Circular debt remains a serious impediment to ensuring that the country's electricity generational capacity is fully utilised. Around two-thirds of Pakistan's total generational capacity of 18,500 MW - 12,500 MW - is generated from furnace oil and natural gas, provided electricity generating units including the Independent Power Producers (IPPs) based on them operate their full capacity.
These units are unable to generate electric power according to their capability because of a shortage of oil and gas. This shortage is primarily due to the circular debt, which in turn is responsible for massive loadshedding third year running. The circular debt consists of each sub-sector relying on oil and gas as a major input for generating electricity being unable or unwilling to pay for the fuel resulting in the circular debt.
The question is who are the main contributors to the circular debt? The government-owned Pakistan State Oil (PSO) is not receiving full payment against the fuel it imports and then supplies to various federal and provincial government entities, including the partially state-owned Pak-Arab Refinery Ltd (Parco). This accounts for periodic threats by PSO management that its financial position disallows it from opening an international tender for critical oil imports leading to the release of the minimum possible funds by the Ministry of Finance. Needless to add this is an ad hoc measure and has included borrowing of billions of rupees from commercial banks through various instruments including the Term Finance Certificates (TFCs) that allowed the government to partially retire the circular debt in an effort to bring it down to a manageable level. TFCs, by raising the government's indebtedness to levels considered unsustainable, in time have led to resistance by the banks to lend for this purpose.
The chain of circular debt also includes power producers like Pepco and Hubco and IPPs who are unable to clear their dues because they are not receiving full payment from their clients - the power distribution companies - who, in turn, are not being paid fully by the federal and provincial ministries/departments/autonomous entities. Inclusive in this list of defaulters are Pakistan Steel, Pakistan International Airlines and indeed Pakistan Railways.
Part of the circular debt is attributable to the tight fiscal position of the Ministry of Finance struggling to meet the budget deficit targets as agreed with the International Monetary Fund (IMF), which has necessitated non-release of committed budgetary funds to various ministries/departments. However a part of the failure to clear their bills is also attributable to these entities' inefficiencies and belief that as they are part of government they would not face cessation of supply/disconnection for continued non-payment.
And finally the failure of the government to allow full cost recovery in terms of setting the price of electricity has further burdened this sector. The foregoing highlights one obvious fact: the circular debt begins with a government-owned entity PSO as the largest creditor and ends with government-owned entities as the largest debtors (federal and provincial governments, as well as autonomous entities). In short, it is a government problem and effective measures are required to deal with it.
Two fresh proposals are at present doing the rounds. First, the government is considering securitising OGDC dividends (an idea opposed by the OGDC) up to 60 billion rupees that would then be used to retire some part of the circular debt. And second, oil refineries owe the government around 100 billion rupees as Petroleum Levy, which they have not paid due to the circular debt. PSO has urged the government to adjust this debt with the refineries. While these two proposals may lead to easing of the circular debt yet if the TFC experience is anything to go by these are at best short-term measures. The government must focus on power sector reforms to include full cost recovery and allow distribution companies to disconnect state-owned entities that do not pay their bills as well as revisit the current energy mix and make appropriate adjustments that would maximise use of indigenous fuels like coal.