Pakistan's state-owned enterprises (SOEs) have consistently been a significant financial burden on the public treasury. Collectively, they consume resources that surpass funding for essential social sectors.
POWER SECTOR
Pakistan's state-owned enterprises (SOEs) have consistently been a significant financial burden on the public treasury. Collectively, they consume resources that surpass funding for essential social sectors.
Despite reform initiatives, inefficiencies persist, with many SOEs operating at a loss and facing political interference. Leading among them are power utilities, formerly part of Wapda, but which became independent companies after restructuring in the early 2000s.
In the first half of FY25, the government allocated fiscal support of Rs616 to loss-making SOEs. Notably, the electricity distribution companies (DISCOs) received 87 per cent of the total subsidies (Rs333 billion) provided to all SOEs during this period. In addition, Rs77 billion was injected as equity into seven DISCOs, excluding GEPCO, HESCO and TESCO. A Rs8.4 billion loan was provided to QESCO, PESCO, IESCO, MEPCO and GENCO-I. Among the highest loss-making entities during this time were QESCO, SEPCO and PESCO.
Collectively, ten DISCOs hold assets worth Rs3.2 trillion yet continue to operate at a loss year after year. Despite an aggregate profit of Rs138 billion in the first half of FY25, the accumulated profit/loss stood at Rs(-3.04 trillion). DISCOs face deep-rooted structural and financial challenges. Issues with asset transfers, debt recovery from government institutions, liabilities, including pension obligations of Rs1.2 trillion, have further complicated matters.
Since the power sector restructuring, the privatisation of energy companies is on the cards; it was part of the reform plan. However, except for Kot Addu Power Plant (KAPCO) (36 per cent of shares were sold) and K-electric (75 per cent shares were sold), no other privatisation took place. Several attempts have been made in the past. For instance, in 2014, a transaction advisor was hired, and privatisation bids were advertised for FESCO privatisation. However, despite the money spent, the plan was shelved within two years.
Pakistan has significant experience in privatising various sectors, but the results have been mixed. Many transactions prioritised short-term fiscal gains over long-term benefits. In some cases, the outcome included job losses, price increases and allegations of favouritism. Many contracts were poorly designed or lacked enforcement, prioritising private interests over public welfare and consumer protection, which resulted in dissatisfaction. Many decisions were even challenged in court.
In the power sector, K-Electric, despite being privatised, is still regulated like any other state-owned DISCO, affecting its efficiency. The regulator's focus also remained on tariff setting rather than on effective monitoring of the monopoly.
Therefore, any future privatisation in Pakistan must focus on purpose -- the concept drawn from various economic and public administration theories, including public choice theory, agency theory, theory of the firm and transaction cost theory. Privatisation should create economic efficiency while also promoting social value and inclusive development.
Indeed, it is not the government's job to be involved in commercial activities. Yet, the government is responsible for ensuring that essential services like electricity are accessible, affordable and equitable for all citizens.
There is plenty of literature suggesting that ownership type (public vs private) is less important than effective management. Studies also indicate that privatisation works better in competitive markets. In monopolies, a lack of strong regulation can lead to negative results.
Tariff design must reflect actual costs to ensure financial sustainability and to attract trustworthy investors in the electricity sector; an independent and competent regulator can resolve disputes fairly and quickly, without political interference
Efficiency improvements from privatisation should not come at the expense of public welfare. Particularly, when we are talking about DISCOs, the decision on privatisation must be aligned with broader public goals such as service quality, affordability, and accountability; that is, to make electricity markets serve people, not just profits. Smaller provinces are already expressing dissatisfaction with the insufficient availability of electricity at affordable rates -- and rightly so. Will privatisation solve this problem?
Policy decisions should be clear, socially responsible, and growth-oriented, rather than solely focused on reducing government involvement. Wise decisions will eventually improve utility management, introduce new technologies, and promote infrastructure investments, eventually allowing the government to concentrate more on policymaking.
The decision to privatise should rely on empirical evidence, not under pressure from donor institutions. Globally, privatisation of distribution companies has been most successful in middle-income countries with large urban populations, characterised by stable governments and strong regulatory frameworks. Evidence further demonstrates that breaking monopolies in the retail sector is essential for generating competition and for better service delivery.
To improve focus, accountability, and customer service, not only professional and independent boards, but also the division of larger DISCOs in Pakistan into smaller entities is crucial. The smaller units can more effectively address local needs, resulting in enhanced revenue collection and focused infrastructure investments. The priority should be to create a market-ready utility.
Some additional preconditions for DISCO's privatisation include strong institutions, effective regulatory oversight and a robust macroeconomic environment that ensures both efficiency and social welfare. Any decision about electricity distribution needs political consensus. Tariff design must reflect actual costs to ensure financial sustainability and to attract trustworthy investors in the electricity sector; an independent and competent regulator can resolve disputes fairly and quickly, without political interference. Besides, consistent policies are essential for maintaining investor confidence. Without these prerequisites, privatisation might just repeat existing inefficiencies.
For a successful transition, the process is also very crucial. The stock market can play an effective role in the privatisation process, linking public sector reform with capital market development and citizen ownership. By offering shares, it encourages citizens to invest in national assets, expanding public support and financial inclusion through dividends and capital gains.
Privatising DISCOs, in particular, through the stock market will allow a gradual and transparent transfer of ownership. It will enable a variety of investors, such as institutional investors, ordinary citizens and DISCO employees, to participate. Using this channel can help avoid secret deals. This approach will enable a gradual divestment process instead of an immediate and total privatisation.
This phased approach allows for broader acceptance over time. Initially, the focus should be on institutional investors to minimise the impact of short-term shareholders. Once market stability is achieved, the ownership rules can be adjusted to encourage greater public participation.
Privatisation is a fundamental part of Pakistan's recent economic plan. It aims to reduce fiscal burdens and meet IMF conditions. A few weeks back, the first women's bank was privatised under the Inter-Governmental Commercial Transactions Act of 2022.
In the power sector, the government plans to privatise nine DISCOs and four other energy companies, starting with IESCO, GEPCO and FESCO. Newspaper reports reveal that relevant organisations are studying the Turkish model for guidance. In DISCO's privatisation, the three Ps are critical: clearly define the purpose, ensure the preconditions are met and select a process with minimal challenges.
The writer is a senior researcher and energy policy expert based in Islamabad.
