The government has made a plan to address the power sector circular debt as part of its commitments to the IMF.
The goal is to reduce circular debt from Rs2.38 trillion to around Rs561 million. A loan of Rs1,252 billion from 18 commercial banks will help the Central Power Purchase Agency-G (CPPA-G) pay off Rs683 billion in loans to Power Holding Private Limited and settle Rs569 billion in arrears to energy companies. The circular debt flow is expected to continue for the next four to five years.
The plan is receiving significant praise, as it promises to free the sector from financial mess.
As someone who has followed power sector issues for many years, I find this narrative of clearing sector debt to be quite familiar. It is important to reference a similar situation from the past for a more comprehensive understanding.
In June 2013, the PML-N government, right after taking charge, cleared the debt of Rs480 billion. The idea was to pay off dues owed to Independent Power Producers (IPPs) and fuel suppliers, to increase electricity generation, reduce massive loadshedding, which was around eight to ten hours on average across the country, crippling economic activities, and to restore investors’ confidence in the power supply chain.
The debt was cleared using various sources: the Ministry of Finance allocated Rs326 billion to IPPs and fuel suppliers from budgetary resources. Rs154 billion was settled through Pakistan Investment Bonds and Treasury Bills issued by Power Holding Private Limited (PHPL), a public sector entity created to manage borrowing for the power sector. This helped keep amounts off the central financial records. Minor accounting adjustments were also made with public-sector entities like the NTDC and GENCOs.
The immediate outcome was an increase in electricity generation, as previously idle power plants commenced operations following the receipt of overdue payments. Load-shedding hours decreased, IPPs and other energy companies, such as PSO, returned to normal operations.
However, no significant initiatives were taken to address the root causes of the debt. Reforms to fix underlying inefficiencies remained lacking; illogical policies continued. While payments reduced the existing debt, they did not prevent new debt from accumulating, causing the circular debt to rise again within months.
The current financing plan, however, is different from the 2013 plan. Under the new plan, Rs1.275 trillion has been secured from commercial banks at a rate 0.9 per cent lower than the three-month KIBOR. Electricity consumers will repay this loan through a Debt Service Surcharge of Rs3.23 per unit, already included in their bills. This surcharge, initially capped at 10 per cent, is projected to last for six years. The cap of 10 per cent has been removed at the IMF’s request.
In 2013, the burden of the circular debt shifted but was not reduced. The amount parked in the PHPL gradually increased, turning into a quasi-fiscal liability. Consumers were burdened; they covered the interest payments on this debt through a surcharge on their electricity bills similar to the 2025 plan.
Addressing the debt stock without fixing existing inefficiencies resulted in suboptimal performance by distribution companies (DISCOs) and the overseeing ministry. In 2013, the government had a chance to reform the energy sector, as declining oil prices eased financial pressures. The decision-makers could have cut irrational subsidies, adjusted tariffs, and redesigned governance structures through corporatisation or privatisation. Unfortunately, these vital reforms were either delayed or abandoned.
The composition of the generation mix did undergo modification, resulting in a decreased reliance on furnace oil; however, there was no change in import dependency due to the addition of imported coal and RLNG in the generation mix. The primary focus was on expanding (expensive) generation capacity, while insufficient attention was given to improving system efficiency and addressing deficiencies in transmission and distribution systems.
The challenges facing the sector have remained the same, if not getting worse, even after more than a decade. Electricity prices are high; with decreasing demand, costs will continue to rise due to the significant burden of capacity payments. This situation is particularly challenging for low- and middle-income consumers.
There has been no improvement in the efficiency or governance of DISCOs, and there are no expectations for future improvements either. The government claims to be serious about privatisation, but similar promises have been made in the past without success. Even if they succeed this time, focusing on the three most efficient DISCOs is unlikely to reduce overall losses. Without a change in tariff policy and without a reform in regulatory infrastructure, these privatisation efforts could end up exacerbating financial losses instead of alleviating them.
Outdated tariff design, along with poor governance in tariff setting and untargeted subsidies/cross-subsidies, also cannot ensure efficiency in the sector. The 2025 circular debt settlement plan, while substantial and relatively structured (in terms of its recovery plan), will only provide temporary relief to the sector without a guarantee to address the root causes.
The implementation of the CTBCM is on the cards, but the proposed wheeling charges still include stranded costs, which raises doubts about its success. With the current advancements in solar energy and the declining costs of batteries, market forces are already influencing the situation, making the existing CTBCM model somewhat irrelevant.
The initiative ‘Apna Meter, Apni Reading’ deserves appreciation. However, it should not end here. This app would help check billing irregularities, but its effectiveness could be significantly enhanced if it is integrated with Advanced Metering Infrastructure (AMI). It is time to empower consumers in all aspects of their decisions, not just in meter-reading. AMI is crucial for DISCOs operational and commercial efficiency.
Essentially, if governance and efficiency issues are not resolved and market forces are not allowed to operate, the problem of circular debt will recur, repeating the cycle seen after 2013. Consumers will remain the worst sufferers, maybe even more this time. Heavy borrowing from domestic banks will crowd out private sector credit, heightening financial sector exposure to the energy chain, and creating liquidity risks if surcharges fall short due to low recovery rates and high losses.
The writer is an energy expert and senior research economist at the
Pakistan Institute of Development Economics (PIDE), Islamabad.