Circular Debt : A solution??

Power sector in Pakistan is plagued with the issue of circular debt (dated today and for the time to come). By the way, I assume you all know what circular debt is, otherwise maybe we can talk about it later.

Current government is taking steps (it already sounds funny) and thinking up of way to reduce this problem which has been affecting companies from E&P up till power distribution. The committee includes of water and power ministry officials, Ministry of Finance officials to name a few. Now these are educated, seasoned people (Dr. Hafeez Shaikh ... its "DR."). And the suggestion mostly likely to take affect ... increase the tariff and thereby recover more money from those who pay to ease the problem. WOW.

Let's just analyze if this GREAT idea is going to work or not

There are three types of customers.

1. One who don't steal and pay
2. One who steal
3. One who don't pay

The first type is the best customer a distribution company could have. These customers have a minimum demand for power which is out of necessity. They may consume some more on top of it ... based on convenience. Now, as tariff increases, minimum demand stays in-tact but "convenience" driven demand may reduce to manage the hike in cost. It has been observed that the "convenience" demand isn't relatively more elastic than the increase in price, thus increase in price most definitely increase the revenue per customer and "MAY" contribute in the reduction of the circular debt. But wait, this is only one part of the equation

Those who steal ... well ... that's mostly unaccounted for. Areas affected are mostly "kachi abadis" and politically influenced areas, which are not well-off in SEC class perspective. Those who are politically backed, are headed by the political elites of this very country who are ... well ... that's anybody's guess [Kudos to "reconciliatory politics"]. The increase in tariff will immediately increase the loss in Rupee term, even if we assume that theft does not increase. But considering the level of inflation and the poverty level ... increasingly more of the population is pushed towards the poverty line, which unable them to pay for even the "minimum demand" and hence leads to either non-payment or theft altogether

Those who don't pay are ... well ... majorly the public sector consumers to the likes of KWSB, Police Departments, Other govt. Departments etc. and some part the type of consumers defined in the previous paragraph. And clearly, increase in tariff will result in increase in non-payment rupee amount

Now, the increase in tariff will only work to "ease" the circular debt only if the revenues from the type 1 customer is enough to offset the losses from type 2 and type 3 customer. So, do you think this is going to work???

Author is a crazy crackpot associated with the utility sector