Privatisation and liberalisation are considered key economic development activities for nations. The primary objective of these activities is to transform state-owned enterprises into private sector entities, with a focus on establishing a stable regulatory framework and promoting macroeconomic stability.
Public communication and engagement, along with monitoring the political context, are also crucial for the successful transition to the privatisation and liberalisation of the power system. Currently, Pakistan’s power sector is facing numerous challenges, including circular debt, high electricity costs, electricity theft and losses, infrastructure issues, political interference, a high dependence on imported fossil fuels and economic losses.
Circular debt had reached Rs2.631 trillion as of June–July 2023. This debt arose from the imbalance between the revenue collected by distribution companies and the payments owed to power producers. The total circular debt, encompassing both natural gas and the power sector, exceeded Rs5 trillion as of March 2023. The electricity tariff has reached Rs50/KWh due to rising fuel prices, while electricity theft has caused losses of Rs90 billion over the last five years.
Infrastructure issues are also significant in Pakistan’s power sector. The outdated infrastructure causes inefficiencies in power delivery, increases vulnerability to voltage surges and results in frequent outages and blackouts. Political interference in the power sector exacerbates shortages and caused a loss of Rs22,784 billion in GDP from 2007 to 2020. Circular debt has been increasing steadily over the past decade due to the high cost of electricity and electricity theft.
The high cost of electricity is due to the heavy reliance on imported fossil fuels, outdated electricity infrastructure that causes grid instability issues, and rising fuel prices. A lack of enforcement against illegal connections and poor governance has also worsened the problem. Technical losses (transmission and distribution) reached 22 per cent, and non-technical losses (electricity theft) exceeded 50 per cent as of December 2023.
The GDP loss is primarily due to the unreliable power supply to the industrial sector, which affects competitiveness and productivity in the market. In addition, fluctuations in the international market due to geopolitical events impact the fuel supply chain and create complications in the energy procurement process for Pakistan.
Pakistan’s power sector is facing numerous challenges that require a stable regulatory framework for the privatisation and liberalisation of the power sector. A comprehensive plan should cover the diversification of indigenous energy sources towards renewables, infrastructure, enhanced revenue collection mechanisms (through the private sector) and improved governance.
The development of a regulatory framework is the first strategic step towards a successful privatisation transition. The Ministry of Energy and the Ministry of Climate Change, in collaboration with the National Electric Power Regulatory Authority (Nepra) and the Central Power Purchasing Agency (CPPA), should establish a regulatory framework to monitor the privatisation and liberalisation of GENCOS (power generation), TRANSCOS (power transmission) and DISCOS (power distribution).
The regulatory framework should develop rules, evaluate performance and ensure that standards are properly followed. It should also have the capacity to address corruption issues, ensure consumer protection, and remove market barriers. The regulatory framework should also ensure proper competition among power utilities and help manage system efficiency, establish cost-effective tariff-setting mechanisms, ensure higher energy service quality standards, and lower prices for consumers.
Privatisation and liberalisation of the power sector may increase macroeconomic stability through capital investment that can enhance infrastructure dynamics and service delivery, ultimately reducing distribution losses and fiscal burdens by transferring operational responsibilities from the public sector to private entities.
Political dynamics in Pakistan are also closely associated with the privatisation of the power sector and the process is highly dependent on political will, strong governance and public support. Political and public stability are both crucial for managing a sustainable transition to privatisation.
Pakistan’s power sector also suffers from high levels of corruption due to governance issues. Public engagement through proper communication regarding the privatisation of the power sector is essential. Effective communication with stakeholders enhances participation and transparency, and tailored messaging promotes trust and strengthens the long-term sustainability of reforms in the power sector.
The process of privatisation is considered a beneficial strategy for promoting economic development and is advocated by the IMF and the World Bank in the majority of developing nations. It is recommended that clear ownership, along with the expertise needed to manage a competitive environment, is established to support privatisation and enhance economic stability.
The government of Pakistan must prioritise strong regulatory frameworks, ensure macroeconomic stability, address political challenges and engage with the public throughout the process. By learning from past experiences and adapting strategies to local contexts, Pakistan can harness the advantages of privatisation while minimising its risks.
The writer is an assistant professor at Mehran University of Engineering and Technology. He can be reached at:shakirali@muetkhp.edu.pk
