Circular debt

Once again, the inefficiency of our power sector has come to light in a recent report on power-sector audit. Earlier, a disagreement between two major stakeholders in the power sector had hit newspaper headlines. The two stakeholders are the power division and the regulator, who disagreed over the size of circular debt and the rate of its monthly growth. The National Electric Power Regulatory Authority (Nepra) disputes the data presented and used by the power division which showed a drop in the circular debt. Though some attempts have been made to reconcile the data, there has not been much success in this matter. The power division and Nepra both have been insisting that their data should be accepted as accurate and validated by third parties. These parties include international financial institutions (IFIs) such as the IMF and World Bank. There have also been some reports about certain mafias within the power companies that report incorrect numbers to Nepra because the power division allegedly puts pressure on them to check power theft to improve recoveries.

There have also been questions regarding the mandate of the power regulator over the circular debt. Now, the latest report has disclosed that the country has sustained over 4.8 trillion rupees in losses due to circular debt in the past 13 years. These losses have been ascribed to the power sector’s inefficiencies which caused an annual loss of Rs370 billion. This report was prepared by a nine-member committee on power-sector audit. It deals with circular debt and also suggests a way forward. As highlighted by the report, the main inefficiency is rooted in the recovery and transmission mechanisms. Details show that for every 100 units purchased by the National Transmission and Despatch Company (NTDC) in the last fiscal year ending in June 2019, three units were lost during transmission and distribution. These losses are mainly caused by inefficiencies in distribution companies (DISCOs). Then at the billing level another nine percent losses are incurred under an inefficient recovery system.

This calls for a major overhaul of the entire power sector. First we also need to take care of the high cost of generation that is reportedly highest in the region. Second, both distribution and transmission mechanisms need to be fixed, as this has long been delayed by successive governments in the past 20 years resulting in huge losses to the exchequer. All governments have tried to control or sustain the circular debt without addressing the fundamentals of high generation costs and distribution. A major hurdle in this overhaul are the DISCOs themselves that resist any major changes in the system. Then there are fiscal and regulatory problems that have beset the system for long. It is about time the government took this matter seriously and, rather than making some cosmetic changes, got to the root of the problem and rectified it. We have seen many reports in the past gathering dust without being implemented. Let’s hope that this time around the present government goes beyond circular debt management to some substantive changes.