Privatisation has long been touted as a catalyst for economic growth, and for good reason. By introducing private sector expertise and investment into previously state-controlled industries, privatisation can unlock efficiencies, drive innovation, and spur competition.
All these factors are a known phenomenon and have time and again been reiterated over multiple platforms. Recently, the report launched by the Sustainable Development Policy Institute (SDPI) and the Network for Clean Energy Transition highlighted lessons from the Pakistan’s power utility sector and how one company’s privatisation success can serve as a torch-bearer for the entire industry.
Historically, many countries around the world have initially operated industries like energy, automobile, telecom, petroleum, etc., under a government or state-owned model. This approach was often driven by several factors, including the need for national control over critical resources, economic protectionism, and the desire to ensure universal access to essential services.
For industries like energy and telecommunication, maintaining control over these sectors was seen as critical for national security and independence. Governments believed that by owning these assets, they could better manage resources and control prices to support economic stability. State ownership was viewed to drive industrialization and economic development, particularly in countries where private sector capacity was limited.
However, time and again it was proven that government-owned enterprises often suffered from inefficiency and bureaucratic inertia. Decisions were frequently influenced by political considerations rather than economic rationale, leading to overstaffing, poor financial management, and lack of innovation.
Furthermore, the monopoly status of these enterprises resulted in lack of competition, stifling innovation and reducing the drive to improve service quality. Customers, with limited or no choice to switch, faced outdated technology and poor service quality.
With time, these challenges became more evident, and countries started shifting towards privatisation to introduce competition, drive efficiency, and improve service quality. The same trajectory is followed by Pakistan’s power sector which is not a center of public plight. However, with only one firm operating as a private entity, it is evident that Pakistan has yet to catch up in the privatisation front.
The struggles of state-owned Discos
For decades, Pakistan’s power distribution network has been dominated by government-owned DISCOs. These entities struggling with high transmission and distribution (T&D) losses and inadequate revenue recovery has been a long-standing issue.
In FY 2024, several state-owned DISCOs, such as PESCO and QESCO, reported staggering T&D losses of 37.4% and 26.72%, respectively signifying a dire need for operational reforms. These inefficiencies have also translated into substantial financial losses.
In FY 2024 alone, the cumulative financial losses due to operational inefficiencies and power theft exceeded PKR 500 billion. These losses further exacerbate the circular debt problem, reflecting a deep-rooted issue within the public power sector that threatens the country’s economic stability. K-Electric (KE) is the only private distribution company in the country and the factors highlighted in the SDPI report should compel the government and policymakers to expedite the privatisation of remaining DISCOs before they are broken beyond repair.
As per the report, post-privatisation, K-Electric showed substantial improvements in operational efficiency and reduced transmission and distribution (T&D) losses from 32.2% in 2011 to 15.27% in 2023, surpassing regulatory benchmarks set by Nepra.
The privatisation reportedly saved PKR 900 billion for consumers and the government, facilitated by significant investments in infrastructure and technology improvements. This improvement not only highlights the potential benefits of privatisation but also showcases the impact of strategic investments and efficient management practices.
It is an evident fact that the high T&D losses and cumulative financial losses have severely impacted the financial sustainability of the power sector in Pakistan.
The persistent inefficiencies within government-owned DISCOs have led to increased reliance on government subsidies and have constrained fiscal space, which could otherwise be used for development projects.
Another aspect of government-owned entities is next to zero competition in the industry which automatically leads to low efficiencies and process innovation.
Private companies, driven by profit motives, are more likely to innovate and manage resources effectively. With increased T&D losses, high tariff rates and unhappy customers, it’s high time the Government of Pakistan take a call to bring in technical expertise and modern management practices from the private sector, which helped modernize industries and improve competitiveness all over the world.
Privatisation as a path forward
The stark difference in performance between K-Electric and state-owned DISCOs underscores the potential of privatisation as a solution to Pakistan’s power sector woes.
A phased approach to privatisation, starting with the most financially viable DISCOs, could allow for careful monitoring and adjustment of policies. This strategy would help avoid the pitfalls of a rushed privatisation process and ensure a smoother transition for both the market and consumers. Additionally, a robust regulatory framework is essential to maintain fair competition, protect consumer interests, and prevent monopolistic practices.
K-Electric welcomes competition
Despite its success, K-Electric is not resting on its laurels and is constantly paving way for innovation in the power utility front in form of renewable energy project. KE’s vision is to bring in more firms in the energy sector to inculcate a sustainable and stable energy eco-system, which is why they are working with the government in different provinces of Pakistan and calling in local and international investors to partner with it.
The company has openly welcomed competition, recognizing that a competitive environment drives continuous improvement and innovation. K-Electric’s openness to competition is a testament to its confidence in its operational model and commitment to providing quality service to its consumers.
“We believe that competition is healthy for the sector and ultimately benefits consumers,” a spokesperson for K-Electric said. “We have seen firsthand the positive impact that privatisation can have on efficiency and service delivery, and we are ready to compete and continue improving in a liberalized market.”
By embracing competition, K-Electric is setting a benchmark for other DISCOs in the country, demonstrating that with the right management and strategic investments, even the most challenging markets can be turned around.
As more players enter the market, the resulting competitive landscape can lead to lower prices, improved services, and increased choice for consumers.
Moreover, privatisation can attract foreign investment, create new job opportunities, and stimulate local economies, all which Pakistan needs desperately. From the telecom sector to energy and beyond, the injection of private capital and competition can transform industries, leading to a more dynamic and resilient socio-economic uplift.
Copyright Business Recorder, 2024
The writer is an energy economist with a focus on optimizing global energy systems
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