The circularity of circular debt

Updated September 05, 2017

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The power sector has been reeling under the impact of what we call circular debt since 2007- 2008.

Despite the passage of one decade, no redressal mechanism has been put in place at the policy, regulatory and implementation levels; highlighting institutional failure.

Resultantly, circular debt is growing in scope and density which, in turn, has threatened the integrity of the energy sector. Window dressing and adhocism are the tools adopted by all actors.

The first casualty in the entire episode is the lack of transparency. No financial and technical audits have been carried out with regards to payments received and paid by the power purchaser.

The transition of the power purchaser’s role from one public sector entity to the other without a legal and contractual trail has added to this non-transparency. The numbers of units that have been billed and paid by consumers are not required to be verified by independent sources, or subjected to regulatory checks.

There is almost no transparent probabilistic trend or comparative analysis that is analysing power plant generation, resource availability and transmission data at the relevant time to ensure checks and balances.

All these niceties have been taking place in a shroud of mystery as the Ministry of Water and Power and its allied entities — the transmission and distribution companies — are not susceptible to independent audit or oversight.

There is no legal definition of circular debt except that it is technically non-payment by the power purchaser for generated electricity.

This non-payment can be classified as owing to inefficiency and corruption prevalent in distribution companies, housed under the various heads of technical losses, distribution losses and theft.

The regulator does not allow losses beyond a certain percentage while the government, due to political reasons, does not pass on the full cost of generated tariff, providing subsidies to cover the differential. A subsidy that is not performance based further supports inefficiency and adds to the circular debt problem.

Low payments by the distribution companies result in low payments to the generators who in turn neglect paying their fuel suppliers exacerbating circular debt.

On their part, generators get paid even for electricity they have not generated. Unavailable private power plants are paid by the power purchaser due to a lack of transparency, regulatory oversight and third party audit or field inspection of the generation facility.

A very large quantum of money is paid in terms of deemed capacity payments which means that even though consumers do not receive the energy they are still required to pay as if the plant was available for generation. That is why most private power plants declare themselves available..

The procuring agencies, the Private Power and Infrastructure Board (PPIB) and Alternative Energy Development Board (AEDB), also continue to purchase power without competitive bidding.

On the one hand these boards are entering into contracts resulting in a capacity trap whereby consumers will be made to pay for energy which was never required in the first place.

Since these are unsolicited purchases, the price is not competitively determined and is not necessarily the lowest.

Further, power purchase agreements are drawn up for 20/30 years which induces structural rigidity and impediments to the creation of market and competitive prices.

Due to acts of omission and commission of various stakeholders, the circular debt has reached an alarming proportion of Rs800 billion in a period where international price of oil are at a historic low.

In a nutshell the story of the circular debt is a story of vested interests getting the better of the system and saddling taxpayers and consumers with their burden of inefficiency.

The writer is a barrister in the energy and corporate sector

Published in Dawn, The Business and Finance Weekly, September 5th, 2017