Circular debt
The transmission losses in Pakistan's energy sector are one of the highest in the world. In its recently issued performance assessment of GENCOs, Nepra put the energy loss by these state-run power generation companies at a whopping 15 billion KWh. An equivalent figure in dollars would be close to $1.5 billion in losses for FY15-FY16. According to the Nepra's determination of 1263MW R-LNG project at Jhang, the total project cost was roughly $800 million. To quantify the opportunity cost of this $1.5 billion loss, the government could have set up almost two 1263MW R-LNG power plants inclusive of their CAPEX and financing costs in this amount.
This loss was borne by the taxpayer at the end of the day while GENCOs have paid a paltry fine of Rs15 million imposed by the regulator. It may also be mentioned here that Nepra also imposed a fine of Rs5 million on the National Transmission and Despatch Company Limited (NTDCL) for failing to comply with prescribed limits for voltage and frequency fluctuations. As things stand today, fines alone will not bring about any change in the management of state-run institutions in the power sector. All state enterprises are in bad shape. Over the years that state control has become synonymous with negligence, poor governance and corruption.
There are reports that the circular debt has reached new heights; almost doubling from the levels back in 2013. The highest figure suggested is Rs 922 billion for total circular debt in the country's energy chain, including the Rs 450 parked separately with the Power Holding Private Limited (PHPL) that has the purpose of raising funds from commercial banks. Recently, the Ministry of Power Division has reported that circular debt has increased to over Rs 750 billion, which is a big jump from 2013 levels. In 2013, when PML-N government took charge, it decided to eliminate this menace in just one go. As a result, the government ended up paying Rs 480 billion for the debt retirement. It was well-known that the relief from the move would be temporary, and hence the dragon started lifting its head in no time, reaching the levels it has not seen before.
In Asian Development Bank's recently published assessment of $7 billion loan approved in 2005 for the country's energy sector to shape its future line of action, circular debt continues to be the top power sector challenge. The report titled, "Sector Assistance Programme Evaluation (SAPE) for the Pakistan Power Sector" highlights that there has been limited action in addressing the underlying causes of the circular debt, which has kept investments at less than desired levels until 2017. One underlying factor for the rise in circular debt is a lack of focus on the transmission and distribution aspect of power supply amid the country's increased focus on adding capacities. The losses in the transmission and distribution system have remained there for a long time.
Other causes for the circular debt menace as highlighted by ADB in its earlier supplementary documents still remain unaddressed at large. These include weak governance, delayed release of Tariff Differential Subsidy by the Finance Ministry, issues in revenue collection by the distribution companies that still remain in some areas, delays in tariff determination by Nepra and liquidity issues due to the fuel-price methodology. Experts are of the opinion that the only long term solution to make the power sector operationally and financially viable is through increased private sector participation.