Is circular debt the real issue?

dawn
By Salman Khalid and Kamal Munir | 10/10/2011 12:00:00 AM

PAKISTAN has been facing a series of power crises over roughly the last two decades. However, since
2007, the situation has deteriorated rapidly.
As a result of severe electricity shortage, industry, commerce and agriculture have all taken serious hits
with the country`s growth prospects dimming significantly. At the same time, residential consumers have
had to endure over eight-to-12-hour blackouts in major cities. The situation is even worse in rural
Pakistan.
Surprisingly, the total energy produced in the country has actually decreased nearly 10 per cent between
2007 and 2010. This is primarily due to lower-capacity utilisation, which in turn has been the result of
`circular debt`, a concept that has been bandied around freely over the past few years as the primary
problem that besets energy production in Pakistan.
However, despite its dominance of policy discourse, circular debt is not the fundamental issue here. The
two most glaring reasons behind the present mess Pakistan finds itself in are the 1994 energy policy and
the resultant extreme over-reliance on expensive imported fuel mix.
It is easy to forget that the roots of the present power crisis can be traced to almost two decades back
with the advent of the highly generous 1994 power pohcy forindependent power producers (IPP). At that
time the country`s electricity generation relied on a fuel mix of approximately 70:30 in favour of hydro
versus thermal.
This changed dramatically over the next decade with the fuel mix going to 30 per cent hydro and almost
70 per cent thermal by the end of 2010.
This dramatic shift in generation source occurred because the 1994 power policy (and later the 2002
power policy) did not discriminate on fuel source being employedand made the country hostage to
fluctuations in international oil and gas prices (the country does not possess either commodity in sufficient
quantity).
The cost of this strategic policy-level folly can be understood with the following comparison. As per the
National PowerSystem Expansion Plan 20102030, as of 2010, Wapda (employing hydro production)
generated electricity at Rs1.03/kWh ((1.2 cents/kWh) while public-sector thermal power plants provided
the same at Rs8.5/kWh (10 cents/kwh).
However, the IPPs (primarily thermal) provided the same at Rs9.58/kWh (11.2 cents/kWh). As a result,
the average blended cost of generation was Rs6.6/kWh (7.7 cents/kWh) in 2010 which further increased
to Rs9.81/kWh (11.5 cents/kWh) for the end consumer due to line losses and theft in the transmission and
distribution systems.
It should be noted that the above numbers underestimate the true cost because the cost of energy from

old power plants is substantially lower due to repayment of debt.

Most new thermal IPPs are charging in the range of 15-18 cents/kWh at current oil prices. As a result,
tariffs will substantially increase further as the world economy comes out of recession over the next few
years and oillgas prices jump (with the US trying to print its way out of recession).
Even after adjusting for debt repayment, power production through indigenous hydro resources comes
out much better than what we are given to believe.
The estimated cost of energy stands at 1.6 cents/kWh forKalabagh dam with a vast majority of new
hydros expected to come under 4.5 cents/kWh as per a recent NTDC (National Transmission and
Despatch Company) report. Furthermore, the country has so far completely failed to develop its coal
reserves (only 30MW coming from coal) which are estimated at 175 billion tonnes (the second largest in
the world).
Engro estimates a tariff of 1012 cents/kWh for Thar coalbased power production based on the current
policy.
Incredibly, the world average for coal-based power production in the energy mix is 40 per cent while it is
only 0.1 per cent in Pakistan.
To make matters worse, many of the thermal IPPs setups under both the 1994 and 2002 power policy are
of inefficient design (single cycle rather than more efficient combined cycle) since these policies provided
cost plus equity return of 15 per cent irrespective of the efficiency of the technology/fuel source being
used in the power plant.
Many of these IPPs would normally be used for load-balancing (matching sudden jumps in demand etc) in
other countries and would fall low in the merit order for power plants used but are instead employed for
satisfying standard base demand in Pakistan. One begs to question the wisdom and/or sincerity of the
policymakers of the country who completely ignored two of the biggest energy resources available locally
which cost substantially less than the options they opted for.
Some people provide the excuse regarding the political deadlock over the Kalabagh dam and hence the
need for Pakistan to go to the oillgasbased IPP route. But what stopped the policymakers from going
down the coal route, let alone hydro projects apart from the Kalabagh dam? Why couldn`t the DiamerBhasha dam or the Bunji or Doyian dam be commenced in the early 1990sinstead of a Hubco? Circular
debt is a red herring. The core problem lies in wrong policy choices made in the early1990s thathave
continued since then. These choices, made for whatever reasons (pressure from the World Bank,
corruption, incompetence) have shifted Pakistan away from self-reliance in energy generation and landed
us at the mercy of daily fluctuations of the international oil/gas markets and choked industrial progress in
the country.
Taking subsidies away is not the solution. Electricity should not only be available to the wealthy! The
provision of affordable electricity is the basic right of every citizen.
In a country that has unparalleled resources to generate electricity the present situation is unacceptable.
Printing money to clear circular debt will hardly deliver us from this problem. For Pakistanis to be able to
get an affordable, sufficient, long-term energy supply, the sustainable solution lies in revisiting the
ridiculous power policies of 1994 and 2002 and exploiting other, more sensible sources of generation.

Salman Khalid has managed investments in power generation in Pakistan, Turkey, Bangladesh and Saudi
Arabia.
Kamal Munir teaches Strategy and Policy at the University of Cambridge.