Budget proposals and Circular Debts scam

-BY NASIR MAHMOOD

A group of industrialists in Karachi have confessed that the 32,000 MW production of electricity claim by government authorities and IPPs was suspicious. They are going to challenge and demand for its physical audit just to clear the mystery of heavy Circular Debts that has made the life miserable for general people in the country.

The Economic Council of the Employers’ Federation of Pakistan in its first ever endeavor initiated solutions to various economic and financial issues impeding the economic growth and prosperity of Pakistan. EFP was certain that the economic policymakers of the government would accord positive consideration to these proposals.

Addressing the media at Karachi Press Club, Majyd Aziz, President EFP presented Federal Budget Proposals 2019-2020. Ismail Suttar, Chairman EFP-EC, and Zakaria Usman, Chairman, Budget Advisory Committee, highlighted the salient features of the proposals. They emphasized on broadening the tax base, reducing the cost of doing business, solving the circular debt crisis, and reforming the existing tax regime that are imperative and must be addressed at all costs.

They urged that a single-digit sales tax be imposed on the non-traditional inputs and government should coordinate with provincial revenue authorities to recover lost revenue. A formula for determination of true market value of real estate may be forthwith devised and proceeds from loss-making public enterprises should be used to revive sick units.

All deferred refunds of export-led industries must be cleared without any pre-auditing. It is also imperative to establish a one-tax authority at federal level and segregate the tax machinery from judicial influence to maintain impartiality. Commercial exporters should be excluded from further sales tax, including withholding tax on locally manufactured vehicles.

To reduce cost of doing business and suppress the existing liquidity crunch faced by exporters, DTRE should be fast-tracked and all sectors with exempted output be declared zero-rated. In order to promote culture of import-substitution, regulatory duties on foreign-made inputs be gradually curtailed.

They said the most crucial issue was to resolve the Circular Debt crisis. According to EFP to tame this beast, “we propose commoditizing electricity in the form of futures and hence, creating wholesale electricity market in Pakistan.”

They referred the energy crisis which largely defines the circular debt, accounts for estimated Rs 1362 billion out of the reported Rs 1.4 trillion. As is known, circular debt is a direct result of high losses accrued to the electricity losses. The largest stake is that of theft, besides unmonitored disbursement of tariff differential subsidies to the tube wells installed in the agricultural sector and an inefficient distribution system. With loss of every one Rupee worth of unit, the quantity of electricity becomes a loss multiplier. All of this has led to a vicious circle of non-payments to the government from end-consumers, distributors and all the way up to the suppliers. In the present state both global oil price hike and currency devaluation have brutishly marred the export competitiveness.

The EFP leaders (quoting Senator Shibli Faraz report, August 2018) stated that we are generating over 32,000 MW, out of which 33 percent is produced by IPPs. However, we do not have the capacity to distribute even 20,000 MW. The government has to pay the institutions for the extra electricity that, in theory can purportedly be generated, even though it has not been distributed. The cost of increasing the distribution capacity by 5 percent is in billions of dollars. “We fail to understand why the government is focused on increasing generation capacity without any efforts to increase distribution capacity”, they said.

At this moment the media members questioned veracity of the claim of 32,000 MW generations by government and asked did they ever investigate or challenged it through physical audit?

The EFP officials confessed that the 32,000 MW production claims were not based on fact. It was just a hype created by IPPs whose secret agreements were never brought into the limelight or discussed in public. Hence, nobody knows the actual terms and conditions on which these companies were claiming huge payments without any real generations.

They agreed with media reporters that instead of suggesting commoditizing the electricity market in the form of futures and traded in Pakistan Stock Exchange first they should ask the government to held forensic audit of all power producing plants in the country. Without such audit the plundering culture of billions of rupees from national exchequer under the garb of circular debts could not be stopped.

The employers’ body disclosed that efficiency of power plants is calculated on the basis of the hottest day of the year. Around 10 percent were underreporting their efficiency by 5 percent. If it is 5 percent on the hottest day of the year, then on cooler days of the remaining year, the underreporting is even more. This is being done by efficient plants, not the smaller players who were already exaggerating their production capacities and claiming monthly payments more than twice the actual production by them. They agreed that another 20 percent plants were overstating their capacity because they had older units and their production capacity was declined.

It may be mentioned here that excessive deregulation and a dearth of audits in the energy sector, especially when it is being traded in the market, can lead to a disaster. There is a case example of deregulation of the Electricity Wholesale Market in California. According to a report published in 2001 by Critical Mass Energy & Environment Program, “Enron’s business model was built entirely on the premise that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant. Central to Enron’s strategy of turning electricity into a speculative commodity was removing government oversight of its trading practices and exploiting market deficiencies to allow it manipulate prices and supply.” According to consumer watchdog website, the energy suppliers were allowed to overcharge approximately $23 billion from consumers for five years under this law.

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