Note on Circular Debt and Water Issue

Note on Circular Debt and Water Issue

The causes and impacts of power sector circular debt in Pakistan

Primary causes of circular debt: (First page of Executive Summary)

1. Poor governance

2. Delays in tariff determination

3. Fuel price methodology

4. Poor revenue collection

5. Delayed and incomplete payments by Ministry of Finance

6. Prolonged stays on fuel price adjustment

7. Transmission and distribution losses

Secondary causes of circular debt: (Second page of Executive Summary)

1. Need for improvement of thermal efficiency of GENCOs and NEPRA to set tariff on actual vs. estimated heat rates.

2. Inadequate budgeting of the TDS

3. Unfavorable generation mix due to the GOPs fuel allocation policy

4. Non-commercial/non-professional approach to load shedding

5. Non-improvement of tariff terms

6. GOPs neglect in promoting demand side management, energy efficiency and renewable energy resources

7. Need to settle payment arrears

Recommendations: (Third, Fourth and Fifth page of Executive Summary)

To resolve these problems, the GOP needs to achieve two tasks:

1. Remove circular debts from the books of energy companies. Reallocate it in consumer tariff or place a tax on the consumer to recovery over time.

2. Undertake specific programs to improve governance and performance

Recommendation to achieve point number 2 above:

Role of GOP

a. GOP to define its role as a policy builder allowing corporatization for proven financially sound entities

b. GOP needs to support a more competitive market

c. Tariff and subsidy disputes between the provincial governments and CPPA and the DISCOs need to be resolved either by arbitration or negotiation

d. Legislation declaring electricity theft punishable crime

e. Selection criteria and methodology of selecting DISCOs BODs to be improved

f. Eliminate uniform tariff and gradually