There have been fewer terms used more than the inter-corporate circular debt in the past couple of years in Pakistan. The simplest way to describe the phenomenon is a debt spiral that results from non-payment of dues from the consumers either in form of electricity bills or subsidies - which travels through the entire energy sector supply chain mounting payables and receivables on the books of every player involved.
In other words, as each entity in the chain of payments is unable to meet its obligations towards the next, it limits the ability of the recipient to in turn, meet its commitments.
WHAT CAUSES CIRCULAR DEBT?
THE NON-PAYING CONSUMERS AND SUBSIDY
Simply put, circular debt persists due to 'inefficiencies' in the form of non-payment by consumers as well as non-payment of subsidies. Digging deeper, a major cause is the inefficient policymaking which often leads to a huge differential in electricity generation cost and the power tariffs. The government due to its tight fiscal position often ends up not paying the dues to the power distribution companies, which means the discos are not able to meet the generation cost through tariffs alone.
Another reason is discos' own inability to collect the dues from a wide range of consumers, of which, government remains the biggest defaulter. The inefficient billing collection mechanism creates more vacuum and widens the tariff and production cost differential.
The matters worsen because of the inefficiency of power producers which witness huge energy losses in transmission and distribution. Line losses are a big component of the energy wasted and this is mainly caused by the use of old and ill-maintained infrastructure. But an even bigger problem is that of power theft, the responsibility of which rests with the law enforcing agencies. Needless to say, these factors combine to make life more difficult for the power discos and the debt spiral worsens.
THE FUEL SUPPLIERS' WOES
Next in line of the sufferers are fuel suppliers - which in this case are Pakistan State Oil (PSO), Sui Southern Gas Company (SSGC), Sui Northern Gas Company (SNGPL), Attock Petroleum Limited (APL) and other smaller players. The relievable cycle stretches as the power companies on account of non-payment form their consumers delay their payments to the fuel suppliers leading not only to a sharp rise in the receivables but also in delays in fuel supplies resulting in extended power shortages throughout the country.
THE REFINERS JOIN IN
The oil marketing companies are left with no choice but to pass on the burden further down the supply chain, delaying payments to refineries. The refineries face a tough task and resultantly often operate well below the optimum efficiency level. This creates more pressure on the government as the loss in refineries' production has to be met with more imports- putting further strain on the import bill.
E&P: THE EVENTUAL SUFFERERS
The exploration and production companies (E&P) are at a disadvantage because the refiners hold back on payments to them whenever the latter are faced with liquidity concerns. These results in a decline in the core activities of the E&P companies, that is drilling and exploration - causing acute shortage of gas and oil - hence, leading to more import requirements. Moreover, the mounting receivables also mean, lesser dividends - which means lower revenues for the government which has huge stakes in the E&P firms.
THE WAY OUT?
There are no short term fixes to the problem. Massive energy sector reforms need to be implemented. There is no dearth of experts and studies on the issue however the vital and as yet missing link has been political will.
For starters, the subsidy needs to go and for myriad reasons. The pace at which the government has been doling out funds for energy subsidies is not sustainable, nor is it desirable because blanket support is inefficient and ineffective in assisting those who deserve this support the most.
Secondly, the infrastructure needs to improve, which will require significant investments. This may require privatisation of the discos as well as further sale of government stakes in companies in the power sector because the government's own ability to finance such up-gradation is severely limited, especially in contemporary times.
The country's law enforcers must take strict actions against defaults and others involved in power theft. Efforts must be stepped up to change the growing culture of energy theft. Given the fact that energy tariffs will likely remain on the rise in coming years; the government will have to stay focussed on curbing power theft and the avoidance of dues.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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