Pakistan’s power sector is mired in a deepening crisis, as highlighted by the World Bank’s recent findings. Despite efforts to contain circular debt and address inefficiencies, the sector continues to grapple with mounting financial burdens, rampant defaulting, and systemic shortcomings.

Despite extensive and recurring price shocks to consumers and nationwide efforts to combat theft and billing defaults, the World Bank observed a continual rise in power and gas circular debts, reaching an average of Rs135 billion to Rs5.5 trillion (about 5.1% of GDP) by early this year. “The government has undertaken comprehensive power sector reforms to mitigate circular debt accumulation, but further action is necessary,” stated the World Bank in its last circular debt update. Additionally, the Bank highlighted a surge in energy inflation from 40.6% in the first half of FY23 to 50.6% in 1HFY24, attributed to significant increases in domestic energy prices.

Despite these efforts, the World Bank noted that the power sector circular debt has been growing monthly by an average of Rs66.14 billion, surpassing Rs2.635 trillion (2.4% of GDP) as of January 31 from Rs2.172 trillion by the end of June 2023. Similarly, gas sector circular debt has risen by an average of Rs68 billion per month, reaching Rs2.866 trillion or 2.7% of GDP by the end of January from Rs2.391 trillion in June 2023, according to official data cited by the World Bank. The institution called on the government to “continue electricity and gas sector tariff reform to align tariffs with the cost of supply to curb mounting gas and electricity sector circular debt.”

Structural issues, inadequate planning, and significant subsidies have led to substantial inefficiencies across the power sector, impacting supply reliability and generating large deficits.

Due to non-cost-reflective tariffs and operational inefficiencies within state-owned electricity distribution companies (Discos), revenue collection fails to cover the cost of electricity supply, leading to accumulating circular debt. “Inefficiencies in the Discos include outdated metering practices, low collection rates, high technical losses, and widespread theft. Although the pace of accumulation has slowed since FY23, power sector circular debt continues to grow,” noted the Bank, attributing significant accumulations to “take-or-pay” contracts signed in 2018 for large, imported coal and gas power plants, which increased capacity payments by 50% and heightened the country’s vulnerability to international fossil fuel price volatility.

Furthermore, gas circular debt reached Rs2.866 trillion by the end of January, compared to Rs2.391 trillion in June 2023. While successive gas tariff increases have helped curb growth, the accumulation stems from tariff adjustment delays (three years without a tariff increase), sector inefficiencies (such as unaccounted-for gas), and increased diversion of expensive RLNG to domestic consumers during winter months.

The Bank commended “timely tariff increases in the last two years, coupled with subsidy rationalization reforms,” and urged the government to uphold its commitment to comprehensive sector reforms, including transitioning away from fossil fuels. “This necessitates addressing inefficiencies within Discos through private sector concessioning, reducing generation costs, decreasing reliance on imported fossil fuels by increasing renewable energy shares, bringing end-consumer tariffs closer to cost recovery levels, improving supply-side efficiency and collections, and enhancing regulatory capacity,” the Bank advised.

The World Bank also acknowledged Pakistan’s significant untapped hydro, solar, and wind power potential. However, it pointed out that large seasonal variations in peak demand pose challenges for the deployment of renewable energy, necessitating simultaneous expansion and strengthening of the transmission grid.

However, the government faces the daunting task of recovering more than a trillion rupees from chronic defaulters of five power distribution companies (Discos) in Sindh, Khyber Pakhtunkhwa (KP), and Balochistan. Power Minister Awais Leghari disclosed that the total outstanding receivables now amount to Rs1.9 trillion, while circular debt has climbed to Rs2.6 trillion.

This scenario is hardly surprising, given the familiar pattern of running Discos on a flawed formula where they cannot recover the full cost of generation from consumers due to unrealistic tariff rates set by the government. Consequently, they rely on subsidies and borrowing to bridge the gap, perpetuating the cycle of circular debt.

Moreover, the Discos’ own incompetence, inefficiency, corruption, and theft persist unchecked despite numerous promises made by successive governments over many years. Even now, there are reports suggesting a suspicion within the federal government that the amount owed by defaulters is significantly inflated by Discos to conceal their own malpractices.

While pending recoveries were expected to increase, it is alarming that there is still no serious discussion of a solution to this persistent problem, resulting in its perpetuation. What happened to the committee formed by Prime Minister Shehbaz Sharif during the final days of the PDM government to explore legal avenues for private sector involvement in Disco management?

Unfortunately, there seems to be a lack of realization among those in positions of authority that privatization is the only practical and logical way forward. However, even this process won’t be as straightforward as merely corporatizing Discos; it requires making them attractive to serious investors, which entails substantial structural changes. Even examples like K-Electric, where performance improved and losses decreased, yielded no returns for shareholders.

These reforms demand time, investment, planning, and above all, political determination. Yet, over the years, all we have seen from the top echelons of government is hollow rhetoric about privatization, often overshadowed by impractical proposals like transferring Discos to provinces without addressing how they would fare any better. Consumers bear the brunt of everyone’s incompetence – from Discos to defaulters and the government – as they foot the bill for kickbacks, corruption, and theft throughout the power sector.

These problems are not insurmountable; they have been exacerbated by successive governments’ failure to address them effectively. However, the economy has now reached a juncture where such failures are not only unacceptable but also financially unsustainable. This realization might finally spur the government into meaningful action, particularly as it boasts of its commitment to turning things around. Only time will tell, but optimism is scarce.

The time for decisive action in Pakistan’s power sector is long overdue. With circular debt escalating and structural issues persisting, urgent reforms are essential to alleviate financial strain, enhance efficiency, and ensure sustainable energy provision. Privatization, coupled with regulatory improvements and investment in renewable energy, offers a path forward. Failure to act decisively risks further economic instability and perpetuates the burden on consumers. It’s time for the government to prioritize meaningful reform and chart a course towards a resilient and reliable power sector.