Energy Crisis:

Circular debt, looming defaults - An Extract:

"At the heart of problem is non-payment of arrears by public sector companies and government entities. The receivables of Pakistan Electric Power Company (Pepco) and its allied power companies have gone beyond Rs150 billion. Karachi Electric Supply Company (Kesc) has been holding over Rs56 billion payments to Pepco while arrears payable by Federally Administered Tribal Areas have gone beyond Rs75 billion as of July 31. The federal government, provinces, AJK and some public sector corporations together owe another Rs18 billion to electricity distribution companies.

In return, the Pepco and Kesc have accumulated payables of about Rs100 billion. Of this, Pepco has to pay about Rs64 billion to IPPs, limiting their capacity to purchase fuel oil and hence run on less than half of their capacity. The Pepco also has to pay about Rs10 billion and Rs8 billion each to oil and gas companies respectively. The problem is that unless the public sector clears electricity bills of distribution companies, they would not be able to release finances to the IPPs and oil and gas companies.

On top of that is the government’s inability to clear over Rs84 billion dues to the oil companies and refineries on account of price differential claims.

The PDC amount might have been much higher but the burden has been replaced with even more expensive borrowing from the commercial banks. So far, the government has paid about Rs50 billion to the oil companies and refineries by arranging syndicated loans from the market. PSO has over Rs25 billion of receivables from Pepco and IPPs.

Since, the government has not been able to liquidate petroleum differential claims (PDCs), the oil marketing firms have also informed the government about their inability to make payments to the oil refineries. This is despite the fact that oil marketing companies have reported 20 per cent higher fuel consumption during the current month.

“This is the re-emergence of the energy sector inter-corporate debt that we used to have in the early 1990s. The situation is even worse today”, said a senior official in the ministry of finance dealing with the chronic problem.

The situation is such that the energy sector crisis could worsen in the short-run in the kind of disruption in oil supplies and much higher scale of load shedding at least for another year. In the longer run, the budget deficit may go beyond eight per cent of GDP by end of current year.

Comment:

Above information is correct. Rather than previously thought, the energy crisis is not because of shortage of installed power generating capacity due to growth in demand (Pakistan had excess generating capacity till a few years ago and WAPDA needed to make guaranteed capacity payments to IPPs without buying any electricity at many occasions), but solely due to the fact that the promised price differential claims to the Oil Marketing Companies (to keep the petroleum prices artificially low) were withheld since the past two years.

These claims had previously been paid through direct central bank borrowing, which is very inflationary, and later began to be withheld when inflation started to spiral. This resulted in the power generation companies cutting down on production since these just don't have the funds to purchase furnace oil.

Instead of direct central bank borrowing to pay for subsidies, any sensible Government policy would have widened the direct taxes base - and introduced Capital Gains on speculative investments including real estate and equity markets, currently completely tax free. That would not have burdened the poor with rampaging kitchen-items inflation plus the now sharply escalating energy costs.

There's little the present Government can do, other than hike fuel prices and other existing revenue areas drastically to be able to clear arrears and get the full generating capacity on the grids again - and there will not be any load-shedding.

But can they do it? The social consequences can be politically disastrous, other than placing even electricity and transport out of reach of most consumers.

The other way is to simply go back to IMF. The 'Kashkol' which was claimed to have been broken in 2005 - accompanied with all its fiscal condionalities precluding any further allocations to developmental budgets till the country is again out of the IMF Balance of Payment Support facility.

I suspect this will be the choice - within next three months.