Provincialization of electricity distribution companies

Restructuring only way to achieve optimal efficiency

Pakistan has ten electricity distribution companies, nine of which are controlled by the federal government, while K-Electric is in private control.  The ten electricity distribution companies cumulatively posted PKR 170 billion in losses for the year 2021-22, and consistently post financial losses. The same losses are eventually borne by national exchequer resulting in an ever expanding fiscal deficit.  It is estimated that the most recent losses for electricity distribution companies made up more than 1.4 percent of the GDP of Pakistan.

As the fiscal deficit expands, the cost of the same is either borne by the taxpayer through increasing taxes (and at the cost of other social and development expenditure), and by the population of the country through inflation, as the state continues to print more money to bridge it’s deficits eventually fueling inflation.  

On average, the electricity distribution companies have distribution losses of 17.5 percent – which means that for every one hundred kilowatt-hour (unit) of electricity that is distributed by these entities, roughly 17.5 units are either lost due to inefficient infrastructure, or remain unpaid.  The inefficiency eventually leads to higher electricity cost for the end-user, who has to pay an ever increasing cost for an inefficient infrastructure.

On a macro level, service delivery of electricity distribution companies is either spread over a city, or multiple districts, exclusively within jurisdiction of a province.  In such a scenario, a governance structure which is centralized at federal level leads to misalignment of incentives.  As incentives are misaligned, reduction of distribution losses is not incentivized, the province does not have any control to improve service delivery, or reduce financial losses.  As the financial losses are borne at federal level, the province does not have any skin in the game to improve efficiencies, and consequently reduce losses.

A transition from federal to provincial control would mean that the provinces will have to bear any potential losses, or participate in subsequent gains. The incentive to improve efficiency, and service delivery would be directly aligned with financial outcomes. A more efficiently run electricity distribution company would result in better outcomes on a provincial level, while also directly affecting the financial position of a province.  

This will also relieve the federal government of heavy financial losses, which then be managed by the provinces through their own resources aligning with the spirit of the eighteenth amendment of the constitution, which calls for devolution of services from federal to provincial for better service delivery and outcomes.

A transfer of electricity distribution companies to provinces would initially entail a substantial reorganization, and restructuring effort.  This would entail rightsizing of the workforce, which would be a politically tough decision.  Inability to take such decisions would mean that even the first step towards revitalization of distribution companies would not be taken resulting in compounding of losses, which will now be borne by the provinces. To avoid such losses, it will be critical to revitalize the entities on a war footing.  

The next step would be to invest in maintenance and development of distribution infrastructure which would require significant injection of capital.  Provinces can take the public-private partnership route to develop infrastructure without entailing significant capital outlay from provincial exchequer.  Provinces can also take the route of privatization, and push entities towards restructuring while having specific goal based efficiency improvement targets.  Moving towards the same would require considerably tough political decisions, that will require availability of political capital of a provincial government.

The electricity distribution companies have been bleeding cash for more than a decade now, and continue to impose a heavy cost on the taxpayers, and the population of the country.  Tough political decisions will be like a bitter pill that can solve the problem for the future and plug the losses.  

Alignment of performance and eventually profitable operations with the financial performance of a province can unlock more efficient operations that add value for stakeholders across the board.  The sovereign is already reeling under the stress of perpetual fiscal deficits, and significantly high energy costs.  Improvement of governance of electricity distribution companies, and their eventual restructuring remains critical for enabling the country to get on track of sustainable growth, while improving outcomes and overall welfare of the country’s population.

Ammar H. Khan
Ammar H. Khan
The writer is a non-resident Senior Fellow at the Atlantic Council. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets.

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