Recent reports indicate that the circular energy debt that had reached manageable levels as far as flows were concerned (though the stock remained constant) in fiscal 2015 and 2016, have begun to rise again and, at present, have alarmingly reached 800 billion rupees. The reason for the decline in the circular debt in 2015 and 2016 are related to four factors notably: (i) historically low international oil prices; (ii) recoveries increased from 88 to 89 percent in 2014 to nearly 93 percent in the next two years; (iii) technical and distribution losses declined from 19 percent to 17.8 percent; and (iv) badly state-run generation companies showed a profit of 5.77 billion rupees in 2015-16 as opposed to a loss of 7.78 billion rupees during the first year in the tenure of the PML-N government. Apart from one external factor - low international oil prices - the other three factors are indicative of improved performance of the sector. So what has gone wrong that accounts for an escalation in the flow of circular debt?
Power Ministry officials claim that the rise in circular debt is accounted for by the as yet un-reconciled balance sheets, and insist that a gap of this size is normal for a 1.2 trillion annual business. However, this view has been challenged not only by international donor agencies but also by independent sector experts. The World Bank, in Pakistan at a Glance, uploaded on its website maintains "circular debt cleared earlier has piled up again nearly to its 2013 levels. There have been efforts to reduce the electricity regulator's independence". The International Monetary Fund in its Article IV Consultations report uploaded on its website in July 2017 supported the World Bank's assessment and argued that "ensuring the power sector's operational and financial soundness and supporting investor confidence require maintenance of a strong regulatory framework... swiftly resolving the ongoing litigation with the regulator on Discos benchmark distribution losses and recoveries is necessary to resume regular tariff setting."
The IMF in its report also noted that "accumulation of power sector arrears resumed in the first half of fiscal year 2016/17 (53 billion rupees) with the stock increasing to 374 billion rupees (about 1.2 percent of GDP). This reflected a widening of the system's operational deficit due to delays in passing through to end-consumers high generation tariffs and weaker bill collection by distribution companies, only in part compensated by the positive impact of a collection in Discos distribution losses and still low oil prices. Staff stressed the need to strengthen Discos performance and adjust end-consumer tariffs to reflect higher input costs, also in view of upcoming increases in generation capacity."
There are two additional disturbing elements associated with Pakistan's energy sector. First, that the agreed tariffs for several ongoing projects are higher than existing rates (including those that are under the umbrella of the China Pakistan Economic Corridor given the high rate of borrowing for investment by the Chinese private sector) and that, as and when they are completed, supply would exceed demand with the government negotiating the purchase of the entire capacity rather than what it actually purchases - a condition that would imply higher cost for end users. Given these concerns, it is little wonder that the IMF report notes that its staff "stressed that ensuring transparency and managing risks associated with new power generation projects will be the key." And, secondly, not enough focus is on enhancing the transmission capacity which was around 16,500MW at last count - or less than the potential generation capacity in 2013. One would hope that the government takes cognizance of these issues and initiates appropriate mitigating measures.
This newspaper fully supports the merger of Water and Power Ministry with the Petroleum Ministry by Prime Minister Shahid Khaqan Abbasi and one would hope that this would lead to improved energy sector management. A lot needs to be done to reverse the reemergence of serious operational, organizational and financial issues in the sector and the new Prime Minister needs to focus on resolving them on an emergent basis.