Inevitable circular debt?

The circular debt menace is back. Dar took the step of clearing the debt right at the onset of joining government and cleverly passed the major chunk in the previous government's last year- Rs322 billion (Rs194bn cash & Rs128bn PIB) were cleared on June 28, 2013 to book the toll in FY13 fiscal accounts. Another Rs138 billion were cleared on July 21, 2013; toll including dividends received was Rs480 billion in total.

The overdue trade debts of seven PPs (HUBCO, KAPCO, KOHE, NPL, NCPL, LPL and PKGP) were around Rs208 billion in June 2012, which were reduced to mere Rs44 billion in June 2013 after the clearance of Rs161 billion in cash on June 28, 2013. The number picked up fast to reach Rs149 billion in just one year.

Lady luck came home to rescue as oil prices started falling in FY15 to let the government arrest the rise of circular debt.Overdue trade debts of IPPs did not change at all in FY15 (Jun15: Rs148bn) and marginally increased to Rs159 billion by June 2016. In March 2017, the overdue increased to Rs182 billion. The government claims that it has virtually capped the circular debt by not letting overdue trade debts rise for the past 2.5 years; and they are half right.

But that is not the way to look at the circular debt or trade debts of IPPs. Due to lower energy prices, the revenues of IPPs fell sharply; and in turn receivables as percentage of revenues or overdue in terms of months of revenues is increasing. That is clogging the cash flows of IPPs and in essence real circular debt is on the rise.

Overdue receivables were 7.6 months of revenues in June 2012, which came down to 1.3 months after the one-time cash releases. It picked to 4.2 months in FY14 and reached 5.2 months in FY15. July 2014-June 2015 was the best period in terms of energy cash management. Why?

It is simply due to the lag of impact of oil prices' downward revision on domestic energy prices computed by NTDC. The government at larger scale took the benefit of low oil prices immediately, while the consumers were paying a relatively higher amount and revenues of IPPs remained high as well in the short run. There is no jugglery in the method; but since gas prices are revised usually twice a year so, overall energy cost takes time to adjust to global prices.

In FY16, domestic energy cost came down significantly and in turn IPPs' revenues trimmed. But the overdue receivables kept on increasing - overdue trade debts jumped to 8.8 months in June 2016 and were at 8.9 month in March 2017.

Oops, that is a sad reality as three-fourths of IPPs' revenues are stuck in the energy chain and the overdue months number is even higher than it was in June 2012. When the circular debt was cleared in 2013, it was claimed that the menace of circular debt is over once for all, and good governance would not let it grow again. Those claims were hollow without any understanding of the energy political economy.

Yes, inefficiencies in the system can be controlled; but what about the number of politically sensitive areas and political establishments that simply do not pay for the electricity they consume? The point is that distribution losses cannot be eliminated without political solutions. Yes, the transmission and generation losses can be controlled through better equipment and management.

Sadly, the inefficiencies in transmission and generation are dealt with on ad-hoc basis. If a good manager is at the top, the generation is high and system is better managed - that is what happened in the era of Younus Dagha. And right after the day he left, the energy load shedding is high again.

Earlier this week, in a cabinet committee meeting presided by the PM, the increasing load shedding issue was discussed. According to a news report, Dagha termed the prevalent situation as a management problem. He used to micro-manage distribution and generation companies and was doing firefighting.

But that should not be the way; the energy menace has to be dealt with in a systematic way. Why the circular debt is on rise? Why IPPs are cash-strapped? The problem is simple; the tariff structures are based on 100 percent recovery of Discos; but according to experts, at best, 92 percent recovery can be achieved. The remaining eight percent ought to result in delay in receivables and that is how circular debt is recreated.

The pace of growth in absolute terms is simply slow due to low energy prices. Now what are the chances of the debt to grow further? Last week, PM inaugurated 1320MW coal power plant and much more energy would be added by June 2018. A significant portion of new energy projects are RLNG-based and the cost of LNG is much higher than at what domestic gas is priced.

The point is that more energy would be consumed and the price of the mix would be increased a bit as well. With given losses ratio, the receivables of existing and upcoming power projects ought to increase.

The circular debt will grow further. Sooner or later, the debt has to be cleared. The cycle would keep on repeating, unless the inevitable losses become part of the tariff. That is not an optimal solution as why would a consumer in Lahore pay for losses in Sukkur, or why would an industrialist in Faisalabad pay for those who do not pay in Quetta?

Earlier, this column wrote about the charter of economy. If there is ever made one on energy, it should be mandatory for all the stakeholders to pay for their respective energy consumption.