I.
INTRODUCTION
Poor financial performance remains a common feature
of many national electricity sectors and utilities. A
widely used public commodity, the political sensitivity
behind energy pricing reforms or wavering off power
subsidies─ expedient to implement but equally
challenging to remove─ has remained a key factor
behind the stated financial underperformance. 1
Inadequate pricing apart, the structural weaknesses
ranging from system losses to poor maintenance
practices further compound the revenue streams
resulting in growing indebtedness of the sector.2
Also a persistent problem for several years in the
context of Pakistan, the power sector of the country
continues to show a substantial cash shortfall referred
to as ‘Circular Debt’. The debt is rooted in low cost-
recovery end user tariffs, unbudgeted subsidies, poor
revenue collection by distribution companies (owing
to non-payment of bills both by government and
private consumers), power theft, and transmission and
distribution (T&D) losses. The cash shortfalls
cascades into entire supply chain acting as a major
bottleneck to economic efficiency.
This debt has long impaired the performance of power
sector─to-date remaining a drag on smooth operations.
However, the incumbent government has committed to
the elimination of this chronic cash shortfall─
resurging every now and again. Against the backdrop,
this brief examines (a) Trends and underlying causes
of circular debt (b) Reforms undertaken for its
1 “Financial Viability of the Electricity Sector in Developing Countries: Recent Trends and Effectiveness of World Bank Interventions”.
The World Bank, IEG, (2016).
2 ibid
3 Faraz, Shibli. “Report of the Special Committee on Circular Debt.” Senate Secretariat, (2018).
4 Faraz, Shibli. “Report of the Special Committee on Circular Debt.” Senate Secretariat, (2018).
resolution (c) Review of the reforms undertaken by
incumbent government.
II. CIRCULAR DEBT: AN OVERVIEW
The history of circular debt in Pakistan i.e. ‘the cash
flow shortfall incurred in the power sector from the
non-payment of obligations by consumers, distribution
companies and the government’ could be traced back
to 2007. 3 Arising in the backdrop of shift toward
expensive thermal sources and sharp devaluation of
the national currency (while prices were kept
constant), these quasi-fiscal losses have remained an
endemic feature of the power sector since then.
At the heart of circular debt lies the issue of subsidized
provision of energy. Provision of energy subsidies is
one of the most pervasive energy policy tool used
globally. In the case of Pakistan, the distribution of
energy sources is heavily tilted toward thermal sources
(see Fig.1), where the imported fuel dependence stands
at around 55%.4 In addition to the high fuel prices, the
capacity charges (indexed periodically with multiple
parameters including exchange rate, domestic interest
rates, and foreign interest rates) have been further
contributing to the increasing cost of generation hence
necessitating social protection measures by
governments in form of subsidies.
[1]
 Fig. 1 Fuel-Wise Comparison of electricity
generation
Source: State Bank of Pakistan
Wherein the difference between the generation cost of
power and the tariff charged from end-users is payable
by government in the form of subsidies, its delayed and
insufficient payment leads to vicious accumulation of
these arrears. Underpricing of electricity is further
compounded by poor recovery of power dues and
sizeable system losses. 5 Against the international
reference point of 10% allowed Transmission and
Distribution losses (T&D) , these losses exceed 20%
in Pakistan. 6 In the FY 2018 alone, these losses
amounted to around 187 billion PKR.7 Poor recovery
of revenues costed an additional loss of PKR 78 billion
to the national exchequer during the same period. 8
Table.1 illustrates the T&D losses recorded across the
distribution companies for the past 5 years.
Table. 1 Transmission and Distribution Losses (%)
Source: Performance Evaluation report
Distribution Companies, NEPRA (2018).
5 “Managing Circular Debt”, MOWP, (2015).
6“Performance Evaluation report of Distribution Companies”, NEPRA (2018).
7 Faraz, Shibli. “Report of the Special Committee on Circular Debt.” Senate Secretariat, (2018).
8 “Performance Evaluation report of Distribution Companies”, NEPRA (2018).
9 “Circular Debt Stands at Rs 795 Billion, PAC Told.”. The News International, May 27, 2019.
The inefficient performance of certain DISCO’s such
as PESCO, SEPCO, HESCO is particularly noticeable
with losses averaging at 38.1%, 36.7% and 29.8%
respectively (see Table.1). Lengthy distribution lines,
inadequate size of conductors and installation of
distribution transformers away from load centers, etc.
are few underlying causes of these technical losses.
Table.2 shows the inadequate recoveries of revenues,
during the same period of time.
Table. 2 Recoveries (%) over the last five years
(2013-18).
Source: Performance Evaluation report of Distribution
Companies, NEPRA (2018).
Collectively these accumulated arrears have a knock-
on effect on the entire supply chain. The untimely
payment of fuel charges to suppliers leads to cutting
off of the stated supplies to generators which in-turn
ends up in idled generation capacity. The cyclical
compilation of the debt in supply stream henceforth
impairs the performance of entire power sector
operations. Thus, in May 2019, the debt reached PKR
795 billion closely touching the highest figure since
2006 when the problem started.9 Fig.2 shows the stock
of annual circular debt registered during 2006-18.
of
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Fig.2 Annual stock of circular debt (Billion PKR) electricity will be timely passed onto consumers. 15
Meanwhile lower income households were insulated
1000 from the tariff hikes. In parallel, explicit budgeting of
900 all prevailing subsidies were avowed for timely
800 recovery of tariff differential in the supply chain.16
700
600 For increase in recoveries, an extensive antitheft
500 campaign was started, with the formation of special
400 task forces in Punjab and Khyber Pakhtunkhwa, in
300 October 2018. Advanced Metering Infrastructure
200 (AMI) project were also planned in two of the
100 DISCO’s namely LESCO and IESCO, for containing
0 system losses. 17 Finally for retirement of existing
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
outstanding circular debt, it was decided to raise funds
through long-term and relatively cheaper SUKUK.18
Sources: USAID (2013) 10 ; Pakistan Development
So far the government claims remarkable progress ─ a
Update, World Bank (2017);11
recorded increase of PKR 121 billion in recoveries
III. REFORMS FOR CONTAINING CIRCULAR (during October 2018 till June 2019). 19 Nonetheless
DEBT: REVIEW the reforms undertaken remain restricted to limited
areas therefore they are inadequate for uprooting the
Among several commitments, power sector reform structural problems constituting the debt. As for as
program was one of the leading agenda of the energy pricing reforms are concerned, it exempted
incumbent government. 12 In this regard, the power around 80% of consumers (i.e. those using up to 300
division of the ministry chalked out an ambitious plan units) from tariff increase. Corresponding to this
targeting thorough elimination of the quasi fiscal protection, the allocated subsidy of 162 billion PKR in
losses in the power sector by 2020.13 the budget is once again a much under-estimated
It is important to note here that circular debt is number which will hardly cover up for the subsidies.
primarily rooted in the underpricing of energy14where Further, the use of subsidies has also made it difficult
its annual size reciprocates directly to the extent of to differentiate T&D losses (arising out of utility
price differential (actual vs end-user price) multiplied mismanagement) from the losses incurred owing to
by amount of energy consumed. The bigger the price unpaid subsidies, creating escape hatches and lack of
differential (and energy consumed at the rate), the accountability in the system.
larger the debt itself. An adequate price structure Increasing efficiency on supply side simultaneously
reflective of cost hence is imperative for gradually needs urgent steps toward minimizing system losses.
bringing the revenues to procurement recovery level. The privatization experience internationally shows
As a first step in this direction of circular debt how it enhances competition and reduces commercial
containment, in January 2019 the government losses in the distribution networks. Pakistan has a 10
increased power tariffs by 11%. Further, as delay in distribution companies. All of them are public entities
quarterly adjustments of power tariffs was one of the
leading factor of repeated cash shortfalls build-up, an
automatic quarterly adjustment of tariffs was
introduced, wherein any increase in cost of supplying

10 Planning Commission. "The Causes and Impacts of Power Sector Circular Debt in Pakistan." Funded by USAID, March (2013).
11For the year 2018, data has been used from “Report of the Special Committee on Circular Debt.” Senate Secretariat, (2018).
12 “A Road to NAYA Pakistan”, PTI Manifesto, (2018).
13 Kiani, Khaleeq. “Govt to Bring Circular Debt to Zero by Dec '20: Omar Ayub.” DAWN.COM, May 25, 2019.

https://www.dawn.com/news/1484389.
14 As revealed in the analysis above, underpricing of energy is a by-product of subsidized provision, poor recovery and T&D losses.
15 Staff Report, “Pakistan: Request for an Extended Arrangement Under the Extended Fund Facility-Press Release”, IMF, (2019).
16 Staff Report, “Pakistan: Request for an Extended Arrangement Under the Extended Fund Facility-Press Release”, IMF, (2019).
17 “One Year of NAYA Pakistan.” Board of Investment, (2019).
18 “A Roadmap for Stability Growth and Productive Employment.” Government of Pakistan Finance Division Islamabad, (2019).
19 “One Year of NAYA Pakistan.” Board of Investment, (2019).

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except for K-Electric. 20 Despite substantial poor
performance, no plan for privatization of these
companies are in consideration. To the contrary,
repeated government rescues in terms of paying the
debt without accounting for inefficiencies in dispatch
weakens, rather kills, any incentives for improvement
by the transmission and distribution companies. With
forthcoming additions in generation, the contribution
of T&D losses in circular debt will further build up.
Table. 3 shows the relationship between the two
variables.
Table. 3 Units Sold Vs T&D Losses
Year Units Sold T&D losses
(GWh) (million PKR)
2013-14 71055 39332
2014-15 72642 91894
2015-16 76623 123759
2016-17 81558 157720
2017-18 91902 187109
Source: “Report of the Special Committee on Circular
Debt.” Senate Secretariat, (2018).
The generation mix though undergoing transformation
remains heavily tilted toward imported fuels. Out of
the 63% share of fossil fuel mix in 2018, 55% was
generated via imported fuels.21 Price volatilities (due
to sudden jumps of international fuel prices and
changes in exchange rate) remain a significant threat
to the structure and size of the debt. All these issues
simultaneously need to be accounted for arresting
circular debt.
IV. DISCUSSION
As indicated earlier, inadequate cost recovery—the
differential between the revenue collected and the
actual cost, operational inefficiencies, and higher
system losses remain a systemic feature of Pakistan’s
power sector. Consequently, the poor performance of
the sector saddled by circular debt─a collective
outcome of these constraints have an extensive knock-
on effect carrying wider implications for the entire
economy. Power crisis which remains an offshoot of
the debt alone costs the economy annual losses of
roughly $12.9 billion.22
While dealing with the debt, energy planners in the
country have once again relied on ad-hoc
measures─periodically paying the debt without
addressing the underlying causes─only to be
resurfaced overtime. From standpoint of elimination of
the problem, the reforms launched remain fragile in
terms of both financial sustainability and T&D
efficiency.
The unrealistic timeframe for elimination of the debt
is one major pitfall of the reform agenda. The political
sensitivity behind bold tariff adjustments ─crucial for
long-term financial viability─ remains a hiccup in
gradually bringing the revenues to cost recovery
level. 23 Chronic inefficiencies in state-owned
DISCOSs continue to be unaddressed challenges.
Introducing competition into otherwise inefficient
public distribution utilities hence is imperative. The
smarter the generation-distribution model, efficient
will be the performance of these companies. Improved
generation using domestic resources and a leap
forward to unexploited abundant renewable resources
will increase energy security and reduce generation
cost─ insulating end-users from tariff hikes. Finally,
no updated reports by relevant authorities exist on
circular debt stock, its components and cyclical flows.
Data limitations preclude comprehensive analysis in to
components of the debt and their varying impacts on
the liquidity shortfalls. Proper data collection and
monitoring is imperative for its vigilant diagnostics
overtime.
To conclude, the quest for financial stability in the
power sector remains elusive. The few reforms
undertaken─correcting one distortion while leaving
others intact─would not yield to eliminate the debt by
2020 (as committed by the government). Fundamental
issues of governance, capacity and induction of
technological improvements in operations are to be
addressed forthwith. An all-encompassing strategy
together with a realistic timeframe is needed for
bringing the sector to financial stability and ensuring
sustainable supplies in the future.

20 Although since its privatization in 2005, KE has not been able to meet the expectations mainly because in spite of privatization it is not
facing any competition. Thus the idea of privatization needs to be pursued with necessary homework. Alongside privatization, competitive
environment and implementation of regulatory disciplines will remain the motors driving efficiency of operations.
21 Faraz, Shibli. “Report of the Special Committee on Circular Debt.” Senate Secretariat, (2018).
22 Zhang,Fan, “In the Dark : How Much Do Power Sector Distortions Cost South Asia”?, World Bank Group (2018).
23 At the same time, as removal electricity subsidies would transfer the cost of inefficiencies (either by energy planners in terms of

switching toward expensive energy mix or distribution utilities for higher losses) to end-users, henceforth it is not a viable option.

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 Prepared by:

Naila Saleh
Junior Research Officer
Institute of Policy Studies (IPS), Islamabad.

For queries:

Syed Nadeem Farhat

Senior Research Officer
nadeem@ips.net.pk | www.ips.org.pk

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