Debt trap or tariff trap?

In mid-2025, the government approved a syndicated Islamic financing facility to retire Power Holding Limited (PHPL) liabilities and settle arrears owed to independent power producers. Circular debt (CD) appeared to fall from Rs 2.393 trillion in June 2024 to Rs 1.614 trillion a year later. However, the improvement was only due to restructuring. When PHPL was shut down in December 2025 under IMF guidance, the Rs 660 billion it held was replaced with CD financing, now classified as commercial loans that the state must repay.

Restructuring did nothing to stop the leak. By April 2026, CD had climbed back to Rs 1.854 trillion, roughly Rs 240 billion of new accumulation in ten months. Meanwhile, consumers are repaying the commercial loan and its interest through a debt service surcharge of Rs 3.23 per unit, projected to run for six years. It raised Rs 233 billion in FY25, and the burden falls regardless of regional utility performance or its ownership. Karachi consumers served by K-Electric paid Rs 35.76 billion, even though K-Electric operates under a separate tariff structure and absorbs its own unrecovered line losses. The surcharge services old debt on schedule, but new arrears pile up faster; it is collected on units sold to non-protected consumers, a base that is shrinking because of solar influx and decreasing grid demand.

Refinancing the past without fixing the tariff design only resets the clock. That design is the uniform tariff. Under the NEPRA Act, the regulator determines a cost-reflective tariff for each distribution company based on its own losses and operating costs. NEPRA then consolidates the revenue requirements for all state-owned companies and determines a single end-user tariff, which the government notifies nationwide. Consumers in efficient territories such as Islamabad, Gujranwala, and Faisalabad pay a tariff rationalizing surcharge (or cross-subsidy), and the surpluses are pooled to offset shortfalls in weaker regions. NEPRA’s own State of Industry Report notes that this framework conceals operational shortcomings and removes any incentive for efficient utilities to lower tariffs or reinvest in the grid.

Weaker companies receive a tariff differential subsidy from the federal budget to bridge the gap between their cost of service and the notified rate. Since FY2007, the government has disbursed over Rs 8 trillion in power subsidies, more than 65 percent of it to maintain uniform pricing across the country; inter-utility tariff differentials alone required Rs 448 billion in FY2026. When fiscal constraints delay the payments, distribution companies delay payables to the Central Power Purchasing Agency, which cascades into arrears for power producers and fuel suppliers.

In Pakistan, revenue pooling removes commercial discipline. A high-loss utility faces no financial consequence for failure because the shortfall is cushioned elsewhere. In FY2025, state-owned distribution companies lost Rs 265 billion by exceeding NEPRA’s line-loss targets; PESCO, QESCO, SEPCO, LESCO, and HESCO together accounted for 90 percent of it. Uncollected bills added another Rs 132.46 billion to the shortfall. By June 2025, total receivables across state-owned companies stood at Rs 2.13 trillion; about 80 percent of that was overdue in PESCO, QESCO, SEPCO, LESCO, and HESCO.

High, cross-subsidized prices weaken consumers’ ability to pay, fueling theft and payment delays that add to arrears. They also push the best-paying customers off the grid. The recent surge in solar PV and battery storage means industry and affluent households increasingly generate their own power. This leaves the grid with fixed costs, notably capacity payments, spread over fewer units, and with fewer paying customers to fund the cross-subsidy. Revenue falls short, arrears grow, surcharges rise, and the case for leaving the grid strengthens. Pakistan is not stuck with a debt problem alone but with a tariff design that regenerates it.

The uniform tariff also complicates the ongoing reform efforts. To prevent uniform surcharges from increasing wheeling rates under the Competitive Trading Bilateral Contract Market, the government separated stranded costs from basic grid charges. It launched an 800 MW competitive wheeling auction paired with battery storage. NEPRA also removed distribution exclusivity and created the Independent System and Market Operator. These are useful, but as long as uniform tariffs and retail-level revenue pooling persist, they remain partial fixes.

Privatization efforts encounter similar challenges. The government is offering 51 to 100 percent equity in FESCO, GEPCO, and IESCO, and 10 to 20-year concessions for weaker utilities like HESCO and SEPCO. Because the uniform tariff prevents buyers from setting prices, the government is decoupling consumer billing from operator earnings: bidders are offered a regulated base return of 13 to 15 percent under an 8-to-10-year multi-year tariff, with room to reach 18 or 20 percent through efficiency gains. That creates a paradox. Investor returns are ring-fenced on paper, but customers in privatized territories still pay the tariff rationalizing surcharge to cross-subsidize weaker utilities, so efficient operators cannot pass savings on to them. The government must cover the gap between what consumers pay and what operators are guaranteed, forfeiting its only self-sustaining distribution cash flows while keeping the liabilities of non-viable regions. Potential investors will remain cautious that a future government could alter the tariff or delay subsidies, and with them the promised returns.

To resolve the crisis, Pakistan must move from price equalization to regional accountability. The government should phase out the uniform tariff so that tariffs reflect each utility’s actual cost of service, and NEPRA’s determinations, not political notifications, must set what utilities earn. NEPRA must enforce strict cost benchmarks, including spending caps and loss limits based on best practice. Losses beyond these targets should be absorbed by the utility, with management pay and tenure tied to results, rather than passed on to consumers or added to CD. Smart meters at feeders and transformers would make those losses measurable, so utilities can act against individual defaulters instead of cutting power to whole feeders and penalizing paying consumers. This requires empowering chief executives as principal accounting officers, free from political and administrative interference. Without autonomy there can be no accountability, and without both, loss targets cannot be enforced.

Support for low-income households or any specific geographical area should be funded directly through the budget with targeted transfers, not blanket tariff subsidies that distort the market. Where asset sales are unrealistic, as in the highest-loss utilities, the government should use performance-based management contracts that tie operators’ pay to loss-reduction and collection targets while keeping state ownership. These can work only if tariffs are cost-reflective, so operators are judged on what they control.

Finally, the tariff should recover capacity and network costs through fixed monthly charges rather than per-unit rates, so that customers who generate their own power still contribute to the grid they rely on. Grid planning should also account for all solar users, not only those with net-metered connections.

Circular debt is the symptom, and the uniform tariff is one of the leading mechanisms that keeps producing it. Until pricing, accountability, and market discipline are aligned at the regional level, every refinancing will only postpone the next accumulation.

Copyright Business Recorder, 2026