ISLAMABAD: The World Bank has revealed that high energy prices in Pakistan disproportionately impact the poor, as only 55 percent of electricity consumption in the poorest households is eligible for below-average tariffs from lifeline or protected meters, while 46-49 percent of middle-class and rich households also access low tariffs from these protected meters.
The bank in its latest report, “Pakistan Development Update the Dynamics of Power Sector Distribution Reforms”, stated that at the end of June 2024, the total accumulated circular debt (CD) stock stood at around Rs2.4 trillion, equivalent to 2.3 percent of GDP.
The energy sector poses major risks to fiscal sustainability and the revival of growth in Pakistan. The scale of the financial burden and costs for the economy arising out of the energy sector necessitate urgent reforms.
The World Bank stressed the importance of full cost recovery from consumers in the energy sector to prevent further financial losses and urged Pakistan to address the inefficiencies within its power distribution system.
Furthermore, consumers paying high tariffs have either exited the grid system entirely (as demonstrated by the increase in deployment of solar photovoltaics), evaded higher tariffs by appearing as low-volume consumers, or adapted by reducing demand and qualifying for lower tariffs.
In 2020, 10 percent of domestic consumers demanded more than 400 kilowatt hours (kWh) per month. By fiscal year 2024, however, and after a precipitous rise in tariffs beyond 300 kWh monthly consumption, less than one percent of domestic consumers demanded more than 400 kWh per month. This implies even higher tariffs are required at ever-lower consumption levels for the sector’s financial sustainability, which impedes the objective of affordability.
Consumption-based tariff subsidies create fiscal costs with limited positive impact on poor, vulnerable, and aspiring middleclass consumers. Approximately, 18 percent of the poorest households have no electricity connection while only half of poor, vulnerable, and aspiring middle-class households that are connected benefit from below average-cost tariffs.
Subsidies to residential consumers increased by 88 percent from fiscal year 2020 to fiscal year 2024, and power sector CD has grown by 48 percent from fiscal year 2019 through fiscal year 2024, even as domestic tariffs for non-protected meters rose by an average of 225 percent and the electricity share of the household budget has tripled for the average poor, vulnerable, or aspiring middle-class consumers over the same period.
The federal government’s subsidy allocations to the power sector, coupled with tariff adjustments, were designed to manage the power sector deficit and the CD. These budgeted subsidies have grown substantially in recent years, increasing from Rs236 billion (0.5 percent of GDP) in fiscal year 2020 to Rs1,190 billion (1.0 percent of estimated GDP) in fiscal year 2025.
Additionally, failure to reduce losses and lower collections, especially at every onset of tariff increase, have contributed to acceleration of CD buildup. In fiscal year 2024, a staggering 94 percent of all residential consumers benefited from both budgeted subsidies and cross subsidies. As a result, despite significant previous reform efforts, the CD flow remains high, averaging Rs400 billion annually over the last four years.
Analysis of household consumption patterns confirms that the indirect effects of higher energy prices are larger (relative to household income) for poor, vulnerable, and aspiring middle-class consumers than for middle-class and rich households. Recent fiscal incidence analysis demonstrates that the current power subsidy system spends 90 percent more than is necessary to reach the poorest households with a targeted electricity bill rebate.
These challenges, combined with overall macroeconomic vulnerability and limited fiscal space, suggest a need to reconfigure essential social and economic service delivery for poor, vulnerable, and aspiring middle-class consumers. Systems for determining eligibility, for identifying and verifying beneficiaries, and payment and reconciliation systems for schemes such as BISP already exist and could be readily repurposed for a targeted electricity bill rebate.
The bank stated that in addition, because costs persistently exceed the electricity revenues being collected, the financial losses or deficit of the power sector has been increasing. Sector deficits are large, averaging 2.8 percent of GDP over fiscal year 2014-fiscal year 2024.
Because power sector debt is typically government-guaranteed, any portion of the deficit that is not covered by government subsidies accumulates as power sector CD and adds to the government’s stock of liabilities. Amid the tight national fiscal space, the continuous power sector deficits and CD debt servicing costs severely constrains government spending on other priority areas, while posing substantial risks to Pakistan’s overall fiscal and debt sustainability.
The report also revealed that most DISCOs in Pakistan are running substantial deficits. In fiscal year 2023, nearly all of them reported losses, except GEPCO. The consolidated total cost of electricity (including operations and maintenance, depreciation, and financial cost and tax) for the sector was recorded at Rs2,900 billion, whereas, the total revenue, inclusive of Rs376 billion subsidies, reached Rs2,622 billion, leading to a shortfall of Rs278 billion (0.3 percent of GDP) in the distribution sector.
The bank stated that most DISCOs are in negative equity, with liabilities far exceeding assets, particularly for PESCO, QESCO, SEPCO, and HESCO. The current financial state of the DISCOs is a result of several challenges, including high T&D losses and poor recovery rates against supplied electricity.
In addition to the high cost of power generation, the distribution sector also faces aging infrastructure and weak governance, leading to significant financial losses that are ultimately reflected in the growing CD. In fiscal year 2023, DISCOs reported a combined T&D loss of 16.5 percent, which resulted in Rs160.4 billion (0.2 percent of GDP; 73 percent of the CD flow) being added to the CD during fiscal year 2023, with the biggest share coming from PESCO, LESCO, QESCO, and SEPCO. Mounting financial pressures and operational inefficiencies are contributing to CD and collectively undermining the financial viability of the energy sector.
The bank official stated that percent improvement in T&D losses, could result in around Rs40 billion recovery.
The bank further stated that despite improvements in generation capacity, DISCOs continue to struggle with high losses and poor financial performance, contributing to high electricity costs. Private sector participation in the distribution sector offers the potential for improved management, increased efficiency, and new investment, but—as discussed in the Special Focus section of this report—good outcomes are contingent on the establishment of a conducive broader policy and regulatory environment.
Pakistan’s power sector is inefficient and financially unsustainable, necessitating comprehensive reforms. Challenges include persistent financial losses, operational inefficiencies, a lack of investment, outdated infrastructure, and inadequate management practices.
Frequent power outages and load shedding discourage investment and economic activity, while electricity costs have tripled to among the highest in the region, negatively impacting both investors and households. The struggle to fully recover costs due to high distribution losses and low revenue collection rates presents risks to the sector’s fiscal sustainability. While much has been done to increase the country’s power generation capacity over past decades, operational inefficiencies of DISCOs remain largely unaddressed.
Copyright Business Recorder, 2024