he energy circular debt, also known as power sector payables, has grown at an alarming rate. The payables stood at a staggering Rs 2.6 trillion as of April. The term circular debt first came to prominence in 2007 when the global prices of crude oil reached an all-time high, putting pressure on fuel importing countries like Pakistan.

The federal government provided substantial subsidies to independent power producers to avoid passing the entire burden of rising costs onto the end consumers. This injection of funds was lauded by many as it kept the nominal electricity bills low. However, this was achieved at the cost of growing national debt.

The intervention had a snowball effect as the debt kept increasing in the following years, due mostly to flawed policy design that focused on short-term relief. Factors contributing to the rising circular debt included: a) operational inefficiency of power distributors (DISCOs), b) transmission and distribution losses (T&Ds), and c) non-payment of electricity bills by some consumers.

Governments have proposed and tried various solutions for controlling the circular debt. Few lessons, however, seem to have been learnt. The policy makers must learn from the mistakes of past governments and craft strategically viable solutions.

Power sector reform was one of the top items on the agenda for the Pakistan Tehreek-i-Insaf government that came into power in 2018. The government said it was keen to address the prevailing inadequacies in the energy sector and to reduce the country’s debt obligations. An ambitious plan was designed to eliminate fiscal losses from the power sector by the end of 2020.

As a first step towards controlling circular debt, the government raised power tariffs by 11 percent in 2019. Next, the government introduced an automatic quarterly adjustment of tariffs whereby any increase in cost of supplying electricity was passed onto the consumers.

Third, to increase recovery, an anti-theft campaign was launched in October 2018. Special task forces were formed in the Punjab and Khyber Pakhtunkhwa.

Fourth, advanced metering infrastructure (AMI) projects were planned in two DISCOs, the LESCO and the IESCO, to control system losses.

Finally, to retire the existing debt, funds were collected through long-term Sukuk, Islamic financial bonds.

It has become clear over the years that the power sector is struggling with mismanagement, corruption, outdated infrastructure, and a lack of supply chain transparency. There is little representation of the private sector stakeholders.

The government claimed encouraging progress following implementation of its policies. Between October 2018 and June 2019 recoveries rose by Rs 121 billion. However, the reforms were localised and limited to certain areas.

This was not the only problem; the ambitious energy pricing reforms had their own limitations. These exempted 80 percent of the consumers from the automated tariff raise. The exemptions included consumers using less than 300 units of electricity in a billing cycle.

Consumers using more than 300 units included in the domestic time-of-use category were also protected from price escalation. The issuance of Sukuk bonds was only a temporary, short-term relief from liquidity stress. Although it provided relief to the power sector, the government remained indebted to the banks it borrowed from. The issue of T&D losses remained unresolved as DISCOs refused to invest in infrastructure improvement.

It can be argued that these reforms had the potential but lacked scale, coverage and long-term foresight. Successor policymakers should recognise the rationale and strengths of their predecessors’ policies and learn from their mistakes to make better-informed policies for lasting impact.

Over the years, it has become clear that the power sector is struggling with mismanagement, corruption, infrastructure obsolescence and a lack of supply chain transparency. There is little representation of the private sector stakeholders in the power generation and distribution decisions.

The government has a strong presence throughout the supply chain. This alone has led to overstaffing, uneven distribution of subsidies and consistent degradation of infrastructure.

Partial deregulation of the power sector can be the first step towards reduction of losses. The county is over-burdened with circular debt. Privatisation will lead to: 1) greater accountability, 2) a systematic distribution of subsidies and 3) reduction in T&D losses once the new management invests in upgrading the infrastructure.

Also, policymakers should allow successful initiatives of their predecessors to continue.

The writer is a business and public policy graduate from the Suleman Dawood School of Business at LUMS. She currently works for the IT governance department at a leading bank