The limitations of power sector privatisation

Business Recorder

17 hours ago

Despite poorly planned generation and transmission, stranded generation capacity, high capacity payments, technical and commercial losses, theft and under-recovery, electricity can be made available to industry and other consumers at internationally competitive prices without any subsidy from the government. Paradoxically, a complex web of cross subsidies to prop up the Uniform National Tariff Policy distorts prices and destroys demand. It has prevented Pakistan's cities and regions from ever capitalizing on their comparative advantages, stifled local investment and competition, and is a major hindrance to energy sector liberalization and sustained economic growth.
The uniform national tariff is the principal reason behind unsustainability of the power and gas sectors. It dictates that all power consumers across the country — within the same consumer category—will pay the same price for electricity or gas regardless of their region or the distribution company they are being served by. Since geography is the single most important determinant of energy endowments, sustaining this regime masks regional comparative advantages and requires financial transfers to regions with higher costs, either in the form of a direct subsidy from the government or through transfers from regions with lower costs.
The system is sustained through a complex system of inter-consumer and inter-DISCO cross subsidies that impose disproportionate financial burdens on 'good' consumers and regions to pay for the shortfall from subsidised consumers and loss-making regions, inhibiting demand for grid electricity due to highly distorted prices — the situation being similar in gas.
With a combined circular debt exceeding Rs 5 trillion — which keeps spiraling despite assurances to the contrary — and an economy constrained by repeated energy crises, the power and gas sectors need urgent course correction. However, progress on bringing down energy costs and stimulating grid demand has become stagnant at best, as any tangible improvement requires a radical overhauling of the system whereas the Government's focus remains only on balancing the books. Take for example the recently celebrated sale of scrap power plants, later revealed to only have shifted from the power ministry to ministry of defence's books, not off of the GoP's books, or the 'reduction' in power sector circular debt through cheaper refinancing—the debt is still there, to be recovered from the same consumers through the same debt servicing surcharge, only moved from the Power Holding Company's to CPPA-G's books.
Meanwhile, measures that would lead to tangible improvements in the country's energy sector dynamics fall prey to the same cross subsidies. CTBCM, for example, is moving ahead with a wheeling charge of Rs 12.55/kWh (plus bid price). This includes Rs 1.45 on account of the Use of System Charge, Rs 2.34/kWh distribution margin and Rs 2.06/kWh in losses, which come out to Rs 5.85/kWh or 2 cents/kWh. A reasonable charge is then burdened by the Rs. 3.23/kWh debt servicing surcharge and Rs 3.47/kWh cross subsidy that render it uncompetitive, for productive industrial use at least, especially as the concept of hybrid consumers for industry is not being allowed.
Hybrid consumers (those sourcing power from both private suppliers and the grid) are to be charged at the marginal rate of the grid, effectively rendering hybrid consumption and therefore CTBCM a non-starter as this pushes the average cost of electricity (sourced from private suppliers and the grid) above the standard grid electricity tariff, leaving no incentive to source under CTBCM. Hybrid consumption is particularly essential under the current model where CTBCM capacity is capped, meaning consumers must rely on the grid for up to 80 percent of their power requirements. If cross subsidies and legacy costs of the grid are built into the wheeling charge, then consumers must be allowed hybrid consumption from the grid at the normal tariff. If they are to be charged the grid's marginal price, then they shouldn't be forced to pay the grid's legacy costs under CTBCM, and there should be no cap.
The flagship reform — privatisation of DISCOs — faces a similar conundrum. The government intends to divest its best-performing distribution companies, IESCO, FESCO and GEPCO, while retaining loss-making entities such as HESCO and QESCO that drag down the entire system. Since all these DISCOs currently belong to the GoP, a state-owned utility can perform well. Yet, decision-makers propose selling the performing entities and retain control of non-performing ones that depend on large transfers from other DISCOs and regions.
This strategy will essentially channel future gains into private hands while saddling the public exchequer with an even higher subsidy burden, which will then be passed back to consumers through increased cross subsidies in power tariffs or other taxes. This is not a critique of privatization itself but of how it is executed in a manner where the benefits are accrued for the government and its hand-picked private parties, creating private monopolies with captive markets, never allowing the benefits to pass on to consumers.
Take Karachi Electric for example. Placing KE under a multi-year tariff (MYT) regime would normally cap costs and let prices follow those costs. However, under Pakistan's Uniform National Tariff, KE's prices ignore costs and instead reflect inefficiencies of XWDISCOs and the government's social and political priorities. Between 2018 and 2024, KE has received over Rs 700 billion in subsidies from the Federal Government, funds that are ultimately underwritten by taxpayers and power consumers across the country, while KE enjoys guaranteed, no-accountability profits, mirroring the risk-free returns granted to IPPs. If privatization cannot deliver competition or pricing discipline, it serves no purpose.
Rather than unbundling the distribution segment to create competition and retaining natural monopolies—like the wire business—under public control, the government created a vertically integrated private monopoly covering generation, transmission and distribution, likely because it is easier to exercise outsized influence over one large entity rather than many smaller ones.
KE, having been released from the shackles of the Federal Government, also went back and concentrated its generation portfolio in the other energy source entirely regulated by the government. Around 40 percent of its generation is based on gas/RLNG that is priced by the government, and another 50 percent is procured directly from the government through the CPPA-G system. In effect, the government still directly sets KE's largest cost component, i.e., the price of energy—while remaining heads carry the MYT guarantee.
Although KE is nominally 'privatized', its tariff and cost structure remain tightly controlled by the Ministry of Energy—hardly the hallmark of true market liberalization. The hen came home to roost recently for both the federal government and KE as the latter's gamble on favourable RLNG prices yielded substantial relief for its consumers through sizable negative FPAs, and the former responded by blocking them to prevent distorting the 'uniformity' of an utterly distorted Uniform National Tariff.
Rather than divesting KE, the government could have run it efficiently and balanced out Karachi's consumers' subsidy requirements through the returns it generated. Around the world, efficient public utilities are run efficiently and generate revenues for the public; public ownership does not necessarily imply inefficiency. Pakistan's real failing lies in the chronic inefficiencies and distortions that the government introduces in every system by design.
The gas sector mirrors these distortions. A uniform national tariff erases local comparative advantages and promotes inefficient use: Balochistan consumers effectively subsidize cheaper gas for other provinces, as the Business Recorder recently documented in its expose on Balochistan's high gas prices for consumers that should technically be protected because the uniform national tariff does not account for local intricacies of demand.
Amidst all this, KE's MYT is being marketed as a blueprint for privatization of other DISCOs. Coupled with the Uniform National Tariff and a regulator operating under 'policy guidelines' from the Federal Government, the very entity's job is to protect consumers from, this is akin to adding a new facade over the same broken system.
The one reform that should get top priority is the commitment under the IMF RSF to replacing the inter-consumer cross subsidies with a transparent, direct subsidy through BISP. According to the Memorandum of Economic and Financial Policies, a public communications campaign around this was slated to start off in June 2025, yet there is no sign of it. Fast-tracking this would lower the effective tariffs for millions of consumers—industrial, commercial and residential—with suppressed demand, stimulate consumption on the grid, and utilize the large share of stranded capacity, further reducing power tariffs and reinforcing the cycle. Crucially, a clean, direct subsidy framework would also streamline the privatisation of remaining DISCOs.
Decision-makers must understand that without thriving industrial and commercial sectors collection of taxes and cross subsidies is going to keep declining as economic activity and the pool of cross-subsidizing consumption keeps on shrinking.
Today, even this is too little too late as it leaves untouched the far larger web of inter-DISCO cross-subsidies that underpin the Uniform National Tariff, demanding continuous intervention, support and subsidies from the government. Privatization, under such conditions, cannot deliver its core promises of improved efficiency (both technical and of the market), competition, and consumer benefit. Instead, it continues the financial shell game where better-performing areas are handed to private investors with locked-in returns under MYT regimes, while the state retains the liabilities. The resulting structure sustains rent seeking, ignores performance, and entrenches vested interests in the status quo (KE's management and ownership crisis being a case-in-point). Consumers are treated not as customers with choices, but as revenue streams to be squeezed within a closed system governed by policy guidelines, not market discipline.
Compare this to India, where electricity is a provincial subject and prices reflect regional realities. The government has gradually opened competition in power generation and transmission and is now moving towards full retail competition in distribution. New platforms enable consumers—particularly commercial and industrial—to choose suppliers, access market-based prices, and procure renewable power directly. Despite challenges, the direction is unmistakably towards competitive, decentralized markets that empower consumers. Pakistan, on the other hand, is still handing out captive markets under MYT frameworks, locking in inefficiencies and foreclosing the development of any real market. All this is happening with a non-functional regulator whose independence has been undermined through a series of ill-thought legislative and policy changes.
Meaningful liberalization of the energy sector must be based on dismantling the Uniform National Tariff in both power and gas. Only then can regional comparative advantages emerge, prices reflect true costs and value of energy supplied, and a competitive marketplace be built where businesses and consumers—not bureaucrats and monopolies—decide what is efficient. Otherwise, we are left with the worst of both worlds: a privatized, tightly regulated system where the government decides who benefits and by how much, while entities like KE continue to receive hundreds of billions in subsidies underwritten by the public, even as they book guaranteed returns.
Copyright Business Recorder, 2025