Service quality, technical efficiency and total factor productivity growth in Pakistan's post-reform electricity distribution companies

Pakistan's energy sector has undergone substantial reforms during the last three decades with the aim to improve its operational performance and to cater to the growing energy needs of the economy. In the wake of these reforms, the WAPDA Act was passed in 1998 to achieve operational and financial efficiencies. Pakistan's electricity market is still hampered by issues like extended blackouts, electricity thefts, high circular debt and poor service quality. The electricity distribution sector is thus an interesting case to investigate its efficiency in the post-reform period by examining the impact of service-quality parameters (SQPs), which have generally been neglected in the literature. Stochastic frontier analysis has been used to estimate technical efficiency, while the Malmquist Productivity Index is implemented to decompose total factor productivity (TFP) into scale change, technical change and efficiency change from 2006 to 2016. We conclude that the technical efficiency score declines from 98 percent to 36 percent with the inclusion of SQPs in the models. The results also indicate a negative trend in scale change, implying that distribution companies are not operating at the technically optimal scale. We propose that the regulatory body should change its governance regime and focus on incentive-based regulation instead of rate-of-return regulation.