Auditor General urges KE-style ring-fenced model for DISCOs as circular debt stands at Rs1.614 trillion

The Auditor General of Pakistan (AGP) has recommended restructuring public sector power distribution companies (DISCOs) on the operational model used by K-Electric, arguing that a ring-fenced commercial framework could help limit the accumulation of circular debt in the power sector, Business Recorder reported. 

According to the audit observations, K-Electric operates as a commercially ring-fenced utility and absorbs the financial impact of operational inefficiencies within its own balance sheet rather than transferring these costs across the national power supply chain.

The recommendation comes as Pakistan’s circular debt stock stood at about Rs1.614 trillion as of June 30, 2025, compared with Rs2.393 trillion a year earlier, reflecting a reduction of roughly Rs780 billion.

However, the audit noted that the reduction was largely driven by government intervention rather than improvements in the operational performance of public sector distribution companies.

The audit report stated that the original power sector restructuring strategy introduced in 1992 aimed to transform WAPDA into a financially self-sustaining system through competition, accountability and managerial autonomy.

The plan also required electricity tariffs to reflect the true cost of service while ensuring that operational inefficiencies — including technical losses and recovery gaps — were addressed at the utility level rather than being passed on to consumers.

During the unbundling of WAPDA, however, the audit found that public sector DISCOs continued to operate with persistent operational inefficiencies despite tariff mechanisms designed by the National Electric Power Regulatory Authority (NEPRA) to cover the full revenue requirements of the power supply chain.

High transmission and distribution (T&D) losses and weak bill recoveries prevented these companies from generating sufficient cash flows to meet payment obligations, contributing to the accumulation of circular debt.

During the financial year 2024-25, the audit estimated that about Rs265 billion was added to circular debt due to transmission and distribution losses, while recovery shortfalls contributed an additional Rs132 billion.

The report stated that the decline in circular debt stock during the year was mainly achieved through government borrowing used to retire liabilities of Power Holding (Private) Limited and clear arrears owed to independent power producers.

To service the cost of this borrowing, electricity consumers — except for certain protected categories — have been paying an additional Debt Service Surcharge (DSS) of Rs3.23 per kilowatt hour.

The audit observed that the continued reliance on government borrowing and tariff surcharges has allowed operational inefficiencies to persist without structural reforms.

It recommended aligning the operational framework of public sector DISCOs with a commercially ring-fenced model similar to K-Electric to strengthen financial discipline and limit the buildup of new liabilities in the power sector.