The Chashma-III nuclear reactor, some 250 kilometers southwest of Islamabad. Photo: AFP / handout

Pakistan faces a power crunch this summer, as the supply of electricity falls short of demand by 4,000 megawatts because of a US$4.1 billion circular debt that has crippled the power generation industry.

Circular debt is the consequence of a link in a supply chain failing to pay its suppliers, causing a domino effect throughout the chain until it breaks and consumers are denied access to goods and services.

Pakistan’s distribution companies are reportedly owed about US$1 billion by provincial governments and another US$1.2 billion by consumers in the private sector. Among the debtors are influential people and some of the country’s biggest companies.

To complicate matters, the country’s independent power producers are pressing for payment for the electricity they have supplied to the grid. If the overdue bills are not settled, at least 13 independent producers have threatened to invoke sovereign guarantees they currently hold. The independent producers threatened to do the same in 2014 and were mollified then by a part-payment of what they were owed.

Both the independent and state-owned power producers are withholding payment for the oil they burn to generate power, crimping cash flow to the state-owned oil company, Pakistan State Oil (PSO). PSO is owed US$2.7 billion. 

The government seems unsure about a strategy to sort out the mess. The ministries involved – those in charge of finance, power and petroleum – have blamed each other, while the National Electric Power Regulatory Authority says subsidies and an unrealistic power tariff are responsible. In an effort to raise money to settle the debts, the government wants to issue US$3.5 billion in bonds with a tenor of three to five years. It issued bonds worth US$4.8 billion in 2013, with the proceeds settling a debt of US$5.3 billion. That failed to solve the problem, instead pushing it back to square one.

The Asian Development Bank has studied the causes of circular debt in the energy business,  and highlights the following as exacerbating factors:

  • Poor collection of revenue by electricity distributors;
  • Slow and incomplete payment of subsidies;
  • Weak governance;
  • Tardiness on the part of the regulator in adjusting the tariff;
  • Lopsided fuel pricing; and
  • Theft and losses of fuel in transit and electricity in distribution.

At the heart of the circular debt problem in the Pakistani energy industry is the failure of government subsidies to make up the difference between the low rates the consumer pays for electricity and the high cost of generating and distributing it.

Contributing to the problem is the incompetence of state-owned generators and distributors of electricity. They are overstaffed and offer their employees free electricity. The utilities lose massive amounts of electricity to thieves, who are often in cahoots with employees, and they are lax in collecting what they are owed by consumers. One solution may be to privatize swiftly all state-owned distributors or turn them over to the provincial governments.

The federal government’s apparent inability to solve the problem will mean shortages of electricity that can only hurt the country’s perilously feeble economy. “The energy crisis will certainly affect the manufacturing sector, which has switched over to captive power [i.e self-generated] mechanisms, as electricity [being generated] is far less than the requirement of local industry,” Aamir Ata Bajwa, senior vice-president of the Federation of the Pakistan Chambers of Commerce and Industry, told Asia Times. He did not offer an estimate of what a blackout might cost industry but he identified the manufacturing sector as the biggest loser.

Tabassum Anwar, standing committee chairman of the Islamabad Women Chamber of Commerce and Industry, blamed the accumulation of circular debt on mismanagement. The consequences, she said, threatened Pakistani industry and would scare foreign investors from the country’s power-generation sector.

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