Mammoth on the Loose!

In the budget speech for FY 2013-14 the newly elected Finance Minister had promised to resolve the circular debt crisis within sixty days. The first of the series of the installments, worth Rs. 326 billion to resolve the circular debt, was released after eighteen days of the promise. This would significantly reduce the rampant load shedding to bring relief to people.

Circular debt is defined as accumulation of receivables for entities all across the power supply chain. Central Purchasing Power Authority (CPPA) is responsible for procuring electricity from the generation companies on behalf the Distribution Companies (DISCOs) before it is provided to the consumers. The problem of circular debt emerges when one entity’s amount receivable becomes a debt for another. So if the DISCOs are owed a certain amount it will appear as amount receivable in its accounts which it may or may not be able to recover. Non-recovery poses an immediate issue as it becomes a bottle neck in the entire payment system. With insufficient cash at DISCO’s disposal to give to CPPA, the latter then becomes indebted to the generation companies. Subsequently the generation companies owe money to their fuel suppliers which are unable to open up letter of credit to import fuel well in time. This clogged system then leads to increase in load shedding as the generation companies, with inadequate fuel supply and insufficient cash to procure more, do not operate at their full capacity. Underutilization of capacity results in unusual load shedding.

The delays in the system have led to the buildup of the circular debt reaching Rs. 872.41 billion by the end of FY 2012 and one off payments would not be a long term solution to resolve the crisis. The government’s perception of the problem is focused around its policy to subsidize the power sector whereby consumers are charged less than what it costs to provide them electricity. The difference between the actual cost and what the consumers pay as tariffs is then paid to the DISCOs as subsidies. The policy to subsidize in itself would not be problematic if these were provided sufficiently and that too well in time. Clearly, this has not been happening. Even if we leave the issue of insufficient subsidies aside there are several other ways in which the circular debt can still arise. A recent report by Planning and Development Commission of Pakistan and USAID teases out the underlying causes of the circular debt and provides useful insights for formulating targeted policies to solve the ongoing crisis.

Amongst the contributing factors, one aspect is the inability of the distribution companies to collect revenues from the private consumers which alone accounts for nearly 197 billion of the circular debt. Power theft, political interference and absence of accountability mechanisms in the DISCOs are to blame. This is to say that in the absence of appropriate mechanisms and infrastructure to prevent power theft there is little room for the distribution companies to capture full revenues from consumers. Now who is it amongst the private consumers who resorts to most pilferage, is something to be investigated. Appropriate steps can then be taken to curb this practice and this is something doable. A case in point is Andhra Pradesh State Electricity Board in India which had suffered massive inefficiencies because of the power theft but effective enforcement of the antitheft laws completely turned the tables around. The collection rates went up from 42% to 98% in just a matter of four years. One doesn’t need to go that far. Karachi Electric Supply Company (KESC) had faced massive pilferage till 2009 because one third of the electricity went unpaid. As a corrective measure, KESC started to disconnect areas with low collection rates whereas areas with high collection rates were preferentially treated with little or no power cuts.

To sum up, power theft and low collection rates by the distribution companies is just one aspect of a broader story about the circular debt. The need is for the government to address each of the underlying causes of the circular debt and devise a clear future strategy. Only then we would be able to capture mammoth of power crisis on the loose.