Theft, old grids, politics fuel debt

Electricity theft remains a persistent problem, particularly in high-loss areas where distribution companies struggle to enforce recovery and prevent illegal connections. Poor coordination between federal authorities, provincial administrations and law-enforcement agencies has further complicated efforts to curb the practice.

Ageing distribution infrastructure and inadequate maintenance have added to the problem. Technical losses, combined with electricity theft and weak billing and recovery systems, undermine DISCOs' financial health. The resulting shortfall eventually feeds into circular debt, leaving compliant consumers to bear the cost of electricity stolen or lost before reaching them.

Political interference has also prevented distribution companies from operating as commercially viable entities. Appointments to senior management positions and boards of directors have frequently been influenced by political considerations rather than professional competence, weakening accountability and operational performance.

The federal government controls most DISCOs, while provincial administrations have often failed to cooperate in tackling electricity theft and improving recovery. The federal government has offered provinces the option of taking over distribution companies, but they have been reluctant to assume responsibility for entities burdened by substantial losses, particularly in Sindh, Khyber-Pakhtunkhwa and Balochistan.

Successive governments have introduced different reform models, including splitting distribution companies into smaller entities, outsourcing bill collection and transferring DISCO management to provincial governments. However, these initiatives have failed to deliver the desired results. The government is now pursuing the privatisation of relatively efficient distribution companies, raising questions about the future of more loss-making entities.

Privatising better-performing companies while leaving the weakest ones under government control could further complicate circular debt management. Rise of circular debt. Circular debt first emerged in the power sector around 2006-07 during the Musharraf regime, when electricity tariffs were frozen despite rising generation costs.

The problem intensified following the 2008 financial crisis, rising international oil prices and rupee depreciation. Pakistan Institute of Development Economics (PIDE), the problem appeared in 2006. A Senate report also traced its emergence on the power sector's books to FY2006-07.

Unpaid government subsidies, electricity theft and inadequate bill recovery were among the principal causes. The interim government that took over after Musharraf's departure increased electricity tariffs by 16%, while oil prices also rose sharply in 2008.

Imported fuel prices increased by 37% in 2007, while furnace oil prices jumped 76% between FY2003-04 and FY2007-08. Furnace oil was then the principal fuel used in thermal power plants. Pakistan subsequently began importing liquefied natural gas in 2015 during the PML-N government.

Circular debt nevertheless continued to accumulate. It stood at approximately Rs656 billion in June 2016 and surged to Rs2.39 trillion by June 2024. The present government subsequently borrowed around Rs1.3 trillion from commercial banks to retire part of the accumulated liabilities, bringing outstanding circular debt down to Rs1.6 trillion.

However, borrowing to settle existing liabilities has not eliminated the underlying causes. Instead, it has shifted part of the financial burden onto the banking system, adding financing costs that ultimately have to be recovered from consumers.

The expansion of installed generation capacity has been another major contributor. Power plants continue to receive capacity payments even when they remain idle and generate no electricity. Annual electricity generation increased from 114,207 gigawatt-hours to 127,523 GWh over the past decade, while circular debt expanded dramatically.

The budgeted power-sector subsidy also increased from Rs118 billion in FY2015-16 to Rs830 billion in FY2026-27. Although DISCOs' bill recovery improved from 92.6% to 96.6%, questions remain about the quality of these recoveries, particularly following an overbilling scandal in which millions of consumers were found to have been charged excessively.

Financial engineering instead of reform. Rather than addressing structural weaknesses, successive governments and the bureaucracy have relied on financial manoeuvring to manage circular debt. The government established Power Holding Limited (PHL), an entity without productive assets, to park part of the power-sector liabilities.

It subsequently imposed surcharges on electricity consumers to service the debt, transferring the financial burden to households and businesses. PHL's outstanding debt increased from Rs335 billion in 2015 to Rs583 billion in 2018, including Rs153 billion in markup.

During 2020-22, the government approved the conversion of around Rs804 billion in power-sector circular debt into public debt. The Finance Division also paid Rs202 billion towards PHL's principal repayment. Despite these interventions, the company's outstanding debt reached Rs765 billion in January 2024.

In 2025, the government negotiated a Rs1.275 trillion commercial-bank financing arrangement to refinance Rs683 billion in existing PHL loans and settle another Rs569 billion in interest-bearing arrears owed to power producers. Circular debt has consequently become a lucrative business for commercial banks extending loans to retire power-sector liabilities.

Repeated refinancing arrangements have also raised questions about transparency in the disbursement of funds to power producers. Pakistan's power sector continues to burden consumers with rising electricity tariffs, mounting circular debt and persistent operational inefficiencies, as successive governments struggle to address structural weaknesses in generation and distribution.

Payments to independent power producers (IPPs) have reportedly followed a selective pattern, with some plants receiving larger amounts than others, raising questions about transparency and fairness. Capacity payments, at times accounting for around 70% of total power purchase costs, have further inflated electricity prices despite underutilised generation capacity.

Between FY2015-16 and January 2026, electricity tariffs increased sharply across almost all domestic consumption slabs. Rates for unprotected consumers using 1-100 units rose from Rs5.79 to Rs22.44 per unit, while those consuming more than 700 units saw tariffs climb from Rs18 to Rs47.69 per unit.

Beyond the actual electricity cost, bills include capacity payments, fuel and quarterly adjustments, financing surcharges, taxes and other government-imposed charges. Distribution inefficiencies have compounded the crisis., transmission and distribution losses increased from 17.9% in FY2015-16 to 18.31% in FY2023-24.

Losses exceeding Nepra-approved benchmarks added around Rs276 billion to circular debt. In FY2024-25, distribution companies incurred another Rs265 billion in financial losses due to excessive line losses. Sepco recorded the highest losses at 39.18%, followed by Qesco at 38.38% and Pesco at 37.15%.

Meanwhile, expensive grid electricity has accelerated the shift towards rooftop solar, threatening distribution companies' revenue base. Although revised net-metering rules have reduced incentives, cheaper lithium-ion batteries could accelerate the transition. A sustainable solution requires stronger regulatory oversight, curbing electricity theft, upgrading infrastructure and depoliticising DISCO management.

Privatisation, restructuring and improved recovery mechanisms could help, but the government must first address heavily indebted companies rather than leaving their liabilities with consumers. THE WRITER IS A STAFF CORRESPONDENT