Energy sector, no doubt, has been Pakistan Tehreek-e-Insaf (PTI) government’s Achilles heel from the day one. It has only gone from bad to worse in three years of the ongoing five-year tenure of the incumbent government. With new power plants coming online and massive currency adjustments, the capacity payments ballooned, and the circular debt soared to an all-time high. After power, gas circular debt is also threatening to become a compelling issue. The PTI government came to power with a reform agenda; but it too has found to its chagrin that it is not an easy task to reform the energy sector. Recently, the Special Assistant to the Prime Minister on power and petroleum, Tabish Gauhar, left the government and spoke his mind about the complex political and economic issues besetting this sector in a blunt manner. The solution in the medium- to long-term is simple: deregulate the energy sector. As Tabish pointed out, reforms need to be kick-started at the beginning of any government’s tenure because introducing reforms at the tail end of tenure can hurt the ruling party’s or coalition’s electoral prospects.
The key consideration for the government should be to reduce the circular debts – both power and gas. Power circular debt is north of Rs2.7 trillion and its growth has been curtailed by partial liquidation of outstandings, while the gas circular debt is at around Rs 600-700 billion and growing. The rising international commodity prices in the midst of supply chain disruptions have exacerbated the pain for countries that are heavily dependent on imported energy products. A depreciating PKR has further worsened the situation. Not only are growing receivables in the power sector projects under the China Pakistan Economic Corridor (CPEC) unnecessarily straining Pakistan’s relationship with Chinese businesses, these are also casting a dark shadow on the phase-II of the CPEC. Moreover, energy sector debt mismanagement constitutes a serious bone of contention between Pakistan and the IMF. The situation, therefore, demands the government pay its contractual liabilities religiously and promptly. There is too much weight of energy debt below the line. This quasi-fiscal debt can bring the fiscal house on the edge or brink of an abyss. It must be brought above the line. The easiest option in accordance with IMF’s stipulations is to pass on the cost to consumers while the government strives to reduce its footprint in the energy sector. It is, therefore, important to note that since the PTI government came to the power following the 2018 general elections, the market capitalization of five listed state-owned companies in the energy sector – Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), Pakistan State Oil (PSO), Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) has reduced by a whopping 47 percent. Although book values are growing, market confidence in these companies is falling due to circular debt. Moreover, their ability to pay dividends has been hamstrung by high receivables that have strained their cash flows.
It is evident that the government will be finding it extremely difficult to raise tariffs, especially in the power sector, in the midst of rising commodity prices in the international market. The government should, therefore, work towards bringing these debts onto the books by giving subsidies and clearing/paying the dues to the companies in the chain. In the case of gas, the government must increase the prices and divert consumers from gas to power by giving right pricing signals. This would only be possible by slashing the galloping current expenditure in a meaningful manner. Only then will the government be able to start thinking how it can fully move away from fixing prices, allowing the sector regulator, National Electric Power Regulatory Authority (NEPRA), to determine tariffs as its exclusive domain while restricting its role in this sector to doling out subsidies to consumers with a view to averting any perceived or real threats of political unrest to its rule. The same should be the case for gas and petroleum. Once that institutional link is established, the government can work on deregulating the entire energy sector. The benefits in the next decade could be similar to what the country has so far experienced in the banking and telecom sectors after deregulation, liberalization, and privatization. One word of caution: the government should base its decisions on sound facts, not inclinations and hunches.