Pakistan: Affordable electricity and power crisis

PAKISTAN’S power sector suffers from inefficiencies that cost the economy billions of dollars every year. According to a World Bank report, the loss to the economy was US 18.5 billion in the year 2015 when large parts of the country were impacted by load-shedding and power outage, a problem which is compounded by an inefficient and weak transmission and distribution (T and D) system. To make matters worse, almost 20% of the produced power is lost to poor infrastructure and theft, according to available figures. The single most debilitating factor that has negatively impacted the power sector and the inability of Discos to up their game is the issue payables and receivables.

According to the National Electric Regulatory Authority’s (NEPRA) State of the Industry Report 2018, receivables of Discos from the Federal government increased by PKR 2.1 billion to PKR 7.2 billion as of June FY 2018. Provincial governments, however, were significantly bigger delinquents, with total unpaid dues of PKR 40.38 as of June FY 2018 billion, an increase of PKR 11 billion in just one year. The Sindh government alone contributed PKR 4.78 billion, or 43.5% of this, defaulting on more than 25% of its payments to Discos.

K-Electric has approached the Government of Sindh (GoS) on several occasions for recovery of dues pending with various provincial departments and entities. According to available numbers, the power utility’s receivables from different departments of the GoS have increased to PKR 19 billion approx. In addition, PKR 32 billion approx is due from the Karachi Water and Sewerage Board (KWSB) as well. The Sindh government had submitted a statement before the Supreme Court of Pakistan in 2016 that they would start making monthly payments and devise a payment schedule for the payment of outstanding dues of KWSB. No such plan has been devised however, and the company’s trade debts have shown an increasing trend (66% over last six years) mainly due to receivables from public sector consumers.

The power utility has repeatedly cautioned that non-payment is putting tremendous pressure on its ability to continue to invest in the business. It goes without saying that this will eventually have a drastic impact on the socio-economic growth of the city. In fact, in a recent letter to the CM Sindh, Moonis Alvi, the CEO of KE has said that if something is not done soon, it could become difficult to fund daily operations as well. We already saw in the first decade of this century how a power crisis compelled industrialists to shift to other business or move their operations abroad when a power crisis hit Punjab’s industrial heartland of Faisalabad.

Growing receivables have obviously caused cash flow issues, and the utility has already had to raise significant debt to finance its daily operations as well as long-term expansion plans. KE has also announced several initiatives, which it says will lead to investment of USD 3 billion over the next few years to keep pace with the city’s power needs, which have been growing faster than the rest of the country. Raising capital will be a challenge though. It has issued Sukuks twice, and is apparently planning a third issue, with a value of PKR 25 billion, as a means of boosting its cash flow. Needless to say, this is not sustainable, nor economically viable.

It is a credit to the power utility that it has agreed to continue providing power to KWSB’s critical water pumping stations in the interest of the citizens of Karachi. At the same time, KE has not defaulted on any of its fuel payments since 2012. It should be obvious to all concerned that unless something is done, and soon, this will become a chronic issue like the circular debt, which has crippled the country’s power sector. Karachi is the backbone of Pakistan’s economy, and contributes more than 20% to national GDP. It makes zero economic sense to put this contribution at risk. By allowing KE’s receivables to pile up, however, that is exactly what we are doing.

Going forward, government initiatives need to focus on ensuring affordable power to citizens by changing the energy mix to reduce dependence on expensive fuels, prioritizing the adoption of indigenous coal for the medium term and developing hydel and nuclear projects in the long term. Reducing the overall cost of energy will directly benefit industrial growth and thus the economy of Pakistan.