Lights out: ‘Circular debt’ cripples Pakistan’s power sector
Ashiq Mahmood sits at his desk in his marble wholesale showroom, feeling the temperature rise, wondering when the blackouts will come.
“Everything comes to a standstill when the load shedding starts,” he says, referring to power outages that have plagued Pakistan for years, crippling industries and small businesses such as his.
The power cuts are not, as has been the case in the past, due to a lack of generation capacity. Instead, they’re the result of a vicious cycle of unpaid debts of more than $10 billion and breakdowns in critical transmission and other infrastructure. The issue is another headache for the government, which is struggling with a large fiscal deficit and slowing economy.
Mahmood’s marble manufacturing and retail business earns him and his family about 1 million Pakistani rupees ($6,600) a month, but as demand for electricity grows in Pakistan’s searing summer heat, electricity outages mean he can hardly ever run at full capacity.
“If I’m not able to deliver an order on time [due to outages], then the customers just aren’t going to come back, are they?” he says.
Last year, when power cuts lasted more than six hours a day in the main I-9 industrial area of Pakistan’s capital Islamabad, Mahmood says sales dropped by at least 50 percent.
Enough power for the people?
Today, Pakistan’s 207 million people and its industries need 15,000 megawatts (MW) of electricity generation capacity, according to power ministry data.
That number will increase as demand rises in the peak summer months. But the ministry says that demand could easily be met using the country’s installed generation capacity of roughly 20,000MW from plants running on coal, oil, gas, hydroelectric and nuclear power.
But users across the country still experience a shortfall of roughly 2,000MW, the ministry says, resulting in outages of up to eight hours a day in some areas.
That is because, while the capacity to generate the required electricity exists, there is no money to pay for it, officials told.
“As of today, we don’t have any issue with availability of supply,” said Nadeem Babar, head of the Prime Minister’s Task Force on Energy Reforms. “Our issues are transmission and distribution constraints, and the high [revenue] losses in certain areas.”
At the heart of the problem is a phenomenon referred to in Pakistan as ‘circular debt’ – a cascade of unpaid bills and government subsidies, coupled with transmission line losses.
A major component of this debt, according to a 2018 World Bank report, is unpaid subsidies from the government to power distributing companies, compensating them for the below-market tariffs these firms have to charge consumers.
As a result, distributors are often unable to pay power producers, who then find it difficult to pay for fuel and are forced to keep plants idle.
Many users do not pay their bills because they do not get the electricity they need, making it harder for distribution companies to upgrade their ageing transmission lines, leading to even more losses. Pakistan’s power regulator says more than a quarter of the power generated never reaches consumers.
Smaller parts of the debt are composed of discrepancies between the government-notified tariff and market rates caused by delays in government adjustments to the tariff and fluctuating international fuel prices.
The end result: hours of load shedding. And as of April 10, Pakistan’s circular debt in the power sector stood at roughly $10.6 billion, Babar told. That number is increasing by $6.4 million every day, he said.
The government is having to deal with the power sector’s debts while struggling under the weight of a spiralling fiscal deficit amounting to five percent of the size of the economy, according to central bank data, and slowing growth.
On Monday, the country’s central bank raised interest rates by 1.5 percentage points to 12.25 percent, citing underlying inflationary pressures, and elevated fiscal and current account deficits.
The government is planning a multi-pronged approach to tackle its power issues.
First, it wants to raise tariffs so that they are closer to market rates.
“We have to change our tariffs to at least recover the costs,” said Babar. “It is clear that customers should not be paying for theft of others … or inefficiencies of the system. But it is equally clear that customers should be paying for the cost of delivery of services.”
Babar foresees an increase in power tariffs by at least 2 Pakistani rupees ($0.01) per unit (a 100 percent rise for the lowest consumer tariff, and 15 percent of the average tariff) over the next 18 months. But the government is still likely to maintain some subsidies.
The government will also be working on reducing transmission and distribution losses – long cited as a structural obstacle by analysts – in order to stem the financial losses in the sector.
Last fiscal year, losses due to theft or transmission system inefficiency stood at 29 percent of power generated, according to Babar, amounting to roughly 140 billion Pakistani rupees ($990 million) in electricity that was generated but never paid for because it never reached consumers.
The government is targeting these losses through both arrests of those found to be stealing electricity and by attempting to address the infrastructure problems that lead to transmission losses in the first place.
Asad Umar, Pakistan’s recently fired finance minister, said the brunt of the immediate push was coming in the form of targeting those who steal electricity.
“This includes filing 21,000 cases [for non-payment of dues], arrests of 13,000 people, and connections being cut,” he told at a media briefing while he was still in office.
In addition, the government is investing in a $100 million pilot project to install ‘smart’ meters – which would make theft more difficult – in the northern city of Rawalpindi, with a view to expanding the project to cover the entire country. The total cost of the countrywide replacement of meters would stand at roughly $3.5 billion, said Babar.
Transmission line infrastructure overhaul – long a demand of power sector analysts – will be the next step. For an illustration of the extent of the problem on that front, consider this: in June 2018, power ministry data shows that there was a day when the system faced 3,700MW in transmission constraints.
“We had the demand, we had the supply, but we could not move 3,700MW,” says Babar.
The government has now identified 19 major transmission constraint issues, and says it will address all of them – including the building of new transmission lines and overhauling old systems and transformers – by January 2020.
Finally, longer term, the government says it will be aiming to reduce the cost of generation of electricity by shifting the fuel mix from the current reliance on imported fuels such as furnace oil, LNG and imported coal towards domestic sources.
Hurting those most in need
This summer, the ministry expects a shortfall of roughly 2,500MW between demand and supply. This will result, Babar says, in load shedding of eight hours in areas where cost recoveries from consumers are below 40 percent.
Analysts warn that the current system of load shedding disproportionately targets low-income neighborhood, and imposes a form of collective punishment, even on those paying their bills.
“Recovery-based load shedding does punish users who are not paying their bills, or those who are outright stealing electricity. But it is also punishing their neighbors who may be paying bills on time and reducing consumption, but are ‘stuck’ in a high defaulter neighborhood,” says Erum Haider, a political scientist at Georgetown University who is studying the sector.
Haider says that according to data from a survey conducted across Karachi, Pakistan’s largest city, individuals are using up to 12 percent of their monthly budget to pay utility bills.
“This seems a relatively high price to keep the lights on so your kids can do their homework, or get a full night’s sleep,” Haider told.
For marble seller Mahmood’s household, that rings true.
“They shouldn’t be doing this injustice with us, when we pay our bills,” says Farooq, Mahmood’s nephew, who just spent a sleepless night without electricity. “We can’t force [others in the neighborhood] to pay their bills, we can only speak to them.”