The real tragedy

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The Finance Division has released its "Year Book 2011-12" which, besides citing heavy line losses, incomplete corporatisation, weak governance, costly fuel mix, and delays in bill payments, points to partial transfer of the tariffs determined by National Electric Power Regulation Authority (Nepra) as the real problem.

According to Business Recorder, well-informed sources in the Planning Commission (PC) revealed that, as per a report yet to be unveiled by the PC, power sector circular debt increased by 938 per cent in the last seven years (ie from Rs 84 billion in 2005 to Rs 872 billion by June 30, 2012).

This huge fiscal outlay was due to the unprecedented surge in the global oil prices and inability to pass its full impact via power tariffs. According to the Ministry of Water & Power, however, no more than Rs 400 billion of the circular debt is outstanding (ie Rs 472 billion have been paid by the taxpayers).

The Year Book 2011-12 states that in 2011-12 alone, power sector was provided Rs 464 billion in subsidies including Rs 412 billion to Pepco to fund the inter-disco tariff differentials (Rs 45 billion to KESC alone) and subsidy on account of unrecoverable tariff (primarily from consumers in Fata).

According to the Finance Division, oil price rise caused Pepco receivables to skyrocket, and accumulation of huge circular debt. The fact that in seven years Pakistan (its power consumers and its public debt financing banking sector) provided Rs 872 billion in the last seven years reflects a big strategic failure.

The Finance Ministry, however, claims that, overall, it injected Rs 1.4 trillion in the power sector in the last four and a half years but since subsidising power tariffs became the policy since early 2007, in the last seven years, the overall injection could be over Rs 2 trillion.

Blaming the oil price rise amounts to ignoring the government's failure (over the years) to reorient the power sector to the new ground realities, and the biggest contributor to this mess was the abject surrender by both Musharraf and PPP regimes to the opponents of the Kala Bagh Dam.

Neglecting the expansion of the country's hydro-electric base is an unpardonable sin because it was motivated purely by political and self-serving considerations - sustaining popularity in Sindh and KP, and benefiting cronies by letting them set-up oil-fired power generation units.

These policies led to ever-higher dependence on a power generation infrastructure that was vulnerable to changes in oil prices and the deceptive pricing practices of the power producing units, but especially because no attention was paid to increasing the domestic output of oil, gas, and coal.

The other crippling side-effect of pursuing this strategy was that, as the price of imported oil skyrocketed, supply of existing energy resources, especially natural gas, had to be rationed to the industrial sector, at a huge overall cost in terms of lower productivity, factory closures, and employee layoffs.

The PC is of the view that state-funded fuel subsidies led to state-determined [and politically motivated] allocation of fuel to various sectors of economy, which distorted the energy markets even more by escalating fuel shortages for the power generation sector.

According to the PC's forthcoming report, "Allocations, of course, are mainly based on political considerations rather than economic benefits. Subsidies are not allocated appropriately, and benefits extend to those beyond the targeted consumer sectors."

The fact that in 2011-12 alone Hesco, Sepco, Pesco and Qesco contributed a huge amount to the irretrievable circular debt manifests the politicisation of the issue. What worsens this situation delayed payment of power bills by the state offices and state-owned enterprises (PSEs) courtesy fiscal deficit.

PSEs are not paying their power bills despite the fact that the state supports them via equity injections, working capital loans, tax exemptions, and subsidies to contain their cash shortfalls and losses, besides state-guaranteed short- and long-term bank credit.

The burden of circular debt that the PSO now shares is preventing it from establishing letters of credit for importing oil to keep the transport and power sectors operative. That these sectors may now operate at a far lower level seems likely because the exchange reserves of the SBP too are sliding.

Last year, the government struggled to prevent the IPPs from calling the guarantee it had provided to secure IPPs' interests in case discos failed to pay IPP bills for supply of electricity. Such a possibility could crystallise yet again because power sector's circular debt is becoming unmanageable.

Improving even partially the operations of the power sector (containing even line losses) is more unlikely now courtesy the high indebtedness of the Gencos that discourages the investment needed to support improvement in their basic services, let alone their refurbishment.

The cumulative effect of not going for the right option - hydro- and coal-fired electricity for decades at a stretch, was bound to have consequences on the economy because, with its high rate of population increase, Pakistan's energy needs were bound to increase - a reality that has crystallised.

Power loadshedding is adversely impacting the economy. Under-utilisation of installed production capacities causes huge financial problems for the industrial sector leading to large-scale defaults on scheduled payments to banks and the eventual closure of such units.

Fiscal deficit compels state offices and SOEs to delay payment of power bills; troubled industrial sector does the same but for understandable reasons. Non-payment of power bills to the discos forces them to default on payments to Gencos, which keeps escalating the circular debt.

It is a vicious circle and oddly, bureaucrats limit their analysis to oil price rise, defective power pricing, late changes in its prices, line losses, etc, though, beginning the 1990s, the strategy of relying on private sector's (imported) oil-fired electricity was wrong.

Privatising the power sector wasn't the solution. Even if the power sector was privatised without any pre-conditions on the fuel it was to use, the impact of its biggest cost - fuel - shouldn't have been ignored. In fact, the bulk of the fuel should have been made available domestically.

Had a large increase in domestic oil and gas output been achieved, in spite of the tricks of the private sector operators the rise in electricity price couldn't prove as crippling as it is. Unless this expending gap is contained, power loadshedding simply cannot be eliminated.

While each successive regime can blame its predecessor for policy flaws the tight thing to do is to correct them swiftly instead of using them as tool for self-praise. The PPP regime did just that, with virtually zero addition to the output of oil and gas. That's the real tragedy.

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