Circular debt for dummies

April 23, 2010

KARACHI: There is only one thing “circular” about the circular debt that has wrapped itself round the energy crisis in Karachi:where it is taking us.

Other than that, strictly speaking, the phenomenon that is called circular debt is in fact a linear chain of receivables that connects at least four different categories of stakeholders in our power sector. But consider for a moment that none of this is new. For decades the normal state of affairs in our public sector enterprises has been one of delayed payments and disputed amounts.

And our first largescale power crisis took place in 1994, when the gap between electricity supply fell short of peak demand by almost 25 per cent, not far from where it is today. But if we have lived with “circular debt” and an endemic power crisis for all these years, what exactly makes it such a big deal today? The answer lies in a decision made back in 1994, a decision we are told helped lift us out of our power crisis back then.

The decision was called the Private Power Policy of 1994, and in essence it opened the door for the private sector to invest in power generation plants to sell electricity at pre-determined tariffs or rates to the Water and Power Development Authority (Wapda). For a while the policy appeared to work. By the year 2000, almost 16 different private power generation plants had been set up in Pakistan, and came to be known as the Independent Power Producers (IPPs). For a brief moment we became a power surplus country.

But underneath this abundance of electricity, a seismic change had taken place. Most of the electricity in our system ever since that year has been generated from oil, the most expensive fuel for power generation purposes that you can buy. By the year 2000, almost two-thirds of Wapda’s finances were being diverted to pay for this electricity from the IPPs. The new capacity that had lifted us out of the era of shortages was proving to be a devil’s bargain of sorts.

The way out of this rising cost spiral was to shift from fuel to natural gas. That would halve the cost of generation, approximately, and would be a cleaner option anyway. But our gas infrastructure could not keep pace with the speed with which demand was growing. After you have taken our admittedly abundant gas resources and divided them among the numerous claimants (fertiliser, vehicular, residential, industrial), there is precious little left for any other large-scale user. Cutting gas supplies to the fertiliser industry has had the unfortunate consequence of hitting farm incomes and driving up food prices.

(This is politically intolerable in a country where power grows upwards from the soil.) Cutting residential consumers means extinguishing stoves and heaters in urban Punjab. (This is tantamount to political suicide in a country whose raison d’etre is to gratify Punjabi urges.) Cutting ve h i c u l a r Compressed Natural Gas (CNG) supplies means snarled cities and frenzied media coverage of angry car owners. So what’s the path of least resistance when it comes to rationing gas allocations? Cut the power plants. And that brings you back to the cost spiral of oil. In 1994 we thought we had found a way out of the energy crisis by inviting private money into our power sector.

The lure of quick and easy electricity was enough for us. But now it is time to pay the piper. We have come full circle: a large and growing power deficit - just like the one in 1994 - and a growing pile of inter-corporate claims. And that is the only thing circular about this picture.



Juvaria Jafri | 13 years ago | Reply Circular debt is also partially responsible for the prevailing shortage as the string of receivables has on frequent occasions resulted in the non supply of furnace oil from oil marketing companies to IPPs. The outcome has been the (temporary)shut down of supply. As an issue, circular debt has a fairly straightforward solution; a cash injection to ensure that all the stakeholders have the requisite amount of working capital to ensure uninterrupted power production. Your gas argument is somewhat weak: There is after all, only a finite supply of gas in Pakistan. If it is to be used by power plants (and some plants do use it even presently)then other segments of the economy will not be able to use it. Admittedly there is room for re-allocation. CNG, mind you, benefits only car owners, and has no use whatsoever to motorcyclists or those you use public transport.But then again it only 10% of gas production is directed towards CNG. A more sustainable solution would utilize renewable sources including solar and wind power. It is also tragic that in the last decade or so there have been no significant contributions from hydel power.
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