In its report on "Circular Debt" released on 26th March, 2013, the Planning Commission (PC) has identified poor governance, delays in tariff determination, fuel price methodology, poor revenue collection and delayed and incomplete payment by Finance Ministry as major causes of piling up of circular debt to Rs 872 billion by the end of the last fiscal year. This amount represents about four percent of the overall GDP, and if circular debt continued unabated, this will increasingly constrain the availability of electricity and slow down economic growth.
There was a failure of governance at all levels including the federal and provincial governments, corporate entities and the inadequately empowered regulator. The federal government, in particular, had failed to resolve the issue and stop future accumulation of debt. The authorities had also been reluctant to initiate improvements in the legal framework to curb theft of electricity, limit the recourse to courts for debtors and stop political interference in sector governance.
For resolving the circular debt crisis, PC has proposed that the government should remove the circular debt from the books of the energy sector entities and take responsibility for mismanagement of the power sector reforms. The report has suggested transferring of the power sector debt to the budget by reallocating it in consumer tariff or in the alternative levy a tax on the consumer.
The government should also undertake specific policies and programmes to improve the governance and performance of energy sector entities to decrease costs, increase cash flow, and ensure operational and financial integrity of the sector. Besides, current fuel cost reference and adjustment mechanisms need to be revamped to include a forward vision approach for fuel cost recovery.
We feel that the PC's report, based on an independent analysis funded by USAID, is quite comprehensive and has listed in detail the reasons of increasing circular debt as well as the proposals which could be adopted to resolve the issue. However, the real problem, in our view, was not the lack of awareness of the issue but the lack of capacity to turn around the power sector and the resistance of various stakeholders to either undertake or accept the necessary reform process.
In fact, nobody was ready to take difficult decisions and as a consequence the power sector had "gone from bad to worse". For instance, recovery of dues in the power sector, which was around 89 percent four years ago decreased to 84 percent. According to certain reliable sources, line losses were not even factually reported. These ranged between 25 and 26 percent but the government was still reporting them between 19 and 20 percent. There was a need to stop this haemorrhage as one percent loss in the power sector translated to Rs 17 billion, which had highly adverse repercussions for the budget and the growth rate.
The most distressing aspect is that various stakeholders including the power sector entities themselves had no aspirations for moving ahead and were generally happy to maintain the status quo. They just listen and sometimes also contribute to various reports but are not prepared to change their attitudes. Deputy Chairman Planning Commission (PC) Dr Nadeemul Haq while speaking at the launching ceremony of a report jointly prepared by PC and the United States Agency for International Development (USAID) admitted that the human involvement in the power sector maybe putting up great resistance to power sector reforms. This is the first time that the human element (workers) has been held responsible for failure to implement reforms. The question is what was Dr Haq referring to?
Wapda employs more than 150,000 workers represented by several powerful labour unions namely Pakistan Wapda Hydroelectric Central Labour Union (CBA) and Pegham Union. CBA in particular has launched several protests successfully in the past against streamlining the workforce, increasing tariffs and privatisation - three critical reform proposals that were agreed between the government of Pakistan and the International Monetary Fund in 2008 as conditions of the 7.6 billion dollar Stand-By Arrangement. Union activity has been suspended under executive orders in the past both during military rule as well as civilian government of Nawaz Sharif.
However, by failing to take the union leadership on board, power sector reforms remain unimplemented to this day. In this context it is relevant to note that during Musharraf's era the government inducted 30,000 to 35,000 junior commissioned officers and 250 officers into Wapda and suspended union activity for two years. Nevertheless power sector woes remained unresolved. It is also relevant to note that in May 2011 conflict between Karachi Electric Supply Corporation (Kesc) and three labour unions namely CBA, People's Labour Union and the Kasoti Labour Union erupted over the decision of Kesc management to retrench 4000 workers.
The supply of electricity to Kesc consumers was severely compromised till Kesc management was forced to succumb to union demands. Last year the CBA launched a protest against the government's decision to deal with Pegham Union instead of CBA. There is therefore an urgent need for the government to take the unions on board which would ensure that agreed reforms may be implemented.
Dr Haq however also refers to what he regards as flawed government hiring rules and regulations that bar it from hiring qualified sector specialists with the capacity to turn a utility around. He cites Raghuram Rajan who is currently the Chief Economic Advisor to the Government of India and former Chief Economist at the World Bank as an example - a man operating at a level where he would not apply for a post but wait to be approached for recruitment.
Dr Haq may bear reminding that the country's finance ministers for the past three years as well as during the long periods of military rule have been technocrats; and Dr Haq as the Deputy Chairman Planning Commission was also appointed by the government of Pakistan on the basis of his experience at the IMF. In addition while one can support recruitment of respected technocrats like Dr Rajan as an economic advisor he may not have the experience and skills necessary to successfully manage a behemoth like Wapda where numerous studies gathering dust in the Ministry of Water and Power have already identified the reforms as well as projects necessary in the power sector to meet the growing energy deficit.
Another misfortune is that the PC's report has been released at a time when the interim government is in place. It would obviously not like to delve into such issues but would concentrate mainly on the holding of fair elections. Also, the suggestion of PC that circular debt should be moved to the budget is also not very feasible because of very weak fiscal position of the country.
In all probability, the issue of circular debt would continue to be a huge albatross for the economy of the country unless and until the government at the helm is really serious about the matter and itself takes the bull by the horns. This would take great courage, integrity and sincerity of purpose. The previous government avoided difficult decisions and did not do anything to stem the rot. We can only pray that the next government is able to rise to the occasion and implement an agenda of reforms, which would gradually decrease the amount of circular debt and energise the presently faltering engine of growth.
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