The fiscal crunch is taking a heavy toll on the corporate sector. The private sector energy companies are touching their borrowing limits, the public sector is defaulting in its payment commitments and the public at large is struggling to cope with more than seven hours of load shedding daily in addition to unannounced power breakdowns.

By August 20, the inter-corporate circular debt has crossed over Rs400 billion and widespread default is looming large in the energy sector. A number of companies have, in fact, started defaulting in their commitments technically and financially.

Oil firms have expressed their inability to ensure smooth supplies in the days ahead and independent power producers (IPPS) are running at less than their generating capacity because of financial crunch to purchase fuel.

Partially, because of previous government’s dilly-dallying on major economic decisions and mainly because of current government’s pre-occupation with political crisis, the administration finds it hard to take even day-to-day decisions in a prudent manner. The IPPs have threatened to declare force majeure and call government’s sovereign guarantees.

The government has started eliminating subsidies. Electricity rates have been raised by 16 per cent last month by withdrawing of general sales tax and another 61 per cent increase would be made soon after the presidential elections to be held on September 6.

Natural gas rates have been increased twice by more than 40 per cent since the democratic government took over and oil prices have surged more than 50 per cent since February this year. Rise in utilities’ cost is resulting in escalation of all essential and not-so-essential commodities.

At the heart of problem is non-payment of arrears by public sector companies and government entities. The receivables of Pakistan Electric Power Company (Pepco) and its allied power companies have gone beyond Rs150 billion. Karachi Electric Supply Company (Kesc) has been holding over Rs56 billion payments to Pepco while arrears payable by Federally Administered Tribal Areas have gone beyond Rs75 billion as of July 31. The federal government, provinces, AJK and some public sector corporations together owe another Rs18 billion to electricity distribution companies.

In return, the Pepco and Kesc have accumulated payables of about Rs100 billion. Of this, Pepco has to pay about Rs64 billion to IPPs, limiting their capacity to purchase fuel oil and hence run on less than half of their capacity. The Pepco also has to pay about Rs10 billion and Rs8 billion each to oil and gas companies respectively. The problem is that unless the public sector clears electricity bills of distribution companies, they would not be able to release finances to the IPPs and oil and gas companies.

On top of that is the government’s inability to clear over Rs84 billion dues to the oil companies and refineries on account of price differential claims.

The PDC amount might have been much higher but the burden has been replaced with even more expensive borrowing from the commercial banks. So far, the government has paid about Rs50 billion to the oil companies and refineries by arranging syndicated loans from the market. PSO has over Rs25 billion of receivables from Pepco and IPPs.

Since, the government has not been able to liquidate petroleum differential claims (PDCs), the oil marketing firms have also informed the government about their inability to make payments to the oil refineries. This is despite the fact that oil marketing companies have reported 20 per cent higher fuel consumption during the current month.

“This is the re-emergence of the energy sector inter-corporate debt that we used to have in the early 1990s. The situation is even worse today”, said a senior official in the ministry of finance dealing with the chronic problem.

The situation is such that the energy sector crisis could worsen in the short-run in the kind of disruption in oil supplies and much higher scale of load shedding at least for another year. In the longer run, the budget deficit may go beyond eight per cent of GDP by end of current year.

Pakistan’s currency has already slumped to a record low, development schemes are being curtailed, the cost to safeguard sovereign bonds from default has almost tripled since October last year and foreign exchange reserves have declined by almost $7 billion-- enough to cover only three months of imports.

Interestingly, the current spate of unprecedented power load shedding emerged primarily because of financial crisis and fuel shortage, and not due to capacity constraints as being portrayed by the government. The government has been attributing the load shedding to the previous government’s failure to enhance generation capacity as the demand for power consumption increased.

However, the situation on ground is that that lack of capacity addition would cause power shortage to the extent of 5,500MW in 2010. The current shortfall in electricity demand and supply was because of the government’s inability to make full payments to the oil supplier and power generation companies and forced closure of a few thermal power plants.

The generation from Pepco’s own thermal power plants, according to official record, has shrunk to the lowest ebb because of Pepco’s inability to purchase fuel oil from its suppliers. On August 20, the Wapda’s thermal plants could produce a maximum of 1,900MW electricity against their capacity of 4,829MW because of their inability to purchase furnace oil and minor technical faults in gears, clutches and switches.

Likewise, the generation from IPPs stood at about 3,470MW on August 19 against their capacity of 6115MW, again because of their fiscal constraints. Similar has been the case all along for the last two months as total thermal power generation remained less than 6,000MW against total capacity of about 12,000MW.

As a result, Pakistan State Oil — the country’s largest and state-owned supplier — has refused to make payments to the refineries or lift fuel oil. As a result, refining capacity of some of the refineries has reduced by one-third due to storage constraints that could lead to shortage of petroleum products in the consumer market.

Facing short supplies from Attock Refinery, Kapco plant which could also run on natural gas, has not been able to produce electricity to its capacity when the gas utilities reduced their supplies to about 60MMCFD (million cubic feet per day) against usual supplies of 300MMCFD. The end electricity consumer had to suffer between August 23-28 as electricity load management became unmanageable.

Despite an available generation capacity of about 18,000MW, Pepco plants have not been able to produce more than 12,000MW in the last two months despite maximum generation by hydropower projects as river flows improved in the monsoon season. During the current month, the countrywide load shedding peaked at 4,810MW on August 25 and it was all because of financial and fuel supply constraints. That meant that generation capacity was available but the plants did not have fuel stocks to run their units.

In the Karachi Electric Supply Company’s system, thermal plants in Karachi could not generate more than 1,300MW electricity against their capacity of about 1,800MW. This was more because of technical problems that fuel shortages.

Oil and gas companies are now demanding to make a law empowering the suppliers to discontinue supplies to power companies if they fail to make payments in time up to a certain limit. Some international lenders also feel that unless it was done, the continuous inter-corporate circular debt in the energy sector would keep various oil and gas companies in the financial turmoil and keep foreign investors at bay since some of these firms are either listed abroad or were multinationals.