Minority Report was a Hollywood thriller ahead of its time, in which a crime was stopped before it could be committed. In a similar spirit, the National Electric Power Regulatory Authority (Nepra) has approved a ‘recovery loss allowance’ for K-Electric, which has a monopoly over electricity distribution in Karachi.
In such an allowance, the regulator has allowed the utility to embed lack of recoveries within the electricity tariff, charged to the consumer. Effectively, for 2023-24, the regulator allowed a margin of 6.75 per cent to be recovered from consumers who are actually paying their bills.
Effectively, consumers that are being compliant and paying their bills on time are now also responsible for paying for those who are not paying their bills. Moreover, just like in Minority Report, these consumers have to pay ahead of any default, or in pre-emption of any default. It is understandable that there will be some defaults, and some margin has to be built in for the same as the cost of doing business. But the scale of the margin is what matters here.
The range of such a margin within the region, or even globally, is around 1-1.5pc of total receivables of a utility. As a utility settles its monthly electricity bills, a typical receivable cycle would be in the range of 30 to 45 days. Meanwhile, in the case of K-Electric, the same is 6.75pc of total revenue (a much higher multiple of receivables) for the first year of its multi-year tariff.
The unintended consequence of KE’s recovery loss allowance will be a class of perpetual defaults
By allowing recovery of losses that have not been incurred in advance, precedence is set wherein the incentive for a utility to achieve 100pc recovery is simply not there. It is to be noted that many utilities in Pakistan are able to achieve close to complete recoveries in other service areas. It is important to note here that such recovery allowances are in addition to allowances for theft, which are an additional 7-8pc.
Effectively, the compliant consumers are paying for theft (which can be reduced through various targeted interventions), as well as for electricity that has been delivered and billed for but never recovered. Losing around 13-15pc of revenue to theft or default and accepting the same as the cost of doing business, while other utilities are doing much better, is an absolute disservice to the compliant consumer and the taxpayer.
One must also appreciate that K-Electric privatisation was a poster child of how entities can be turned around — a phenomenal reduction in losses through management reform and tactful interventions. But along the way, within the last few years, something changed, and from being the best-performing utility, it is now among the worst out there in terms of domestic or household recoveries.
Aggregate recoveries reached a high of 96.5pc in 2022-23 and faltered to 92pc currently. Moreover, on the domestic, or household, recovery front, it dropped from 90pc to an embarrassing 80pc for the ongoing year. During the same period, the average domestic recovery rate across the country was greater than 90pc.
Such inefficiency, instead of being rectified, was further allowed to crystallise through the availability of a recovery loss allowance — a new concept that has been endorsed by the regulator. Previously, any losses and its eventual write-off required the availability of certain documents and the completion of mandatory steps. These included the requirement of a CNIC, disconnecting a defaulter connection for at least three years, ensuring recoveries through the land revenue act, and external validation through an audit.
All of these conditions have now been diluted, wherein even the requirement of a CNIC is simply not in place, and neither is there a requirement for a specialised external audit. This effectively opens up room for potential overbilling or creating a cohort of perpetual defaults that will continue to be funded by the consumer through a recurring allowance.
As of December 2024, K-Electric had over 260,000 “running defaulters”, owing around 90pc of the amount overdue. These can be deemed as problematic accounts. Effectively, the new allowance would continue to perpetually serve these problematic accounts, giving zero incentive to actually resolve the same. The
unintended consequence of this recovery loss allowance will be a class of perpetual defaults — why bother with a recovery when the compliant consumer can cover for the same?
To put things in perspective, on average, the amount associated with this recovery loss allowance would be in the range of Rs45 billion annually, and over a period of the multi-year tariff of seven years, that may accumulate to more than Rs300bn annually. All of this exclusively added to the bills of compliant consumers.
However, it still doesn’t end here. The country has a uniform tariff regime in place, which is the mother of all inefficiencies, but that is a story for later. Due to the same, to ensure there is a uniform electricity tariff, the federal government provides a subsidy to utilities whose total cost of service is higher than the uniform tariff. In K-Electric’s case, such a subsidy is called a Tariff Differential Subsidy. Effectively, the Rs40bn annual recovery loss allowance identified earlier is paid through the public exchequer by the country’s taxpayers.
In other words, just this annual amount can unlock massive infrastructure projects for the city. Taxpayer money, or allocation from the public exchequer, needs to be used in a manner that generates the highest impact. A better use of the same allocation can perhaps be the rollout of massive infrastructure projects, like the Green Line; the construction of four state-of-the-art 500-bed hospitals; or even universal health coverage for all residents of Karachi. Every single alternate reallocation of the public exchequer is better than, say, enabling inefficiency through a perpetual recovery loss allowance.
It is understood that recovery losses are a genuine cost of business, and there are political and economic considerations, but there is a better way to manage the same. A better way would be through the creation of a loan loss reserve, wherein certain capital can be allocated through the creation of a reserve. Similarly, explicit caps need to be in place, which may be lower of a notional amount, or six months of average electricity bill per customer.
Through a conventional credit risk management process, exposure and eventually recovery losses can be constrained. Moreover, any defaulter, once hitting an exposure cap or even before that, may see their connection being disconnected. It may be considered that the default of a connection can only be covered through such an allowance once — following which it shouldn’t be allowed. The taxpayer should not be perpetually subsidising defaulters — this is moral hazard at its worst.
The lack of imagination of both the utility and the regulator to design a credit risk management framework that is efficient is appalling at best — with the solution being slapping a flat loss allowance on all consumers.
Effectively, the most inefficient way to manage the problem at hand — a classic case of misalignment of incentives when it comes to utilisation of public money. Such a thing would not happen if shareholder capital were involved, which obviously stays protected and nurtured in dollarised returns, despite glaring inefficiencies.
The taxpayer or compliant consumer should not be at the receiving end of all inefficiencies. Such has been happening for decades, but maybe there is time for change — not just in this case, but also across the board. Allocation from the public exchequer needs to be viewed through a lens of impact, rather than solving a problem by throwing money at it. The latter is the preferred route, almost always.
The writer is assistant professor of practice at IBA, member of the Tariff Determination Thar Coal Energy Board, and CEO, NCGCL
Published in Dawn, The Business and Finance Weekly, June 2nd, 2025
