THE independent power producers have been persuaded to withdraw their notices to call in their sovereign guarantees for now, and the government is busy trying to arrange the funds for another massive retirement of the circular debt.

The latter has once again reached historic highs near Rs580bn. This spiralling increase has happened in spite of huge increases in the power tariff.

This is the second time that the IPPs have been forced to call in their sovereign guarantees, which means pushing the government into paying up or being declared in sovereign default in the last two years.

Also read: Govt pays Rs15 billion to IPPs

The government has reportedly told the IPPs that so long as the notices are hanging over its head, its ability to raise funds to properly pay the receivables in the power sector will be hampered.

This shows the enormous position of weakness that the government finds itself in when dealing with private power producers.

Not that long ago, Nepra, the power regulator, had raised the prospect of auditing the accounts of the IPPs to determine if they were properly billing the government for sale of power. But this time round it appears all attempts to push back against the IPPs’ tough talk have been abandoned.

The State Bank has also said in its annual report that the circular debt “will be paid this fiscal year, or it could risk undermining the supply chain of power”, meaning we could land up right where we were in June 2013, with unending power outages across many parts of the country.

Certainly nobody wants to traverse that territory again, but we also cannot afford to keep letting the debt pile up then retire it at one go every two years. Somewhere something has to change fundamentally to make sure that this problem does not keep recurring, and endless tariff increases are not accomplishing the task at hand.

The fundamental changes needed are on the distribution side. This is where the bulk of the inefficiencies are piling up. The government’s efforts thus far have been focused on increasing generation, because improving distribution is a long and difficult road that includes fundamentally reforming the distribution companies and making them more responsive to the needs of the consumers and the prerogatives of the government.

The minister for water and power has emphasised the importance of the transmission and distribution side as well, saying that it is pointless to arrange for more electricity since our system cannot carry it.

The State Bank has also pointed in this direction, saying “the immediate solution lies in overhauling the existing transmission and distribution system on a war footing”, as well as bringing down the cost of generation.

Given the emphasis that the transmission and distribution inefficiencies have been receiving over the years, it is almost incomprehensible why there has been so little effort at reforming this.

Published in Dawn December 13th , 2014