However, the initiative is not a sustainable solution.
“The government should avoid delay in payments, which would curtail accumulation of circular debt and enable IPPs to run on maximum capacity,” Niaz said.
Analysts said the vicious cycle of debt once again bogged down energy supply chain as power distributors delay payments to generators who, in turn, face difficulty in clearing dues of fuel suppliers like Pakistan State Oil.
An expensive fuel mix is partly blamed for the country’s energy woes. The average fuel component of generation cost on furnace oil has increased to Rs19/kilowatt hour in 2013 from Rs12 in 2011, while generation cost on coal is around Rs3/unit.
Still there has been no significant progress made on the coal side. Although, a number of power producers announced to convert to coal, none has been able to achieve the financial close so far primarily because of the lethargic attitude of the National Electric Power Regulatory Authority (NEPRA).
“Vested interest groups mainly the infamous oil mafia in the country, keep bringing up frivolous points against coal, which is costing $700,000/day to consumers of Karachi,” an official of an IPP intending to convert to coal said. “Running a 420 megawatts plant on furnace oil costs $500 million a year and it would cost less than $250 million on coal.
“The addiction to oil is set to be replaced by addiction to natural gas/LNG. LNG is better than oil but still more expensive than coal,” he said.
The central bank report said energy conservation must be promoted to manage the demand-supply gap in the short-run along with supply initiatives to find a long-term solution of the issue. On the demand side, no policy initiative was implemented to rationalize power