Daily Times

The power sector is a cornerstone of modern economies, essential for industrial growth, technological advancement, and improved living standards. However, traditional power sector models face significant challenges, including outdated infrastructure, rising demand, inefficient regulations, and environmental concerns.

To address these issues, many countries have undertaken governance and policy reforms aimed at creating a more efficient, sustainable, and resilient energy system. These reforms are designed to introduce competition, attract investment, and promote sustainable energy sources while improving service delivery and financial stability. This op-ed series explores the potential objectives, types, and impacts of governance and policy reforms in the privatization of Distribution Companies (DISCOs) in Pakistan and examines real-world examples of successful implementation.

Privatizing DISCOs could improve efficiency and financial performance, though challenges remain, including political opposition and operational constraints. The privatization of K-Electric, for example, led to efficiency gains and reduced government subsidy dependence, highlighting the potential benefits of privatization, albeit requiring customized models for nationwide application.

The primary objectives of the initiative for privatizing DISCOs in Pakistan include four basic points these are managing and curtailing the current ballooning circular debt which amounts to Rs 2.4 trillion as of June 30, 2024; reducing transmission and dispatch (T&D) losses which presently are about 18 percent and are significantly higher than regional counterparts such as India, where losses are approximately nine percent; enhancing revenue collection where average collection rates vary widely across DISCOs, with some companies like Quetta Electric Supply Company (QESCO) collecting only 40 percent of billed revenue, underscoring the need for a performance-oriented structure; and last but not the least, improving customer service and reliability with load-shedding remaining a frequent issue and reliability metrics like the System Average Interruption Frequency Index (SAIFI) and System Average Duration Index (SAIDI) being far below global standards.

The privatization of DISCOs in Pakistan, though limited in scope so far, has provided insights into potential gains for operational efficiency, financial stability, and customer service improvements. K-Electric’s privatization, serving as the country’s primary case study, demonstrates these advantages. Although K-Electric remains an exception rather than the norm, its performance has indicated achievable targets and benchmarks that could be replicated across other DISCOs if privatization is implemented comprehensively and effectively.

Achievements of DISCO privatization can be analyzed from three perspectives. These are operational efficiency gains, financial performance improvements, and service quality & customer engagements. One of the primary achievements of privatization is the significant improvement in operational efficiency, particularly in the reduction of T&D losses. Before privatization, K-Electric’s T&D losses were around 34percentin 2005. By 2023, following strategic investments and operational restructuring, these losses were reduced to approximately 17percent. This is in stark contrast to other state-owned DISCOs, where the average T&D loss remains around 18-20 percent, with some companies experiencing even higher losses (e.g., QESCO at 30 percent).

By 2022, over 60 percent of customer queries were managed through digital channels, significantly improving response times and customer satisfaction.

K-Electric’s investments in advanced metering infrastructure, grid rehabilitation, and modernized distribution networks contributed to this reduction. Between 2009 and 2022, K-Electric invested over PKR 474 billion in infrastructure, which helped improve system reliability and reduce T&D losses significantly.

In addition, through digitalization, K-Electric was able to monitor losses more accurately and implement automated controls. The smart grid technology and automated distribution management systems enabled the company to identify and address inefficiencies proactively, further enhancing operational efficiency. These achievements underscore that operational improvements in the distribution sector can be realized through privatization, particularly when combined with technological upgrades and targeted investments.

Secondly, privatization has also shown improvements in financial performance, a critical aspect given Pakistan’s ongoing circular debt crisis. By privatizing K-Electric, the financial burden on the government was significantly reduced as the company became more self-reliant and less dependent on government subsidies. Before privatization, K-Electric received substantial government subsidies, averaging around PKR 20 billion annually. Post-privatization, however, subsidy reliance has been minimized, demonstrating a shift towards financial sustainability. K-Electric improved its revenue collection rate from around 70 percent in 2005 to above 90 percent by 2023. This is notably higher than many state-owned DISCOs, such as QESCO and HESCO, where collection rates remain below 60 percent. This enhanced collection is due to better billing practices, strict enforcement measures, and reduced energy theft.

Improved financial performance has meant that K-Electric’s contribution to the national circular debt has decreased relative to other DISCOs. The company’s circular debt liability is significantly lower than comparable state-owned entities, reducing the burden on the overall power sector’s financial health.

Thirdly, privatization has also enhanced service quality and customer engagement, with K-Electric leading in implementing customer-centric initiatives that can serve as a model for other DISCOs. The privatized model has enabled the company to adopt a proactive approach to customer service, driven by performance metrics and consumer satisfaction. In recent years, K-Electric has reduced load-shedding hours in many areas, particularly industrial zones. By 2023, K-Electric implemented a policy of load-shedding exemption for high-revenue industrial areas, leading to increased productivity and economic benefits for Karachi’s industrial base. Further, DISCO introduced various digital solutions, such as mobile applications, online billing, and digital complaint management systems, allowing customers to interact with the utility more efficiently. By 2022, over 60 percent of customer queries were managed through digital channels, significantly improving response times and customer satisfaction.

K-Electric has achieved improvements in key reliability metrics. The SAIFI and SAIDI for K-Electric showed improvement by over 30 percent compared to national averages. This achievement demonstrates that privatization can lead to enhanced reliability, provided the private operator prioritizes investment in infrastructure and customer service .

(To be Concluded)

The writer works at a public policy think tank. He can be reached at saudzafar5@gmail.com