ISLAMABAD: As Pakistan’s economy shows promising signs of recovery, the power sector plays a pivotal role in sustainable growth.
THE Economic update And Outlook for November 2024 highlights a significant increase in foreign direct investment (FDI) in the sector, with $414 million invested in the first four months of fiscal 2025, representing 46% of total FDI. The influx is part of a broader $585.6 million investment in energy, encompassing electricity, oil, gas and renewable energy.
The Special Investment Facilitation Council (SIFC) plays a central role in this positive dynamic, transforming the investment landscape and improving energy infrastructure. SIFC’s focus on renewable energy is evident through initiatives such as a $200 million investment to convert a thermal power plant into a 300 MW solar facility and establish a solar panel manufacturing plant and 3 GW batteries in Karachi. These projects not only promote clean energy transitions, but also position Pakistan as a regional leader in renewable technologies.
However, a major challenge undermining progress in the power sector is the persistent problem of increasing circular debt, largely due to inefficient operations of distribution companies (discos). High transmission and distribution (T&D) losses and low recovery rates have put immense financial pressure on the sector. The inability of nightclubs to effectively recover billed amounts, coupled with power theft and management issues, has contributed significantly to the circular debt, which now exceeds Rs 2.6 trillion and is expected to rise further.
This burden is borne by all electricity customers in Pakistan, even those in Karachi who have no contribution to the circular debt. This is evident from the PHL charges applied to K-Electric’s invoices, although KE, a private entity, does not place its losses in circular debt, unlike the Discos.
The privatization of nightclubs appears to be a viable solution to remedy these structural inefficiencies. This is also a condition set by the International Monetary Fund (IMF), with progress expected by early 2025. The transition to private management can improve operational efficiency, governance and customer service. The initial privatization targets would include Gujranwala Electric Power Company (Gepco), Lahore Electric Supply Company (Lesco) and Multan Electric Power Company (Mepco).
Privatized entities like KE demonstrate how private investment and accountability can reduce T&D losses, improve infrastructure and better serve customers. Privatization aligns with Pakistan’s broader reform strategy, including the introduction of the Competitive Commercial Bilateral Contract Market (CTBCM).
A striking example of successful privatization is that of Tata Power Delhi Distribution Limited (TPDDL), privatized in 2002. TPDDL has achieved remarkable success through policies balancing fair tariffs and operational costs. This approach ensured financial sustainability and significantly improved service delivery. Operating without circular debt, TPDDL reduced AT&C losses by 53% to single digits over two decades, investing more than $1.3 billion in infrastructure. Supportive policies, such as voluntary subsidies and special courts for theft cases, have bolstered its success, with $160 billion paid in dividends to shareholders.
Pakistan could benefit from studying such examples to guide its approach towards effective privatization and sectoral reforms. A sustainable pricing mechanism is essential for the stability and growth of the sector. Current tariffs should reflect the true cost of electricity supply, easing financial pressures on nightclubs and consumers. Regulatory bodies, particularly the National Electric Power Regulatory Authority (Nepra), play a crucial role in addressing these challenges by ensuring that tariffs are fair, transparent and reflect market realities.
However, Nepra must reconsider the assumption of a 100% recovery rate when developing tariffs. The current system, in which unrecovered costs are ultimately passed on to consumers in the form of PHL surcharges, is inefficient. Setting ambitious but achievable recovery targets, with over- or under-recovery funding for nightclubs, could sustainably reduce prices and facilitate privatization. For example, the recovery rates of Hyderabad Electric Supply Company (Hesco) and Sukkur Electric Power Company (Sepco) in 2022-23 were 75.88% and 68.19%, respectively, while the recovery rate of Quetta Electric Supply Company (Qesco) was only 36.92%. %. No investor will finance such large gaps.
Nepra should adopt a phase-down strategy similar to that of TPDDL, supported by a sustainable business model for nightclubs. In conclusion, Nepra’s balanced regulatory decisions, coupled with the government’s decisive actions to privatize and restructure nightclubs, will reaffirm Pakistan’s position as a reliable and attractive destination for international investments. By prioritizing improved recovery and sustainable tariffs, the power sector can become the cornerstone of Pakistan’s economic recovery.
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Originally published in News