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ISLAMABAD: The circular debt has increased to Rs 537 billion in 2012 from Rs 144 billion in 2008, reflecting an increase of 272 percent during the last five year largely due to the previous government's inability to tackle the problem. According to an official report of the Planning Commission, the stock of power sector debt was Rs 144.99 billion in 2008, which increased to Rs 161 billion in 2009, Rs 235 billion in 2010, Rs 365 billion in 2011 and Rs 537 billion in 2012.
The report also revealed that the non-collection has increased to Rs 100 billion in 2012 from Rs52 billion in 2008. The report also listed factors for circular debt which included; (a) the difference between the actual cost of providing electricity in relation to revenues realised by the power distribution companies (Discos) from sales to customers plus subsidies; and (b) insufficient payments by the Discos to CPPA out of realised revenue as they give priority to their own cash flow needs.
This revenue shortfall flows through the entire energy supply chain, from electricity generators to fuel suppliers, refiners, and producers and consequently results in a shortage of fuel supply to the public sector thermal generating companies (Gencos).
As a result, there is a reduction in power generated by Independent Power Producers (IPPs) and an increase in loadshedding. The report cautioned that circular debt, if continued unabated, will increasingly constrain the availability of electricity and slow down economic growth.
The primary causes of circular debt include; (i) poor governance; (ii) delays in tariff determination by an inadequately empowered regulator compounded by interference and delay in notification by the Government of Pakistan (GOP); (iii) a fuel price methodology that delays infusion of cash to the power sector; (iv) poor revenue collection by the DISCOs (v) delayed and incomplete payment by the Ministry of Finance (MOF) on Tariff Differential Subsidy (TDS) and Karachi Electric Supply Company (KESC) contract payments. The report also stated that prolonged stays on fuel price adjustments (FPAs) granted by the courts, transmission and distribution (T&D) losses and theft are also causes of circular debt.
The federal government retains the authority for approving customer tariffs, but is influenced by a legacy system that supported a single postage stamp rate for all consumers in each category across all DISCOs. The government is not implementing the differential tariffs determined by the regulator for each DISCO, which often overshadows commercial decision-making. This results in conditions that contribute to circular debt.
Several secondary causes to circular debt have also been identified which included the need to improve the thermal efficiency of the GENCOs and for NEPRA to set tariffs based on actual versus estimated heat rates, inadequate budgeting of the tariff differential subsidy (TDS), which delays payment and increases financing costs and unfavourable generation mix of the GENCOs, due largely to the government fuel allocation policy that diverts natural gas to other non-economic uses.
The non-commercial and non-professional approach to loadshedding, non-improvement in tariff terms and conditions, impact of court decisions that have delayed payments to the DISCOs are also some of the secondary causes of circular debt. The late payment surcharges (LPS) paid by CPPA to the IPPs resulting from the inability of the DISCOs. There is a need to settle payment arrears (both disputed and undisputed) in a comprehensive manner.

Copyright Business Recorder, 2013

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