ISLAMABAD: The Auditor General of Pakistan (AGP) has recommended restructuring the operational framework of Pakistan’s public-sector power distribution companies (DISCOs) to align with the commercial model followed by K-Electric, which operates under a ring-fenced structure and does not contribute to the country’s growing circular debt.
According to audit observations, the model adopted by K-Electric ensures that operational inefficiencies are absorbed within the company’s own balance sheet rather than being passed on to the national power supply chain or electricity consumers.
The recommendation refers to the strategic plan for the privatisation of Pakistan’s power sector introduced in 1992, which envisioned restructuring the Water and Power Development Authority (WAPDA) to establish a financially self-sustaining electricity sector independent of continuous government support. The plan emphasized competition, accountability, managerial autonomy, and profit incentives to improve operational efficiency.
It also called for electricity tariffs to reflect the true cost of service and for inefficiencies—such as technical losses and poor recovery of bills—to be addressed at the utility level rather than transferred to consumers. Distribution companies were expected to operate as autonomous commercial entities, maintain full recovery of billed revenues, and avoid accumulating liabilities that would require government borrowing or additional consumer surcharges.
However, during the unbundling of WAPDA, the Audit (Power) observed that despite the tariff determination mechanism developed by the National Electric Power Regulatory Authority (NEPRA) being designed to fully cover the revenue requirements of the power supply chain, public-sector DISCOs continued to suffer from operational inefficiencies.
These inefficiencies include high transmission and distribution (T&D) losses and low recovery ratios, which prevent the companies from generating sufficient cash flow to meet their payment obligations. As a result, the sector continues to accumulate circular debt.
As of June 30, 2025, Pakistan’s circular debt stood at approximately Rs1.614 trillion, compared to Rs2.393 trillion a year earlier, reflecting a reduction of about Rs780 billion.
The audit report noted, however, that this decline was not the result of structural improvements in DISCO performance. During the fiscal year 2024–25, inefficiencies in distribution companies added around Rs265 billion to circular debt due to T&D losses and another Rs132 billion due to poor bill recovery.
According to the AGP, the reduction in circular debt primarily resulted from government intervention through commercial borrowing used to retire liabilities of Power Holding Private Limited and to clear arrears owed to independent power producers (IPPs), rather than from operational reforms within the distribution companies.
To service the cost of this borrowing, electricity consumers—except for a limited number of protected categories—have been subjected to an additional Debt Service Surcharge (DSS) of Rs3.23 per kilowatt-hour. This surcharge has become a significant component of the final electricity tariff paid by consumers.
The audit further highlighted that K-Electric, the country’s only privately managed distribution utility, operates under a commercially ring-fenced structure and therefore does not contribute to the accumulation of national circular debt.
The AGP noted that continued reliance on government borrowing and tariff-based surcharges has effectively substituted for long-overdue structural reforms in the power sector.
The report recommended adopting reforms that would bring public-sector DISCOs’ operational frameworks closer to the K-Electric model, ensuring greater financial discipline, improved efficiency, and reduced dependence on government support.
Story by Mushtaq Ghumman
