POWER SECTOR
The recent restructuring of the power sector’s circular debt by the government is a necessary but not a sufficient step, an agreement aimed at addressing the trillion-rupee debt through a Rs1.225 trillion financing and restructuring facility arranged with a group of 18 banks.
The package restructures existing loans, injects fresh liquidity to settle overdue generation and fuel claims, and introduces a debt-servicing surcharge of Rs3.23 per unit on electricity bills to amortise the loan arrangement over six years.
The headlines are warranted because of the deal, but policy triumphalism would be premature. To understand why the deal matters and why it still may not be enough, we must treat circular debt as two different problems -- stock vs flow, rather than just a single number.
The stock, which as of July stands at Rs1.661 trillion, is the pile of unpaid obligations, accumulated arrears to Independent Power Producers (IPPs), fuel suppliers and liabilities parked over time in state-owned subsidiaries.
The flow, on the other hand, is the steady trickle of new unpaid obligations that continue to emerge each month because distribution companies fail to collect bills, legacy IPP contracts impose large, fixed payments irrespective of electricity demand, theft and technical losses persist and international fuel prices remain subject to shocks and fluctuations. Despite the vulnerabilities posed by the current stock of circular debt, the flow is the true test.
If net inflows -- new debt minus timely transfers and recoveries -- are not driven to zero and maintained there, any one-time shock reduction will prove to be only a short-term remedy until the problem re-emerges. In 2013, the government injected Rs480 billion, and later, through various measures including tariff hikes and subsidies, attempted to retire and curb the circular debt. Yet, it failed to achieve the desired outcomes, primarily due to deep-rooted structural inefficiencies in the power sector that have long remained unaddressed.
These structural issues are stubborn and interlinked. IPP capacity payments are a major contributor to the stock, driven by contractual clauses that guarantee payments even when plants sit idle. Payables to power producers account for a sizable portion of the arrears. At the same time, DISCO losses and weak recoveries continue to add fresh arrears every quarter. Lastly, political resistance to tariff adjustments compounds the problem. All of this makes achieving zero-flow extremely difficult.
As more consumers shift to rooftop solar and net-metering, monthly collections decline while fixed obligations remain unchanged
This facility cleverly converts arrears that are difficult to collect into structured obligations, while the surcharge provides a credible revenue stream for repayments. Yet surcharges are blunt instruments; in effect, they are regressive in nature, and they fall on all the consumers alike. More importantly, there is no guarantee that the underlying operational deficiencies will be fixed.
Worse, if the surcharge is removed after the loan is repaid but no reforms are undertaken in contract terms, theft, losses, and metering, the stock will creep back up. Worse still, if the surcharge remains in place indefinitely, it will continue to burden consumers.
If this round is to be remembered as reform rather than rescue, a set of structural reforms must be introduced and enforced. First, legacy IPP contracts should be audited and renegotiated where they impose unsustainable fixed charges, while new procurement must be done through competitive bidding. Second, targeted smart meters should be rolled out on high-loss feeders to reduce losses, enhance accuracy, and improve reliability by automating billing and collections. Smart meters yield measurable paybacks, reducing recurring manual billing costs and non-technical theft.
Third, the corporate governance of DISCOs must be improved, with independent boards, merit-based management and performance contracts. Selective privatisation or private management contracts for loss-making feeders/areas should also be considered where governance can be meaningfully upgraded.
Consumers should not bear the burden of a problem they did not create. Years of opaque contracts and weak governance produced these arrears, yet households are footing the bill through the imposed surcharge. While the facility’s design shortens repayment if interest rates fall and consumption rises, lower interest rates are apparently economically defensible, its effectiveness without governance reforms remains doubtful.
The rise of solarisation directly interacts with the stock flow problem. On the flow side, as more consumers shift to rooftop solar and net–metering, declining monthly collection occurs when fixed obligations remain unchanged. On the stock side, the shrinking base is left to shoulder the rising surcharges; consumers risk being turned into contingent financiers of past policy failures unless deeper reforms are undertaken.
The rise of solarisation further complicates the stock–flow problem. On the flow side, as more consumers shift to rooftop solar and net-metering, monthly collections decline while fixed obligations remain unchanged. On the stock side, a shrinking consumer base is left to shoulder rising surcharges, effectively redistributing the cost burden onto fewer, often less affluent, consumers.
The writer is a research associate at the Pakistan Institute of Development Economics (PIDE). He can be reached at: azwarpide.org.pk