There is perhaps no country in the world where bad debts do not exist in the energy utility sector, and usually, there are allowances to avoid creating financial strains. Even small private enterprises, in any sector, do not operate without leaving room for these. The power sector is no exception to the rule.
The global expectation is that all customers will pay the full costs of the electricity they use, but this may not always be possible for a variety of reasons, including socioeconomic dynamics and macroeconomic conditions. During COVID-19, for instance, Pacific Gas & Electric sought regulatory approval for unpaid dues, while Ofgem in the UK also allowed write-off provisions following the energy crisis of 2022–2023.
The common principles followed by regulators include historical trends in non-payment, efforts by the utility to recover debts, and the impact on customer bills. Thus, the provisioning of write-offs is not a sign of weakness or mismanagement but rather a prudent measure to ensure accurate financial reporting and informed decision-making.
In the case of XWDISCOs in Pakistan, the non-provision of these amounts ends up becoming the noose of circular debt. In the same circular fashion, they are passed on to customers in the form of PHL surcharges applied uniformly—even to KE customers who do not contribute to the circular debt.
Over the last seven years, between FY17 and FY23, KE has filed its write-off claims with the regulator to seek a way forward. These claims are backed by internal and external audits, as well as extensive action against defaulters, including notices, disconnections, and the involvement of external agencies.
During this period, KE’s claims of Rs68 billion exceeded the company’s cumulative profitability of Rs45 billion (the sum of all losses and profits), which is a fraction of the Rs544 billion investment made since privatization.
For the period FY2017 to FY2023, K-Electric has requested a total of Rs68 billion in write-offs, representing the cumulative bad debt expense. While substantial, this amount pales in comparison to the estimated Rs475 billion in write-offs accumulated by the DISCOs over the same period. KE maintains that all its claims have been validated by globally reputable auditors and approved by KE’s Board of Directors.
These claims arise because NEPRA’s tariff determination assumes 100 percent bill recovery, which is unrealistic due to operational challenges such as electricity theft and socioeconomic factors in areas with over 900 slums.
There is a stark disparity between KE and XWDISCOs, where one company is subject to intense scrutiny while the other continues to add to circular debt without much concern. As per NEPRA’s State of the Industry Report, as of June 30, 2023, the circular debt had risen to Rs2,309 billion, with a year-on-year increase of Rs57 billion. Current defaulters of DISCOs owed around Rs900 billion, presenting a significant challenge as their billed amounts remain unpaid.
The KE management has been vocal over the issue and maintains that denying K-Electric the ability to recover legitimate costs could have far-reaching consequences and could impact KE’s financial viability, discourage future investment in the power sector, and shake investor confidence at a time when the government is actively pursuing privatization of DISCOs.
Failure to act would make privatization a pipe dream, leaving the power sector trapped in a cycle of financial instability and hindering the country’s economic development. The sector cannot attract investors by promising to reimburse all legitimate claims, only to keep them waiting for decisions. These internal contradictions must be resolved in the interest of long-term sectoral stability.
The power sector is the backbone of any economy, and to build a strong foundation, Pakistan must move beyond its legacy of outdated practices and focus on strengthening the balance sheets of utility companies. The future of Pakistan’s power sector, and indeed its economic development, hangs in the balance.
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