The Shibli report on circular debt
Message of the Shibli report is that the whole energy system is supply driven
The writer is a senior economist. He can be contacted at pervez.tahir@tribune.com.pk
In terms of performance, the Senate of Pakistan has always done better than the lower house. Its latest contribution, the Report of the Special Committee on Circular Debt authored by Senator Shibli Faraz of the PTI, is by far the first attempt to bring in the public domain the components of circular debt, measures taken so far and what must be done to plug what has emerged as the third-biggest hole in the economy after the current account and fiscal deficits. A good part of it is parked outside the budget to make the size of the overall fiscal deficit somewhat palatable. Institutional failure, myopic governance and lack of political will to change have marked the mess called the energy sector. Countless reform efforts costing millions of dollars by the World Bank, the ADB and the IMF only added to the mess. Separation of generation and distribution, decentralisation and the autonomy of NEPRA and OGRA are in place in form only. In substance, the power ministry and Wapda reign supreme, with the finance ministry and the FBR all too ready to claim their pound of flesh. The net outcome is the ballooning circular debt, estimated by the report at a staggering Rs1.2 trillion. While the report was prepared largely during the political transition, it has come out at a time when the good senator is the Leader of the House and his party rules the roost in the country. The centrepiece of his party’s announced agenda is institutional and governance reform. It is hoped that the Shibli report will be the starting point for the Task Force on Energy Reform, although its composition does not inspire much confidence.
Discussed as an inter-corporate debt during the caretaker regime installed by president Farooq Leghari, and christened as circular debt by Hafiz Pasha in the second PML-N regime in 1995, the problem surfaced because of a shift from the low-cost hydro to high-cost thermal power and the government’s attempt to maintain a uniform price across sources as well as locations. This involved subsidisation in a regime that was already marred by abnormally high transmission and distribution losses. Theft, abetted and outright, was on top of the losses. The AJK, Fata and Balochistan also default for legal and other reasons. The subsidy, given in the name of the poor or as an incentive to industry or agriculture, became unbearable for the exchequer as the oil price boom started in 2007. Failure to pass on the increase fully and the inability to pay the resulting subsidy on time led to high levels of receivables for the distribution companies, which in turn undermined the ability of the generation companies to pay their fuel bills to entities such as the PSO and gas distribution companies. As bulk of the fuel is imported, these companies cannot afford avoid paying for long. The two regulators go their own separate ways in the determination of power tariff and the oil and gas prices. The ECC takes its own time in the approval and final notification of the changes. Being the most taxed sector of the economy, the notorious FBR practice of never giving back the refunds takes its own toll. Out of this rigmarole, one thing becomes quite clear: the system is biased against renewables.
Succinctly, the message of the Shibli report is that the whole energy system is supply driven. Conservation is dis-incentivised. It adds more and more costly supply to the ever decaying grid, ignoring the gridlock of a debilitating order of rent-seeking institutions. The peaks of circular debt are reminders of sustained inaction.
Published in The Express Tribune, October 5th, 2018.
Discussed as an inter-corporate debt during the caretaker regime installed by president Farooq Leghari, and christened as circular debt by Hafiz Pasha in the second PML-N regime in 1995, the problem surfaced because of a shift from the low-cost hydro to high-cost thermal power and the government’s attempt to maintain a uniform price across sources as well as locations. This involved subsidisation in a regime that was already marred by abnormally high transmission and distribution losses. Theft, abetted and outright, was on top of the losses. The AJK, Fata and Balochistan also default for legal and other reasons. The subsidy, given in the name of the poor or as an incentive to industry or agriculture, became unbearable for the exchequer as the oil price boom started in 2007. Failure to pass on the increase fully and the inability to pay the resulting subsidy on time led to high levels of receivables for the distribution companies, which in turn undermined the ability of the generation companies to pay their fuel bills to entities such as the PSO and gas distribution companies. As bulk of the fuel is imported, these companies cannot afford avoid paying for long. The two regulators go their own separate ways in the determination of power tariff and the oil and gas prices. The ECC takes its own time in the approval and final notification of the changes. Being the most taxed sector of the economy, the notorious FBR practice of never giving back the refunds takes its own toll. Out of this rigmarole, one thing becomes quite clear: the system is biased against renewables.
Succinctly, the message of the Shibli report is that the whole energy system is supply driven. Conservation is dis-incentivised. It adds more and more costly supply to the ever decaying grid, ignoring the gridlock of a debilitating order of rent-seeking institutions. The peaks of circular debt are reminders of sustained inaction.
Published in The Express Tribune, October 5th, 2018.