Circular debt

According to a Business Recorder exclusive, receivables of Pakistan State Oil (PSO), already high due to overdue payments from the power sector have risen by 23 billion rupees - an amount payable by Sui Northern Gas Pipelines Ltd (SNGPL). The reason: failure to clear payments on re-gasified liquid natural gas (RLNG) with total purchases by SNGPL valued at 424.85 billion rupees with 401.75 billion rupees paid up by April this year. Around 10 billion rupees of the overdue amount, 43 percent, is owed by two independent power producers (IPPs) - Rousch Power and Fauji Kabirwala Power Company - reflecting the amount of their receivables from their consumers. The rest of the receivables are due from government power producers, fertilizer manufacturers, compressed natural gas stations, industries and other consumers.
The debilitating energy sector's circular debt begins with PSO, the state-run company empowered to import not only oil and products but also RLNG, and its sustained failure to ensure bill clearance by its clients who, in turn, are unable to ensure payment of their dues from their end consumers. This is the crux of the problem and it has recently surfaced in the gas sector and is subsequent to the then Abbasi-led Petroleum Ministry and Natural Resources signing a 15-year contract with Qatargas in February 2016. Without going into the merits or demerits of the contract or those made since with other foreign companies to procure RLNG, the fact of the matter is that the circular debt reflects massive inefficiencies in the system which are paid for by the common man in ever-rising tariff rates. This is a serious problem and must be promptly dealt with because this could well be the start of the circular debt in the gas sector that continues to cripple the capacity of the power sector to deliver capacity output; and this in spite of the significant rise in generation capacity.
At present, the energy sector's circular debt is estimated at 1.1 trillion rupees, about 514 billion rupees receivables sourced to within the sector, referred to as the flow, while the rest is parked in the Power Holding Private Limited (PHPL), referred to as the stock of debt on which the general public pays a surcharge for enabling the government to pay interest on past loans and no attempt has yet been made to pay off the actual debt incurred.
The Power Division cites a number of reasons for the escalation in the circular debt notably: (i) 2016-17 witnessed quarterly tariff adjustments not determined by the regulator which added a whopping 70 billion rupees and which could have been collected from the end consumers. However, the determination is now being undertaken and is in process of notification which would imply collection can begin in a year's time; (ii) less than regulatory benchmarked performance (both losses and recovery); (iii) non-realization of subsidies; (iv) delayed determination of tariff for end consumers (court stay orders, quarterly adjustments); and (v) non-payment by provincial governments.
To deal with the situation, the Economic Coordination Committee of the Cabinet, presided over by the Prime Minister, considered the following options: (i) borrowing 80 billion rupees through PHPL; (ii) payment of Rs 14 billion against AJ&K subsidies; (iii) payment on account of FATA GST amounting to Rs 14 billion; (iv) budgetary support from Government of Pakistan; (v) raising of Rs 50 billion through commercial financing against Discos balance sheets; and (vi) issuance of Term Finance Certificates to IPPs of appropriate value. All proposals unfortunately have a cost element for the end consumers.
Both the PPP-led coalition government and the PML-N administrations were made aware of the serious issue of circular debt debilitating the sector's ability to produce at capacity leading to horrendous hours of load shedding during the International Monetary Fund's programmes in 2008 and 2013; however, no concrete measures have been undertaken to-date to deal with the issue other than borrowing and parking the debt in PHPL and/or raising the tariffs for the end consumer. One can only hope that the parties contesting the 2018 elections identify the ways they plan to deal with this crisis.