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More steps needed: Tackling circular debt

Published Jun 29, 2013 06:21am

DAYS before the curtain is due to drop on one of the most profligate fiscal years of our history, the newly inducted government is ready to utilise a jaw-dropping Rs326bn to retire a large chunk of the circular debt. The amount will add another percentage and a half to the country’s fiscal deficit, expressed as a proportion of GDP. Once completed, this will be the largest single retirement of the circular debt ever attempted, with at least two other examples from the past of similar efforts to douse the problem in a single move. In both cases, the circular debt resurfaced within six months.

Debate has continued over the structural reasons behind why the debt is proving so stubbornly resilient to eradicate. One view says the tariff itself is flawed, where the cost of generation averages out to Rs14 per unit (due mainly to our reliance on pricey oil imports) but the cost at which the unit is sold averages to Rs9. Another view puts emphasis on efficiencies, pointing out that transmission and distribution losses are the root cause. In the past proposals have been considered to pass the cost of the circular debt — such as the penal interest rates the power producers charge to the government for late payments — onto consumers as a special ‘surcharge’ on their power bills. Other proposals have sought a raise in the tariff, even though an almost 75pc hike in power tariffs since 2008 did little to eliminate the debt, since the cost of generation keeps climbing with every tariff increase.

This is the first time we are hearing of large-scale structural changes to be brought about in the aftermath of a massive payout by the government. Given the amount being disbursed, it is only fair for the government to seek a relaxation in the terms of the power producers. But it’s difficult to escape the impression that more needs to be done by the private sector in return. Capacity charges should be scrutinised again and technical audits conducted to ensure the power producers are properly stating their efficiencies. New legislation should be drafted immediately for a revamped and strengthened regulator empowered to play the role of referee and not act like a timid tariff-setting body. The first steps are encouraging, but if they are not followed up by equally strong measures to provide oversight to the power sector — public and private — it is reasonably feared that like before, the circular debt will resurface all over again.