Mountain of debt

22 Oct 2020

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THE power sector’s outstanding debt, known as ‘circular debt’ in common parlance, is reaching new heights as the government gropes in the dark to find a solution to a problem that is becoming untenable. A new Nepra report estimates the debt to have increased by more than a third to Rs2,150bn in the last fiscal from Rs1,600bn a year ago. Although the power-sector regulator recognises in its State of the Industry 2020 report the “contribution” of the economic impact of the Covid-19 health crisis on consumers to the increase in debt last year, it does not mince words in highlighting the real issues of poor governance and mismanagement plaguing this sector and causing the accumulation of debt over the last one decade and a half. The Nepra report acknowledges that electricity theft had increased and more people had delayed or defaulted on payment of their bills owing to financial stress during the pandemic. But at the same time, it says that the government’s policies of raising tariffs and resorting to revenue-based blackouts (on high-loss feeders) are to blame for the increased power theft and defaults, which, in turn, are adding to circular debt liabilities. Instead, it advises power-sector policymakers to improve governance of distribution companies to check theft and recover bills to reduce the losses that are feeding into the debt.

It is sad to note that political expediency has kept successive governments from fixing the long-term problems of governance and inefficient management of state-owned distribution companies to stop further accumulation of circular debt. The circular debt challenge will continue to threaten the sustainability of the power sector as well as the fiscal stability of the country unless reforms are implemented immediately. Little progress has been made so far on power-sector reforms since 1990, when the government first adopted a road map to privatise public-sector power generation, transmission and distribution firms in order to create a competitive electricity market in the country. The process could not move ahead after the formation of Nepra to regulate the sector in the late 1990s and the sale of KESC in the mid-2000s. Several attempts have been made to develop an effective competitive electricity market in the country and numerous deadlines have been breached. Turkey had started working on its power-sector reforms at almost the same time. Thirty years later, it has developed a functional competitive market while we have yet to take off.

Published in Dawn, October 22nd, 2020