The menace of circular debt looms large in Pakistan, with consumers now bearing the brunt of costs exceeding Rs50 per unit. This pervasive issue demands our immediate attention as it not only threatens the country’s economic stability but also burdens honest consumers unfairly.
In July 2023, Govt of Pakistan decided to increase base electricity prices by up to Rs7.50/unit under the guise of controlling circular debt. However, this begs the question: will this incremental price hike effectively reduce the flow of circular debt? Regrettably, the answer is a resounding “Absolutely Not.” This conclusion is grounded in the persisting issues of theft, line losses, and inadequate bill collection.
We have listened to many ministers in the last 10 years explaining how raising electricity prices is the only option to control circular debt. Ironically, this remedy was attempted last year as well when the base tariff saw a Rs7 increase, yet circular debt swelled by approximately Rs400 billion in FY23.
The circular debt issue in Pakistan casts a long shadow over the nation’s economic prospects.
This raises a critical question: How can we address these pressing issues? To unravel the crux of the problem, let’s focus on two pivotal numbers: 1) total generation costs per unit and 2) the price paid by an honest consumer in Pakistan. For FY24, total generation costs are estimated at around Rs2.86 trillion, which equates to Rs20.6 per unit. This cost is quite competitive at 7.25 cents, and with optimal utilization of our power capacity, it can be further reduced to 6-6.5 cents. The real concern lies in the fact that how a unit that costs Rs20 to generate becomes as expensive as Rs35 by the time it reaches a Pakistani household or industry.
A staggering 20% of the electricity generated never reaches its intended destination due to line losses and theft. When the remaining 80% of bills are sent to consumers, an astonishing 10-12% of customers never pay their electricity bills. These two factors alone inflate the bills of honest, paying customers and contribute to the monster of circular debt. Both of these inefficiencies trace back to the Government of Pakistan, with distribution companies (DISCOs) such as Multan, Peshawar, Quetta, and Sukkur exhibiting alarmingly high losses. Moreover, it is disheartening to note that major defaulters in Pakistan’s power sector are, in fact, government organizations themselves. To compensate for interest costs on prior circular debt, a Rs3.3/unit PHL surcharge has been imposed, further augmenting the cost of electricity by 10-12%. In sum, an honest citizen of Pakistan is compelled to purchase electricity at a 30-40% higher cost due to cross subsidies and subpar performance of government organizations within our power sector.
To salvage our power sector and revive our economy, we must act swiftly on the following four fronts:
Reduce Distribution Company Losses: Privatization or outsourcing of DISCOs with performance-linked compensation should be a priority to curb losses. Attempts to reduce losses within the public sector have repeatedly failed, necessitating private sector involvement.
Implement a Multi-Buyer Model: For future power plants, the government should relinquish the burden of capacity payments. Power companies should be permitted to sell electricity in an open market, fostering competition and efficiency.
Incentivize Industrial Consumption: Encourage incremental industrial consumption at rates between 9-11 cents to diminish the seasonality of energy demand and maximize the utilization of installed power plants, thereby alleviating the burden of capacity payments.
Shift Gas Captive Power Plants to the National Grid: Pakistan is a gas deficit and an electricity surplus country. Despite that, around 200MMCFD gas captive power plants (approx 1000MW) are operating in the country. These should be shifted to national grid, all stakeholders have to play a role in this to create a win-win situation.
The circular debt issue in Pakistan casts a long shadow over the nation’s economic prospects. It is crucial to address the root causes of this crisis, reduce inefficiencies, and adopt proactive measures to ensure competitive energy prices. The fate of Pakistan’s economy and the well-being of its citizens depends on it.
The writer is an independent financial analyst holding BSC Economics degree from University of Warwick, UK. He tweets at @abdulrehman0292.