The government has announced a plan to privatise various public sector companies including the power generation (GENCOs) and distribution companies (DISCOs). In the short run, the plan envisages privatisation of electricity distribution companies IESCO and GEPCO followed by FESCO. In the long run, it seeks to privatise the loss-making GENCOs and DISCOs. The plan seeks to sequence privatisation of efficient utilities first, and then move on to the loss-making ones. The obvious motive behind the plan is to address financial woes caused by inefficiencies in the power sector.
Unfortunately, however noble and well-intentioned, Pakistan’s privatisation experience of power utilities has brought more trouble than benefits!
The privatisation drive of energy sector entities and assets since the early 1990s was partly driven by political economy, but largely motivated by international conditions that favoured divestment of public resources from the energy sector. Ever since, the state has followed a path to a fully privatised sector, regulated by a regulatory authority (NEPRA). The institutional ecosystem had been restructured in the early 1990s, with more than 24 public entities/companies currently working with the aim of providing efficient, reliable and affordable electricity to consumers.
The investor emphasis in lieu of the privatisation drive in the power sector has always been on the generation side, while the transmission and distribution sector have remained neglected. The power policies, especially the 1994 and 2015 policies, favoured investments in the generation sector with generous incentives, guaranteed profits and unprecedented returns, something that was absent in the case of transmission and distribution, two of the most troubled areas since WAPDA’s founding in 1958. These policies attracted investments in more than 100 private/public generation companies (Independent Power Producers – IPPs) with a combined capacity of more than 24,000 MW.
However, this over-investment in generation backed by guaranteed profits has proved a tight noose around the state’s neck in the shape of inefficient and unaffordable power production. In the transmission sector, the Transmission Line Policy-2015 was meant to attract investment in transmission lines with the incentives of guaranteed profits, capacity payments and tax holidays. Resultantly, investment came in the shape of the Matiari-Lahore transmission line under CPEC. Since commissioning in 2021, the line has been underutilised due to multiple issues including instability and lack of aligned facilities at the entry and exit points of the transmission line.
Research suggests that the chances of failure in public and private companies are the same; there is no significant evidence supporting private ownership of electricity distribution
The most neglected area, one that needed investment in infrastructure and human capital most, i.e., DISCOs, however remains neglected, saddled with huge accumulated losses due to technical and financial inefficiencies. The 11 DISCOs across the country were created to corporatise, commercialise and then privatise them to bring about efficiencies and reduce losses. However, the DISCOs are still loss-making companies and have hugely distorted the power market. Such losses are reflected in the circular debt, which every government has struggled to do away with, but in vain. The circular debt by June 2024 rose to about PKR 2.4 trillion despite the fact that the government had retired more than PKR 2.6 trillion of circular debt since 2006. The subsidies to the sector have also surpassed the figure of PKR 5 trillion ever since.
However, in terms of financial burden and liabilities, capacity payments to IPPs (for utilised and unutilised capacity both) are the main culprit, which rose to PKR 1.9 trillion in 2024, primarily reflecting the consequences of policy failures.
The inefficiencies and malpractices of DISCOs have compounded problems in the power sector. The consumer-end tariffs are distorted through wrong billing by DISCOs. In the year 2024, a NEPRA inquiry determined that excessive billing cycles that exceeded the mandated 30 days resulted in the improper reclassification of consumers, causing many to shift from lifeline to non-lifeline or from protected to unprotected status. Over 2.6 million consumers in MEPCO and 1.2 million in GEPCO were notably impacted. The inquiry also revealed that DISCOs failed to replace defective meters promptly, leading to extended periods of average billing, some cases extending back over three years. Many DISCOs recorded meter readings in less than the mandated 30 days and compensated for this by projecting additional units onto consumer bills. This practice caused numerous consumers to be reclassified from protected to unprotected categories or from lifeline to non-lifeline status. As a result of these improper adjustments, over 404,000 consumers faced adverse reclassifications.
DISCOs sometimes exploit defective meters to manipulate billing outcomes, either to unfairly benefit consumers or the DISCO. In certain cases, faulty meters are left unresolved or intentionally deployed, leading to inaccurate billing. Such defective meters record fewer units than actual consumption, resulting in under-billing that benefits consumers, or may also register more units than consumed, benefiting the DISCO. According to NEPRA Industry Report 2024, the status of defective single-phase and three-phase meters across various DISCOs, including KE, stood at 170,848 (out of 742,905) and 10,281 (out of 64,439), respectively. Such malpractice at the DISCOs and KE has pushed consumers to seek other solutions, including theft, hooking, and rooftop solar solutions for those who can afford to invest in the system.
The regulatory system under the current setup is hardly efficient. The power sector woes also stem from NEPRA’s inability to regulate the market even-handedly. This inability partly stems from the government’s interference in its affairs (like tariff determinations and pushing forward private generation projects that are not required). However, the evidence suggests that selection, qualification, and intra-board differences in NEPRA have also rendered the entity toothless.
All the above factors have contributed to the current financial issues and economic troubles for the sector. In this scenario, going alone for the privatisation of DISCOs cannot solve the issues, and will not absolve it of the responsibility to provide reliable and affordable electricity to consumers as a social responsibility. The evidence of the last three decades suggests that the privatisation of electricity entities for the sake of privatisation without due thought process can lead to disaster. Research suggests that the chances of failure in public and private companies are the same; there is no significant evidence supporting private ownership of electricity distribution. However, there is evidence for an increase in profitability after privatisation, but no substantial evidence suggesting any efficiency gains, improvement in service quality or tariff reduction. Further, privatisation of utilities does not guarantee competition and fair pricing for the consumers. The private investment in IPPs and resultant inefficiencies in the power system are a glaring example of this misperception.
Therefore, the privatisation of the reasonably efficient DISCOs will neither make any difference to the circular debt liabilities, nor reduce subsidies, nor improve the efficiency and affordability of power for compliant consumers. Lessons should, ideally, be learned from the aftermath of the KESC privatisation, which still relies on government subsidies to keep its operations going. Only well-managed and well-designed privatisation that takes into account all the relevant factors will guarantee meeting both private and public gains. Otherwise, the public will be the loser again.