Circular debt and electricity theft | Political economics


Jhe electricity sector is the Achilles’ heel of our economy. Our capacity to generate electricity is greater than our needs, but we resort to load shedding. Our electricity prices are the highest in the region, but the sector is mired in huge losses.

The mismanagement is evident — from transmission to distribution and from billing to bill collection. The government does not accept criticism. Its economic managers act as if they were the only ones who knew how to get this country out of trouble. After more than three years of autocratic rule, the country’s economy is in dire straits, worse than it has ever been in our history.

Inefficient and incompetent management in the electricity sector has resulted in huge circular debt. Circular debt refers to the debt that prevails between different government departments over electricity usage charges. The National Transmission and Dispatch Company (NTDC) supplies electricity to all government departments and the Karachi Electricity Supply Corporation, but these do not pay regularly or promptly for the electricity they use.

The NTDC, in turn, must pay the various Independent Power Producers (IPPs) from which it purchases power; but since he does not receive his money, he therefore cannot pay the PPIs. The IPPs, in turn, have to pay the oil companies to buy fuel that they cannot afford. It is therefore a quasi-circle of indebtedness from which IPP electricity production suffers.

The way it works is as follows: electricity generators sell electricity to distributors who are unable to collect full payment from electricity users. The distributors are then unable to fully pay the producers, who do not fully pay the fuel suppliers. Fuel suppliers stop supplying fuel (heating oil, etc), resulting in lower power generation and widespread load shedding.

Circular debt, which is responsible for the long hours of power cuts, is also intimately linked to the government’s financial difficulties. Despite frequent increases in electricity prices, the government borrowed from banks to make partial payments to electricity generators to delay a further increase in electricity tariffs. This is a wrong approach. Instead of raising the tariff, the state must eliminate corruption from the system.

According to the World Bank, the global average transmission and distribution loss is 8%. Pakistan’s power sector has long faced unprecedented challenges in this regard. It seems stuck in a bad balance characterized by expensive energy production, overloaded infrastructures, high transmission and distribution losses, extraordinary load shedding and growing circular debt.

Despite frequent increases in electricity prices, the government borrowed from banks to make partial payments to electricity generators to delay a further increase in electricity tariffs. This is a wrong approach.

The U.S. Energy Information Administration (EIA) estimates that electrical transmission and distribution (T&D) losses accounted for approximately 5% of electricity transmitted and distributed in the United States in 2016-2020.

No serious effort has been made by successive governments to reduce circular debt by making the system efficient and transparent. Attempts have been made at the level of the electricity distribution companies, but they have failed because, with a few exceptions, the entire distribution chain is involved in the complicity of theft against a certain rent.

This income is distributed from bottom to top in each power zone. Upon taking office, the current government took the issue seriously for some time. The strategy he adopted seemed to have rich dividends as the theft was effectively controlled and the circular accumulation of debts in the power system increased from Rs 30 billion per month to Rs 12 billion per month.

The government encouraged the bureaucracy to bring corrupt power sector officials to justice. The strategy was quickly successful beyond expectations and the government declared that the circular accumulation of debt would be reduced to zero by December 2020.

The campaign against electricity theft was led by the Secretary for Water and Electricity who had the full support of the Minister, Omar Ayub. He said the circular accumulation of debts had diminished because many electricity thieves had been arrested and officers complicit in the theft had been fired and punished.

Non-commissioned officers (SDOs) were warned that any leniency towards the thieves would result in their removal from service.

In many cases, power thieves have resisted detection raids. The determination of the Ministry of Water and Energy was tested by an influential landowner in Sindh. Its employees caught the SDO photographing a tampered meter. They took him inside the house and beat him. The case was brought before the higher authorities.

The SDO was scared and did not want to take action against this influential consumer. The relevant police station also refused to register the FIR. The ministry contacted the Inspector General of Sindh Police, but still failed to register the FIR. The Chief Minister was informed and the IG was summoned to Islamabad. The matter was also brought to the attention of the Prime Minister; finally, the FIR was recorded.

There was a clear message that the government was serious. Many private sector entrepreneurs have also been apprehended in Sindh, Punjab and Khyber Pakhtunkhwa. Theft thus began to recede, as did the circular accumulation of debt. But the operation to eliminate corruption could not be sustained. Some of the officers insisting on merit were dismissed, and requests from influential people for the assignment of friendly officers were granted.

The circular accumulation of debt then began to rise again. Today, it is being built at more than double the rate at which the previous government started. An excellent initiative has fizzled out. At some point in the process, the secretary was transferred.

Circular debt and the electricity crisis are linked. These problems can only be solved if all stakeholders – consumers, power companies, distribution companies and government – agree on comprehensive measures.

The problem of intercompany circular debt has become chronic. This has affected the electricity generation capacity available in the country. It stems in part from the failure of several public sector business entities, including Pakistan Railways, Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and government departments, to pay their electricity bills. Unpaid electricity charges to private sector consumers are even higher than unpaid electricity bills from the public sector.

The government, instead of addressing the root cause of circular debt, resorted to ad hoc measures to solve the problem. These measures include borrowing billions of rupees from commercial banks to make partial payments.

The writer is a great reporter

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