The circular debt enigma
The relentless rise of power sector circular debt to nearly Rs1.7 trillion in the first quarter of the current fiscal year is a glaring alarm that stopgap financial measures are failing to cure the sector's diseased core. The Rs79 billion surge from July to September this year reflects the persistent drain that circular debt places on the national economy, demanding urgent and substantial reforms beyond short-term debt shuffling.
The Power Division attributes the recent increase to familiar demons, namely inefficiencies in power distribution companies (discos) and seasonal factors affecting bill collection. A deeper look at recent government reports and data reveals that without Rs198 billion in additional subsidies and prior-year recoveries, the debt would have ballooned by an additional Rs276 billion, driven by interest costs, pending generation expenses and widespread non-recovery of bills. The problem is further compounded by Rs229 billion in receivables from K-Electric.
A major headache for the government has been its inability to address factors that keep adding to the debt. In late September, the government signed a Rs1.225 trillion financing deal with a consortium of 18 commercial banks to permanently retire a portion of the legacy debt, using surcharges already on people's power bills. However, while the government may claim that it is thus erasing debt without increasing bills, this is only true within a narrow definition, because bill-paying citizens are already paying more than they should in the form of various line-loss and debt-related tariffs and surcharges.
Meanwhile, new debt continues to be added because the government still can't address line losses or inefficiencies in the management of discos, or sweetheart contracts handed out to many power producers.
A permanent solution for the debt requires more competition in the electricity marketplace and offloading discos to private parties, while ensuring effective regulation. Unfortunately, this remains wishful thinking.