Circular Debt: The Vicious Cycle.

Byline: Nazir Ahmed Shaikh

The unprecedented tale of Pakistan's power sector has been a tale of institutional weaknesses, weak governance and a lack of financial sustainability. The result has been decades of power outages and expensive electricity thanks to the incompetent corporate governance and implausible financial management in country's power companies. This has led to a chronic shortfall between inflows and outflows, which are commonly known as circular debt.

The developing economies are facing issues due to non-natural energy crises. It is the evidence of the fact that there are flaws and inconsistencies on the part of public value agents in keeping pace with the demand-supply requirements of power services. This inability to manage the public's needs, a shortage of power generation from the back-end, and technical as well as political problems give rise to a vicious cycle of circular debt. The debt is being accumulated at the cost of the state's social and economic stability. This implies that circular debt is a wider problem of public value creation, which must be addressed through a concerted and joint effort of public value agents.

As of January 2021, the total circular debt of Pakistan is a"2,306 billion. As per Federal government, the power sector's circular debt went past Rs2.306 trillion as of Nov 30, 2020, up by Rs156 billion over the first five months of the last fiscal year, at a rate of Rs31.2bn per month. The bulk share of the increase in circular debt is the poor governance in the public sector itself. The Rs156bn increase in circular debt included the non-payment of budgeted and unbudgeted subsidy, delayed payments on account of interest to independent power producers (IPPs), other mark-ups, pending price adjustment on account of quarterly and monthly adjustments and non-payments by K-Electric.

The causes of the circular debt can be attributed to a failure of public value co-creation: the cumulative effect of administrative, political, social and economic failures to bridge the gap between demand and supply gap. Specific elements that comprise the problem includes are:

1. Transmission and Distribution losses

2. Discrepancies in the tariff rates

3. Inefficient regulatory framework

4. Federal-Provincial frictions

5. Overly paid incentives for Independent Power Producers

This incapacity at the part of national stakeholders not only affects the efficiency level of the whole supply chain but also disrupts household-level...