Relentless circular debt in energy sector.

AuthorShaikh, Nazir Ahmed

Byline: Nazir Ahmed Shaikh

Currently, Pakistan's circular debt stands at a whopping Rs1.4 trillion, which includes the loans accumulated by previous governments. The alarming source of this burden is the persistent IOUs that keep piling up among all the stake holders in the energy sector supply chain.

This includes power distributors, power producers, as well as oil and gas companies - PEPCO (Pakistan Electric Power Company), IPPs (Independent Power Producers), K-Electric, Pakistan State Oil and Sui Southern Gas, to name a few.

Circular debt occurs when one entity facing problems in its cash inflows holds back payments to its suppliers and creditors. Therefore the problems of cash inflow of one force down to other segments of the payment chain. This issue is persistent in the energy sector for last many years and have seriouseffectsin economy.

One of them is cash flow constraints. This enhances operational inefficiencies of the companies in the power sector. Even some companies are operating below their capacity due to liquidity constraints. Subsequently the increase in the power supply deficit has also contributed to supply-side constraints. Therefore the buildup of circular debt has led to a reduction in the potential gross domestic product (GDP) of the country.

The key players in circular debt of energy sector are involved in the supply of primary energy to power generation companies; including oil/gas exploration companies (e.g., OGDCL and PPL), oil refineries (e.g., ARL, Parco), distribution companies in gas (e.g., SNGPL, SSGC) and oil (e.g., PSO, Shell). Power generation and distribution companies e.g. K-Electric, Independent Power Producers (IPPs), Hub Power Company and Kot Addu Power Company, captive power producers, rental power producers, WAPDA Hydel, and the Pakistan Electric Power Company (PEPCO).

Whereas include individuals, industries, and the government sector are consumers. It may be noted that tariffs paid by power consumers (often subsidized by the government) are used to make payments at various stages of...

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