A REPORT from the finance ministry to the IMF details the increase in the circular debt in the three months till June of this year, and the picture is hardly inspiring.

The power sector is defying all efforts to cap its accumulation of debt. Even though losses in the year 2014-2015 remained constant, at 18.7pc according to the report, collections declined by 1pc.

The circular debt increased during this time, despite tariff increases applied during the year, by almost 12pc in just the three months ending June.

Also read: Power sector circular debt rises to Rs313bn

According to this report, the circular debt now stands at Rs648bn, up by Rs33bn in merely three months.

This may not be a stellar increase by standards of the recent past, but the fact that it comes after high-profile efforts to cap the circular debt, to audit its details, to address it through ramped-up recovery efforts and tariff hikes, it is a quite a disappointing turnout.

The circular debt is being fed by a number of factors, the report notes: the stock of past amounts, disputed amounts with the IPPs, non-recovery by distribution companies as well as penalties by the regulator for failure to meet performance targets, arrears on subsidy payments, debt service obligations and court stay orders on surcharges.

The fact that almost three years into its term the government is still struggling to control these challenges shows that the problem is systemic, and that nothing short of deep-rooted reform of the incentives that permeate the power sector entities will be enough. The scheduled privatisations for this year may not be enough.

A larger multiyear tariff framework will be required, and much of the space for tariff increases has already been taken up by surcharges to help pay for the costs of carrying the circular debt.

The government needs to ramp up its efforts to address the systemic roots of the problem rather than become bogged down in managing the day-to-day consequences that rise out of the myriad dysfunctions that plague the power sector.

Published in Dawn, October 14th, 2015

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