Circular Debt

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a Multi-pronged Strategy for Managing the Circular Debt
Circular debt arises when one party do not have adequate cash to pay out its liabilities to its suppliers or creditors.  This creates difficulty for the supplier or creditors to pay out its liabilities, which ultimately sets out a deep circle of debt liabilities in the economy. It is clear through this flow chart that the delay in payment by one entity will hinder it to fulfill its own obligations, thus creating liquidity constraints with the energy sector. In Pakistan, the energy sector has faced this issue for several years. It has not happened overnight but is an alarming development nonetheless, that the circular debt among energy companies has increased by almost 147 percent in two years.

STRATEGIC SOLUTIONS:
In order to solve the circular debt issue, serious and honest attempts need to be made in the interest of the country. The strategy to resolve circular debt must focus on:
1. How to reduce the outstanding stock of circular debt?
2. How to prevent its accumulation?
SHORT TERM SOLUTIONS

1. RECONSTRUCTION OF THE SECTOR:
* The energy sector is being used for political leverage. * The inefficiencies of government-owned generation and distribution companies, overstaffing, free provision of electricity to Wapda employees, poor maintenance of plant equipment, obsolete technologies (resulting in technical losses), corruption, all of which simply add to the cost of electricity that consumers are being constrained to bear with equanimity through tariff increases. * Lack of trust encourages the consumers to use illegal means.

* Recommendation:
The Energy Sector entities should be placed under professional and competent management, and the BOD’s be restructured on a non-political basis, to allow for good corporate governance and fiduciary responsibility. Further the energy sector companies must be provided autonomy and full government support to enable them to move to economic and commercially viable operations without political interference. All power distribution & marketing companies (DISCOs) be privatized and allowed to operate in a competitive power market

2. Sincere and intense efforts for collection of Past A/R and Current Payments from Provincial Governments, Federal & Provincial Departments, Organizations, and Individuals * Instead of asking for the whole amount, ensure monthly or at least future payments.

3. Theft: One of the major reasons behind the circular debt is that the consumers, both government & private, are able to resort to power theft & non-payment without fear of repercussions. A large amount is alone due from provincial governments. Also, powerful private individuals and companies are also defaulters as are those who in collusion with Wapda employees do not pay without being disconnected

* Massive Campaign for Theft Control with Focus on QESCO, HESCO, & PESCO (Power distributors). Penalty for power theft either by governmental or private consumers.

* PEPCO’s collection system is the biggest hole in the sector’s cash flows, which needs to be improved on a top priority basis through implementation of efficient accounting systems and through the hiring of professionals.

4. Technical measures should be introduced in Distribution and Transmission of energy across the country because the accuracy in measurement of electricity units consumed by the users and transparency are very essential in order to so that the users are billed properly and they have the confidence that their money is going to the right hands.

Smart Metering :It can provide up to date information on gas and electricity consumption in the currency of that country and in doing so help people to better manage their energy use, real-time or near real-time sensors, power outage notification, and power quality monitoring. More detailed and better quality data is required for which new...
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