Pakistan’s power sector circular debt has reached PKR. 2.655 billion  and some reports even ominously predict that it will cross PKR 2.8 trillion, reflecting inefficiencies prevailing in the system which have dragged it to the depths of darkness. As per Ministry of Energy, DISCOs contribute 596 billion in circular debt on account of higher T&D losses . The MoE is looking into this closely with Federal Minister Awais Laghari presiding over a meeting with board chairpersons and chief executive officers of XWDISCOs, as the privatization of DISCOs is imminent on the horizon, slated to begin in April 2025 . 

That the government is taking a deep interest in exploring the issues is an assuring sign, but the privatization agenda is a serious undertaking that requires holistic attention on the policy side as well. Even as a country, Pakistan’s receipt of IMF bailout packages, including the recent $7 billion, 37-month loan agreement, has been contingent on the implementation of “sound policies and reforms” to enhance macroeconomic stability. 

In the context of the power sector, what do these policies look like? An opportunity for comparison presents itself in the case of Tata Power Delhi Distribution Limited (TPDDL) which is arguably one of the best examples of privatization. Privatized in 2002, the power utility has thrived on the back of favorable tariff-setting practices and government support which balanced the cost of doing business thus enabling its financial sustainability. 

TPDDL, operates in a stable financial environment without the burden of circular debt, giving it the fiscal space to focus on operational efficiency and customer service. At the time of privatization, the AT&C losses in its territory stood at 53%, which required substantial investment for redressal. The tariff determined for the utility accounted for these factors enabling the company to inject USD 1.3 billion into its infrastructure and drive an 89% reduction over a 2-decade period. TPDDL was also supported by Government through facilitation of cheaper power, funding of loss reduction programs, timely payments by Government entity and consistent tariff regime. This is reflected in the fact that TPDDL has paid dividends to the tune of USD 160 million to its shareholders.  In TPDDL’s case, it has further been ascertained that their government has created the fiscal space to support customers through opt-in subsidies on their electricity bills, while special courts were also established to expedite the resolution of electricity theft cases.

When we look at our home-based privatized power utility, KE we get to know that it has also reduced its AT&C losses, from over 40% to approximately 20% today since privatization, but the regulatory regime underwent changes capping the investment and the returns that the utility could make. Moreover, supply of power from national grid, approvals for installation of new generation and payments by Government entities remained a significant challenge and no on ground legal support was provided. Given the roadblocks, KE has absorbed losses and reinvested any earnings it has over the years. Its return on equity of 1.42% also pales against other industry benchmarks of 22% to 32% and no dividend has been paid out to investors, moreover KE has not been able to eliminate load shed entirely. Investors will undoubtedly evaluate such indicators when deciding to jump on the privatization bandwagon in Pakistan. Therefore, the government’s attention towards addressing the systemic challenges must be accompanied by attention to provide an enabling environment for investment.

Among an array of regulatory issues while setting benchmarks in our power sector, an unrealistic expectation persists when determining the cost of electricity charged to customers which is 100% recovery by DISCOs. Pakistan has been aggressively cracking down on theft as well since September 2023. A presidential ordinance was passed in 2023 allowing the lodging of FIRs, but this has outlived its shelf life and requires legislative support to become a formal part of the law so that all efforts targeted towards combatting power theft bear fruit. 

Until macro and microeconomic conditions improve, we need to acknowledge that 100% recovery will remain a dream. Even the National Electricity Policy 2021 requires regulator to take into account ground realities while setting targets for losses and collections, but the Regulators chooses to ignore and takes the easy way out saying that it would lead to increase in tariff. What actually is leading to an increase in tariff is inaction of Government to privatize DISCOs and for the regulator to set an enabling tariff that can encourage investors to earn reasonable return while meeting targets set taking into account ground realities.  

Privatization success would depend on enabling environment and a realistic tariff. No investor will invest if no recovery loss is allowed for high loss discos like HESCO, SEPCO and QESCO where recovery ratio in FY 23 were 74.42%, 66.50% and 36.92%.  Keeping in view success of TDPPL model, initially the regulator would need to take into account realistic AT&C losses curve with gradual reduction to ensure that the investor invests and make return only by beating the performance curve. But if the regulator continue to insist that recovery loss cannot be allowed then there would be no privatization. Maybe, good discos, like IESCO, FESCO may be privatized but that won’t help the circular debt issues. To conclude, a stable regulatory framework is essential to provide clarity for investors. Ongoing government support will facilitate a smoother transition. Above all, policymaking and tariff-setting grounded in operational realities is crucial to allow privatized DISCOs to thrive as TPDDL has been able to.