http://www.youtubeproxy.pk/browse.php?u=rdsmPQVm4W3UDfw8hQJwrtfq%2B7uslnIyiKthvXL0CBze WLJ0EGQ%3D&b=29 Lay man Definition : Circular debt is when, A owes B, who owes C, Who owes A.

(ITUS) Subsidies which government in Pak is providing to the electricity consumers. By not collecting the bills KESC doesnt have the funds to pay its oil suppliers, which could be PSO which in turn doesnt have funds to pay to its suppliers, Natural Refinery. And National refinery in turn doesnt have funds to pay for imported bills.

for example PEPCO supplies power to all the governments departments nd also to KESC but all these do not pay for the power they use. PEPCO in turn has to pay to various IPPs from where it purchases power but as it dun gets it money so it cant pay to IPPs. IPPs in turn have to pay to oil companies to purchase fuel which they cant pay. so this is a circle of debt due to which power production of IPPs suffer ____________ So it is like the circular road of lahore, you start from Dheli Gate and end up at the same gate after covering the whole distance around the walled city.
Paying off heavy circular debt would lead to Inflation in the country!
Circular debt occurs when one entity facing problems in its cash inflows holds back payments to its suppliers and creditors. Thus, problems in the cash inflow of one entity cascade down to other segments of the payment chain.

http://www.nation.com.pk/business/31-Dec-2013/circular-debt-again-mounts-to-over-rs225b http://www.lawsofpakistan.com/tag/circular-debt-definition/ http://www.lahoreschoolofeconomics.edu.pk/JOURNAL/LJE%2015,%20SE/04%20Syed%20Saj id%20EDITED%20TTC%2011-10-10.pdf As far as my memory goes , this circular debt problem started in 2007-08 when oil prices started their un-precedented hike and prices in the country were not increased propotionately. Since then , this problem has worsned day by day. In july 2008 , oil prices reached the peak of 148$ per barrel and then fell and these days are hovering at around 80-90 $ per barrel. Important thing is that due to sluggish economy , our consumer is not in a position to pay further . On line losses / theft side , there are two things .

a) Distribution Losses My understanding is that our network has become really old and over-loaded. It requires a huge capital investment to be revamped but the problem is capital which we don't have :). In early 90's (91/92) , i read that a transformer (pmt) gives optimal perforamnce at 80% load but in karachi almost all pmt's were operating at 120% capacity. Situaion has worsned since then not improved at all. b) Theft Due to deterioting law & order , state is not able to enforce its writ . Although , technogloy has improved a lot but again huge capital investment is required. ISLAMABAD: The government has proposed Rs184 billion subsidy for the power sector for the fiscal 2012-13 (July-June) against the revised estimated allocations of Rs464 billion in the outgoing fiscal year under this head, indicating that it plans a massive increase in the electricity rates. The PPP-led government has a track record of understating power sector subsidies during its four years of rule. It allocated Rs122.7 billion in the current 2011-12 fiscal for power subsidies, but they ballooned to Rs464 billion, according to revised estimates. The inter-Disco tariff differential has been estimated at Rs120 billion in the next fiscal year against Rs412 billion subsidies given in the outgoing fiscal year by not passing on full tariff to consumers. The subsidy for the Pakistan Electric Power Company (Pepco) has been estimated at Rs134 billion in 2012-13 against the revised estimates of Rs419 billion, while for the Karachi Electric Supply Company (KESC) the budget proposes Rs50 billion against the revised estimates of Rs45 billion for the outgoing fiscal year. During the last four years, the government has provided Rs1,122 billion worth of subsidies to the power sector that actually transformed into the monster of circular debt that now stands at Rs300 billion despite a massive increase of over 150 percent in the electricity tariff. The government will provide subsidies of Rs10 billion on account of non receivables from Fata. On the pressure of Balochistan government, the government has resumed tariff differential for agriculture tubewells in the province by allocating subsidy of Rs4 billion. The energy crisis is taking a heavy toll on the countrys economy and its impact is being estimated at around two percent of lost growth in the GDP. The liquidity crunch in the power sector has resulted in the under utilisation of installed capacity of up to 4,000MWs. It has also affected investment in this sector.

The primary reason of circular debt is due to expensive cost of production and selling it on low rates. Cost of production: Rs. 10.95 per KW (average) Sale of electricity: Rs. 7.03 per KW Loss to Government : Rs. 3.92 per KW Now if line losses are 0%, even then circular debt will keep on piling up. I believe line losses are already charged to consumers in bills, may be someone here can confirm this. Now I think we have 2 options: 1- Either change consumers the price higher than the production cost 2- Built dams that make electricity at Rs. 1 per KW and add 10K - 15K megawatt more from dams to bring the average cost to less than Rs. 5 per KW. The biggest contributor to this problem is IPP that is expensive to make. Current cost from thermal is between Rs. 20-25 per KW. PMLN warned and protested against PPP on floor of national assembly around 15 years ago that Pakistan will face this situation if we started to build electricity based on thermal instead of dams.

The Subsidy on Electricity provided by government last year already crossed Defense budget, it was 464 Billion Rupees (The initial budget allocation under this head was only 122 Billion) (2012) The biggest defaulters of PEPCO are KESC and Sindh government with Rs 60 and 50 billion respectively. (2012)

According to the latest report of Pakistan Electric Power Company (Pepco), the total power sector receivables shot up to a massive Rs375.870 billion in the first nine months of the current fiscal year because of distribution companies failure to recover dues. During the last three quarters (July-March), the companies (Discos) issued bills for Rs535 billion, but could recover only Rs455 billion a gap of Rs90 billion. The Karachi Electric Supply Company (KESC) has emerged as the biggest defaulter with a bill of Rs60.397 billion. In July last year, its default stood at Rs40.89 billion and over the next nine months, it added Rs20 billion, taking the total to over Rs60 billion. The Government of Sindh is the second biggest defaulter with a staggering Rs50.435 billion. It started the fiscal year with an arrear of Rs39.23 billion and by March defaulted on another Rs11 billion. They are followed by Fata (Rs20 billion), the Punjab government (Rs15.19 billion), the AJ&K (Rs14.96 billion), the federal government (Rs7.62 billion) and Balochistan (Rs1.07 billion). The menace of circular debt, bad governance in power generation and distribution companies, inefficiency in recovery of electricity bills, containing transmission and distribution losses and electricity theft are grey areas which continue to fuel the power crisis. Line losses stand at 22 percent; a one percent loss means a loss of Rs7.5 billion. The inefficiency in recovery of electricity bills means when one consumer is billed Rs100, Discos officials recover only Rs82 a loss of Rs18. According to a study funded by USAID, furnace oil amounting to $300 million is stolen on its way through oil tankers from Karachi to power houses in Punjab. These are issues owing to which financial constraints in the power sector are worsening by the day down to 13 percent of the GDP in Financial Year 2011 from 23 percent in 2007. the circular debt has swelled to nearly Rs398 billion with Rs30.5 billion added to circular debt every month. 2012. Circular debt is to blame for the notable investment decline in the energy sector. Sattar says the electricity mix has been hard hit as reliance on thermal electricity generation based on costly furnace oil has soared to 78 percent whereas hydrogenation stands at only 22 percent. Circular debt can be settled if reliance on thermal power plants based on furnace oil is

reduced

After signing hundreds of millions of dollars worth of rental power plant (RPPs) projects in the face of harsh criticism, the government is finally starting to deal with rising circular debt to address power shortages. Outgoing finance minister Saukat Tarin recently told the News that in real terms the circular debt has swelled to Rs108 billion which mainly includes non-payment of Rs42 billion by KESC, Rs21 billion by the government of Sindh and Rs15-16 billion from commercial consumers to the Pakistan Electric Power Company (Pepco)".Just prior to leaving office, Tarin has decided to raise Rs. 25 billion as a small step toward settling a debt estimated at hundreds of billions of rupees. (2010) ISLAMABAD: With the circular debt issue still unresolved, three major refineries have stopped oil supplies to Pakistan State Oil and two others have threatened to do the same if their dues are not cleared. The PSO sent on Wednesday an SOS to the prime minister`s adviser on petroleum and ministers for finance and water and power for immediate payment of Rs60 billion to avert a shortage of petroleum products in the country. In his last communication to the federal government, PSO`s outgoing managing director Irfan Qureshi said: Attock Refinery Limited, National Refinery Limited and Byco have already discontinued supplies to PSO while Parco and Pakistan Refinery Limited have expressed their inability to continue supplies because of financial constraints. This will ultimately lead to severe shortage of POL products in the country. The refineries have taken the extreme step because of PSO`s inability to clear about Rs100 billion dues. The PSO`s own receivables from power sector and the government of Pakistan on account of price differential claims reached Rs181 billion on April 20. The country`s largest fuel supplier said that from Feb 1 it had supplied oil worth Rs78 billion to the power sector but received only Rs45 billion. The remaining Rs33 billion and the opening balance of Rs148 billion on Feb 1 have left the PSO in dire straits. It has already defaulted on its tax obligations and is on the verge of international default on Rs39 billion in 21 days. The PSO said it immediately needed Rs60 billion to avoid default on international payments and to clear its dues to tax authorities and local refineries. Last week, the fuel supplier had expressed its inability to import furnace oil for power generation. The circular debt issue has now reached a point where the PSO expresses its inability to be able to continue its furnace oil imports from May onwards. With no financial limit available and all our bank borrowing limits exhausted, we have

no option, but to suspend import of fuel oil from May 15, 2011 to avoid any default and create a bad image of Pakistan in the international community. The government plans to issue term finance certificates of Rs130 billion to the local banks, but no concrete step has been taken because of the absence of the finance minister and finance secretary who have been in Washington for talks with the International Monetary Fund and other lenders. Because of water and gas shortages, power companies are already resorting to more than five hours of loadshedding which could escalate if furnace oil supplies are affected. April 21, 2011 at 9:35 AM The government has paid Rs120 billion overdue electricity subsidies to improve the financial condition of power companies, leaving it with the option of either letting the budget deficit slip to 6.3 per cent or playing with the figures to restrict it to 5.5 per cent. The payments would partially improve the balance sheet of the power sector that has been crippled by the governments inability to pay price differential claims. The arrears that have increased to Rs288 billion are one of the main reasons for the massive power shortfall, recorded at 7,200 megawatts on Tuesday, as companies are not running at optimum capacity. The capital injection will enable power companies to purchase fuel for electricity generation. The payments have been made to the Pakistan Electric Power Company (Pepco), Pakistan State Oil, oil refineries, power generation and distribution companies. However, these will widen the budget deficit by another 0.7 per cent of national income, torpedoing the revised fiscal framework. The government that has been struggling to restrict the budget deficit to Rs941 billion or 5.5 per cent of Gross Domestic Product (GDP) is now facing a situation whereby the gap may swell to Rs1,078 billion or 6.3 per cent. Finance ministry officials said so far the ministry was reluctant to pay its dues because of the negative implication for the budget deficit the gap between national income and spending. Officials added that the government paid Rs98 billion on Wednesday while the remaining Rs22 billion would be released today (Thursday). Sources said the finance ministry was considering deferring payment of other subsidies like those for agriculture and fertilisers to the next financial year. There is an option to even defer some of the electricity subsidies of this fiscal year. Any attempt to play with the figures may invite the International Monetary Funds wrath that in the past slapped penalties after noting tempering with budget figures. According to the Budget Strategy Paper 2011-12, the government will pay Rs186 billion electricity subsidies by June-end. The accumulative power subsidy for this year and the

previous two years amounts to Rs306 billion. The finance secretary was not available to comment on the issue. The circular debt still stands at Rs168 billion even after Rs120 billion payments. The major factor for the debt now is the refusal of provinces to pay their dues to Pepco. The four provinces, Fata and AJK owe Rs106 billion to Pepco, according to official documents. Of this amount, a major chunk of Rs76 billion is due to be paid by the provinces. Punjab owes Rs9 billion whereas Sindh owes Rs37 billion. The ongoing massive power shortage is partly because of oil and gas shortages and partly because of inefficient power plants. Although the government has paid a handsome amount, there is still a big question mark on the sustainability of the power sector due to resistance to reforms. The government is not ready to completely disband Pepco and it is also not amending the National Electric Power Regulatory Authority Act that is necessary to ensure full power tariff recovery. Karachi Electric Supply Companys (KESC) tariff structure is another source of concern. This year alone, the federal government will pay Rs40 billion subsidies to KESC on account of price differential. The other major factor is longstanding receivables from private consumers. All the distribution companies are unable to recover Rs69.7 billion from private consumers which are overdue from two months to three years, according to the documents. Here's a Daily Times report on Pakistan settling "circular debt" owed to IPPs: In order to eliminate circular debt, the government has released Rs 362 billion to the Independent Power Producers (IPPs), out of which four IPPs announced that they have received a total sum of Rs 116.826 billion as a part of their overdue receivables, according to the Karachi Stock Exchange (KSE) notice released on Tuesday. Five IPPs out of 19 others, in Memorandums of Understanding (MoUs) signed between government and IPPs, including Hub Power Company Limited (Hubco), Nishat Chunian Power Limited (NCPL), PakGen Power Limited (PKGP), Kohinoor Energy Limited (KEL) and Nishat Power Limited (NPL) have announced officially in notices to all bourses of the country that they have received around Rs 116.826 billion from Central Power Purchasing Agency (CPPA), Water and Power Development Authority (WAPDA) and National Transmission and Despatch Company (NTDC). Hubco remained prime beneficiary as the company stated in a letter to the KSE that the company has received overdue amounting to Rs 75 billion out of Rs 83.2 billion (overdue as of May 31, 2013) for Hubco and Rs 17.4 billion for Narowal Plant from WAPDA and NTDC, bringing the total to Rs 92.4 billion. Hubco announced that the company has paid Rs 55.8 billion to Pakistan State Oil (PSO) as agreed under the settlement arrangement. Hubco has entered into three MoUs with the government as required by them for the settlement of agreeing to convert Hub plant from oil to coal, extend the credit period for its Narowal Plant from 30 days to 60 days and to endeavour to operate the plants at full

capacity. Under the MoUs, IPPs also agreed to achieve their maximum generation capacity and provide 1,500 megawatts (MW) to 1,700 MW to the national grid before Ramazan, four IPPs including Hubco, Lalpir, Pakgen and Saba Plant, have agreed on conversion to coal-based power generation within 18 months, extend credit period from 45 days to 60 days and reduce interest rate on late payments by public sector power companies. Similarly, NCPL announced that the company has received overdue receivables amounting to Rs 6.86 billion from CPPA without any reduction in existing delay mark-up rate of existing 4.5 percent to 2.5 percent as against expected cut of 2.0 percent from 4.0 percent to 4.5 percent. Likewise, PKGP also informed the KSE that the company has received overdue receivables amounting to Rs 6.982 billion from CPPA at existing delay mark-up rate. Also, KEL announced in a letter to KSE that the company has received overdue receivables amounting to Rs 3.504 billion from WAPDA. Muhammad Affan Ismail of BMA Research told this scribe that the fund injections (cash or otherwise) are a short-term solution and have no long-term implications on operational factors or returns to investors. Best would be to recall the Rs 82 billion Tem Finance Certificates (TFCs) issued last year by the government in order to help solve the power crisis, he added. NPL has announced that it has received overdue amounting to Rs 7.080 billion. --Naveed Tehsin of JS Research believes that PSO stands out as a key beneficiary from the retirement of the circular debt as its receivables and payables to local refineries have sharply declined to Rs 79 billion (down 54 percent) and Rs 9 billion (down 66 percent), respectively. Tehsin expected that receivables would further decline by Rs 48 billion after the issuance of Pakistan Investment Bonds to PSO. http://www.dailytimes.com.pk/default.asp?page=2013%5C07%5C03%5Cstory_3-72013_pg5_1
July 2, 2013 at 7:12 PM http://www.brecorder.com/editorials/0:/1168465:pcs-advice-on-circular-debt/?date=2013-03-29 http://www.thefinancialdaily.com/NewsDetail/144852.aspx