The current discussion on economic issues in government circles as well as business networks seems to be focused upon the host of energy issues being faced by the country. One of the major ones pertains to the distribution companies (DISCOS) and what to do with the constant losses burdening the public finances. For many years, across various governments and consistently advocated in IMF programs, the problem of DISCO losses is to be solved by selling these companies to the private sector.

The question arises – will privatization solve the problem? How does a change in ownership put an end to the perennial issue of financial losses? And why would a private investor venture into a sector where there is no previous example of successful returns for the investor? To be clear, I am not against the role of the private sector. In my opinion, the state is not capable of exercising control over the economy and therefore needs to create many public private partnerships to enhance performance viz its civic responsibilities.

Specifically In the context of the DISCOS, the issue is about the type of change of control/privatization which needs to be undertaken to fix the DISCOS while providing adequate returns for private investors.

Why do DISCOS run perpetual losses?

Before we venture further into the change of ownership discussion, let’s clarify what is the nature of problems with electricity distribution. Anyone who has basic knowledge of DISCO operations understands that the business suffers from a large amount of electricity theft coupled with low recovery rates. Both of these occur mostly in remote areas, city outskirts and urban slums where overall lawlessness is rampant and is caused by decades of economic deprivation and poverty.

According to the NEPRA State of the Industry report 2023, the 4 DISCOS with the largest quantum of Transmission & Distribution (T&D) losses as well as recovery deficits are (not necessarily in any order) Peshawar, Sukkur, Hyderabad and Quetta. If we were to note the respective geographical coverage of these DISCOS, we would see a wide expanse of sparsely populated rural areas or city outskirts. What is common amongst these areas, as well as urban slums, is the inability of the state to provide economic opportunities and hold the population accountable per the laws of the country.

While we do not have access to detailed T&D/recovery performance data, I would imagine the same would be the case with all DISCOS, including K Electric.

Therefore, how are we to deal with the issue of electricity theft? Is it a management or administrative issue or is it largely an economic problem? I would argue it is the latter and any attempt to solve this problem via only administrative measures will not succeed. It’s like saying we will solve the deep-rooted issue of inflation with price controls! Can it ever work?

Is K Electric a relevant model?

A case in point is to look at K Electric which was given into private hands almost 20 years ago. While KE has been successful in improving some aspects (full disclosure – I have been associated with this organization in the past), its T&D and recovery performance (according to NEPRA state of the industry reports) surpasses only the large loss-making DISCOS, and it is almost at par with most of the better-performing DISCOS.

But in the context of the future privatization of DISCOS, the relevant issue is not KE’s performance. Instead, it is the fact that it follows a completely different business model as compared to the state-owned DISCOS.

The pertinent question to be asked, therefore, for our current discussion, is whether the transmission & distribution (T&D) business can be sustained on its own and if the private sector can be attracted to invest in it – if it was owned and run independently of the generation business.

The vertically integrated KE business model has stood against the highly regarded and internationally recommended reforms undertaken by Pakistan in the eventful 90’s decade. Is it a case against those reforms which saw a break up of WAPDA businesses – into GENCOS, NTDC and DISCOS?

One cannot try to answer this question without the perspective of the policymakers who orchestrated those reforms – but surely the financial viability of the transmission and distribution businesses on their own is unproven.

To date, the incentive to invest in T&D business does not exist and future owners will be aware of the same.

Is there a way........

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