Prime Minister Shehbaz Sharif is about to decide on a proposal to solve the circular debt issue by making a one-shot payment of Rs 1 trillion to eliminate the circular debt. The advantage would be that it would enable a cut in electricity tariffs, which enable the government to provide relief to the hard-pressed co0nsumer from the present punitive tariff. Capacity payments are guaranteed to power plants no matter how much electricity is actually acquired from them. In short, they are paid to have the ability to generate, irrespective of whether they generate any electricity or not. One of the major components of the tariff is that of capacity charges. The IPPs were given guaranteed capacity charges so as to induce the Independent Power Producers to set up their plants in the first place. There have been numerous proposals to get the IPPs off the consumer’s backs, once it was realized that their capacity charges were behind the current crisis, such as nationalization, or simply revisiting their agreements, which is a polite way of saying that the government a should twist their arms until they agreed to take less money.
However, nationalizarion would represent a return to the bad old days of the 1970s, and would also mean that if IPPs had to be invited again, no one would come, as the sovereign guarantee of the government would have lost all meaning. Revisiting the agreements had been done before, with the first generation of IPPs, and the present agreements are a result of that revisiting.
One problem the government faces is to avoid the circular debt from recurring. That may well require paying in advance. It will also require converting the federal government making its departments pay their bills, which they are avoiding on the ground that the amounts of the bills need to be reconciled. The government needs to scotch all attempts by WAPDA against solar power, because it has alleged that its best customers switching to solar power has meant less money is being received for onward transmission to the IPPs. However, the entire proposal is still up in the air, because the financing remains the headache of the Finance Ministry, and it has already given the caveat that the IMF guidelines must be adhered to. It might be remembered that a similar proposal was made before, but was shot down by the IMF, for vit involved the government exceeding its budget deficit target. Something like that could happen again.
