Some innovative ideas to resolve the crisis
According to the USAID report on the ‘Causes and Impacts of Power Sector Circular Debt in Pakistan in 2008’, the circular debt was Rs161.21 billion that increased to Rs235.65 billion in 2009. Similarly, circular debt in 2010 increased to Rs365.66 billion and in 2011, this amount swelled to Rs 537.53 billion. During the current fiscal year circular debt increased to Rs872.41 billion.
The report revealed that poor revenue collection from the distribution companies in 2012 added Rs86.90 billion into the circular debt while another Rs72 billion was added due to poor recoveries by HESCO, PESCO, SESCO and QESCO. The USAID report further stated that Rs197 billion were outstanding by private consumers under electricity bills, which was the major reason of current circular debt.
The key to resolving the electricity shortfall issue is the gap in payments to thermal power producers for the purchase of fuel. This happens due to the ever widening gap in payment collection and payment for oil/fuel required. The government has been borrowing money mostly from the domestic sources to fill this gap through various forms. These loans are hurtful to the overall economy and not just the power sector in multiple ways, leading to scarcity of private credit/funds for overall industry to grow.
Loans either in form of direct loans or term certificates are to be paid back in-time along with profit and interest. To payback we need the payments from the final consumer, which are to be collected after consumption and then directed back to DISCOs and then the power producers; who eventually pay this amount to the fuel suppliers or the banks. The collected amounts are not sufficient to cater for payment of both, which eventually leads to power cuts and more borrowing. At the end of calendar year 2012 these loans had surged to almost four to five percent of the GDP.
The payment cycle of the power sector is burdened by the ‘alien’ sharing partner – the loan provider. On the other hand it is impossible to run the thermal power sector without further loans.
Solution: Borrow this money directly from the consumer by giving it incentives and electricity. This may not resolve the issue overnight but it will contribute to smoothening things out.
How can we do this: This can be done through selling advance electricity units to industry and private consumers at lower per unit price. There may be a possibility where purchase of advance units by public sector may also be allowed. As most government-based organizations get their funding in proportion to their share in annual budgets, it becomes irrelevant whether they pay for the year’s utilities at the start of the financial year or at the end. This will also discourage the collection losses incurred to power distribution companies.
Consumers from both the commercial and industrial sector as well as private sector are already spending this money on buying generators and fuel. If load-shedding could be brought down the funds used by individuals and businesses to cater for the high costs of running small domestic and commercial generators will automatically divert to purchase of future units.
Incentive for the high power consumer: The discount on per unit rate is to be based on saving of financial cost by the government and power producers. The schedule discount is correlated to the number of units purchased. Higher number for comparatively longer term unit purchases shall be given higher discount. Another incentive to attract commercial and industrial users is to allow the future units purchased completely deductible from the taxable income of the organization as reinvestment. The income tax payable through electricity bills may also be exempted against the forward purchase units. In this manner the private sector will be more interested in purchase of maximum number of future power units as a cost cutting and tax saving tool.
A detailed study on the comparative effects of the collection through forward purchase and current methodology will unveil the actual monetary gains of the process. However, the financial cost reduction is already evident which is paid by the consumer as well as the producers.
Growth Opportunities: The same model can be replicated for domestic and non-commercial users with a few exemptions of course. The government is already trying to cut down power losses and default in the collection, the forward purchase will also contribute in better collection of these losses. The same tool can also be used in better collection by applying conditional purchase of power units forecasted in developing/ licensing/approvals of new business/ industry/housing schemes etc. A detailed sector-based study is required to determine the exact window for application.
The purchased units can be made transferable through a secured mechanism. This will allow specific interest in purchase and resale of units. However, the resale has to be guarded by strong regulations restricting any artificial inflation.
Factors relating to future power production can be applied in reverse to determine the power sale prices of the advance/ future units. The foreign currency conversion forecast and future hedging too will have to be studied.
The industry can benefit by reduction in the cost of production and better power supply. This will encourage the private sector to invest more and strengthen the economy as well as reduce inflation.
The writer can be reached at: [email protected]
Seems highly unrealistic with the catch line "if load shedding can be reduced" How?
I hope this solution will work, but let think about that if every one (assumption) purchase the future units, we have again the same problem, energy sector need money to generate the future units, if money from future units use for debt paying, how will generate units in future, this will come lot of panic, the investor (buyer of future units) will wants energy, but energy sector will not have capacity to generate it. at other side if money receive from future selling of units use to generate future units, the problem will still that what we do for circular debts.
let we think for the following solutions. we need to follow some steps.
1) very basic is need of cash in flow in energy sectors, your solution is selling future units is sound good. but i am not agree to resale/purchase of this units. for future units selling we need to follow the Teleocom industry strategy, prepaid electricity cards!, this will eliminate the debt at all!.
2) for debt collection we need to follow the collection plan, recover the every possible penny from direct consumers, giving him some relaxation in time. the time will not more then 9 months, (installment plan can be use, but not more then 9 installments). i hope this will work and 65 to 80% of debts from home users can be recover. for industries we definitely use the tax exemption incentive for payment of his liability.
3) a scenario being observed from 1990s is energy sector not increase his capacity with proportion to the demand of energy. thats why we face shortfall of energy. so, energy sector must make the investment plan to compete this shortfall.
4) now the time come for government to play his role, since the crisis begin, government did not ready to take the responsibility. this is the core responsibility of government to accept the failure in energy sectors and make the corrective actions, like increase investment in energy sector in coming budget.
i hope this will work if every one consider his responsibility and come to step forward.
appreciate your suggestions. for friends who see this as unrealistic thought must do more reading about the losses we are suffering from load shedding,import of unnecessary items (generators and UPS , batteries) and they way the use of this low quality equipment is inefficiently consuming petrol/ diesel , gas and electricity itself
I agree with Shah and Muhammad Irfan. If you use future funds now, what will you do in future. I think we have to reduce line losses and improve revenue collection. There is no short cut solution.
I agree with Tariq Alvi. Political interference & Revenue Collection Mechanism should improve along with proper legislation.
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