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  • Mar 25th, 2017
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When the PML-N government assumed power, one of the major challenges it faced in the energy sector was a huge circular debt amounting to over Rs 500 billion. The debt had accumulated over the years due to the previous government's inability to raise the price of electricity charged from the consumers to match the production cost. Realising that the non-resolution of the debt could further worsen the energy crises, in July 2013 the government took a rather bold and unprecedented step of immediately clearing the accumulated debt without even going through the formality of mandatory pre-auditing of the claims. Through various steps such as gradually closing the gap between the cost and sale prices of electricity, cutting line losses, improving collection of bills and timely provision of subsidies, government ensured that the circular debt continued to stay under control for a while. Fortunately, the oil prices continued to slump and thus the cost of production also remained relatively low.

But alas, this situation could not continue. With the government's failure to privatise Discos, reign in Nepra and failure of the Finance Ministry to provide subsidies, the circular debt is rising to the same levels as it prevailed in 2013. Who is to blame for this resurgence of the debt? Is it the government, the regulator National Electric Power Regulatory Authority (Nepra), the power producers (IPPs) or the distribution companies (Discos)? Each one is passing the buck to the other. The Ministry of Water and Power blames the regulator Nepra for not correctly determining the tariff and thus adding Rs 150 billion to the burden. On their part, Nepra is blaming the DISCOS for their continued high transmission and distribution (T&D) losses and not achieving 100% recovery of their bills. In return, DISCOS blame Nepra for not being realistic and correctly determining the tariff; and also the Ministry of Finance for not meeting its obligation to pay the subsidy amount on timely basis.

As in 2013, once again the government seems to be in a fix. It has no way out then to look for ways and means to pay up and clear the debt. But it has to realise that unless some structural reforms are undertaken, the monster of circular debt will continue to appear again and again.

No doubt that there are many factors for making the sector fully sustainable, but even a cursory look would show that any major reforms will have to address two key issues: improving the efficiency of distribution companies and improving the working of Nepra.

With the government's track record with all nationalised industries, it is not likely that the performance of distribution companies could improve unless they are divested of government control. There is every likelihood that their privatisation could reduce the T&D losses to the same level as some developing countries such as the Philippines, Vietnam or Sri Lanka where they are around 10%. Therefore the government's top priority should be to privatise them as quickly as possible. Privatisation should not mean government keeping the management control as seemed to be the intention but to hand it over to the buyers as was done for K-Electric, PTCL and many banks.

Second, Nepra's performance has to be considerably improved. Nepra has to realise that it is not a political entity and does not need to play a popularity game. While the interests of consumers should be paramount, but other factors such as promoting investment and improving the financial health of power producers and distribution companies are equally important for long-term sustainability.

Nepra would have to adopt advanced concepts of tariff making. It should have ensured that the tariff structure is cost-reflective so that Discos could become viable corporate entities. Its option for applying distribution tariff framework across Pakistan is not viable and cannot be sustained on long-term basis. Nepra has to deal with the structural flaws in determining the tariff. This is one of the major barriers to attracting new investors in this sector.

It seems that Nepra is regressing even on the progress made earlier. A case in point is that of K-Electric, which was given a multi-year performance based tariff structures based on advice by leading international experts. This worked well and incentivized the company to bring in new investment. This helped bring operational efficiencies and higher quality of service. Earlier this week, Nepra cut K-Electric's multiyear tariff and at the same time, it asked the company to increase its level of new investment for the next 7 years. It will be naïve to expect K-Electric to bring in new investment when its tariff has been cut substantially. This untimely decision of Nepra is meant to throw spanners in K-Electric being sold to a new investor who could have further turned around this company. Unless the government is able to privatise distribution companies and make Nepra more professional, there is every likelihood that circular debts would continue as a long-term feature and may soon become unsustainable.



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