Power sector remains directionless

According to a Business Recorder exclusive, the inter-circular energy sector debt has again reached critical proportions that accounts for a significant increase in loadshedding in spite of the change in weather and a significant decline in demand in upcountry areas. The amount of the circular debt cited in the report is around 375 billion rupees with several government officials putting the figure at around 450 billion rupees. Differences in estimates are due to the challenge faced by various ministries/government departments in evaluating exactly how much the circular debt is.
In this context, it is relevant to note that the Letter of Intent (LoI) submitted by Pakistan in November 2008 to the International Monetary Fund (IMF), a prerequisite for the approval of the 7.6 billion dollar Stand-By Arrangement by the Fund's Board of Directors, explicitly committed to the preparation of a plan by end-March 2009 to eliminate the inter-corporate circular debt within the then fiscal deficit target - a plan that the LoI committed would include the identification of all debts owed and due among the corporations, duly reconciled, the determination of the validity of the claims and a schedule by which respective entities would discharge their liabilities to each other. This is obviously not being undertaken which explains why different figures are being quoted by different sources. This is a serious lapse and indicates that while the circular debt is widely acknowledged as the reason for loadshedding yet its extent in any given time period is simply not quantified.
Be that as it may, the government released 82 billion rupees of term finance certificates (TFCs) on 11th September this year, a policy to retire the debt that has been periodically employed since 2009. However, what is significant is that issuing TFCs has not only been fraught with the use of strong arm tactics by the government against banks who complain that they are already too exposed to the energy sector debt but has also not yielded the long-term objective of circular debt elimination. And the reason is that the impact of the issuance of TFCs would remain for limited duration until and unless steps are taken to reform the energy sector.
The Ministry of Water and Power is presently at odds with the Ministry of Finance as well as the Ministry of Petroleum and Natural Resources for periodically requesting subsidies to enable Pakistan State Oil to pay for critical fuel imports designed to reduce loadshedding in the aftermath of violent street protests. The two ministries maintain that until and unless the Ministry of Water and Power seeks to reduce line and transmission losses and begins disconnecting all those private and public sector entities that are not clearing their bills extending subsidies would be throwing good money after bad. The Ministry of Water and Power in turn argues that disconnecting electricity supply from defaulters is fraught with danger as staff routinely gets attacked and suggests that the Ministry of Finance must cut the amount of default at source with respect to public sector entities. This argument has been ongoing for a number of years and it remains unresolved.
What the three relevant ministries need to do is to revisit their economic priorities and weigh it against political considerations. At present, Finance is budgeting an amount for subsidies to the energy sector that is dramatically revised upward by the end of the year. Last year as a case in point reveals that a total of 147 billion rupees was budgeted as subsidy for Wapda/Pepco and KESC while revised estimates were 464 billion rupees, an amount more than three times what was budgeted. This year a total of 199 billion rupees has been budgeted as subsidy and analysts reckon this would be again exceeded by at least three times the amount based on current trends. What this does to the fiscal target is evident and the resulting rising local and foreign debt, higher inflation, lower productivity and rising unemployment are just some of the negative fallouts of the government's continued failure to reform the power sector.
To conclude, it is evident by now that the Ministry of Water and Power does not have the capacity to deal with the circular debt issue. It would require support from Finance as well as law enforcement agencies. However, it must at the same time focus on improving its own governance and not allow solely political considerations to determine its plan of action.