Three-tier policy: Govt pays Rs95b in electricity subsidies

The amount is more than six times the available fiscal cushion.

ISLAMABAD: The government provided Rs95 billion in subsidies on electricity during six-months (July-December 2010), as against a fiscal envelope of Rs15 billion for the period, depicting a complete collapse of its much-vaunted three-tier policy to overhaul the bleeding power sector.

The subsidy paid during the second half of 2010 is over six times more than the available fiscal cushion.

Finance Ministry officials told The Express Tribune that the government had earmarked a total of Rs30 billion in electricity subsides for the financial year 2010-11. This money was set aside to protect the lifeline consumers against the proposed tariff hike during the course of the year.

The size of the subsidies and the anticipated government indecision on how to stop the power sector from bleeding is likely to further deteriorate the fiscal framework.

Official sources said that, bearing in mind the six month trend, the authorities were now expecting Rs180 billion subsidies by the end of June. The amount is more than 1 per cent of the total size of the economy.

The government has prepared a plan to overhaul the power sector by increasing power tariffs to minimise the gap between the cost of electricity generation and the consumer price. The plan also envisages reducing line losses from an average 20.4 per cent to 18.6 per cent that was to save  Rs12 billion. The third tier of the plan was enhancing efficiency of the power distribution companies – a move designed to save Rs20 billion.

“All this has failed. Things are even worse than the last financial year despite people like the Deputy Chairman Planning Commission and the newly-appointed Energy Adviser to the Power Ministry beating reform drums,” said another Finance Ministry official from the Corporate Wing.

Currently there is a difference of over Rs2.50 per unit in power generation cost and average consumer price. The government is picking up the difference.  According to rough estimates the cost of the government indecision on power sector reforms is Rs20 billion per month.

Though the government increased power tariffs by four per cent in two installments it has temporarily frozen the move after likely political upheaval on the issue.

Independent experts have criticised the policy of only increasing the power tariffs while there are no measures to enhance efficiency and reduce line losses.

The government dissolved the Board of Directors of all power distribution companies around two months ago with a promise to constitute new ones in a fortnight. So far it has not notified the new boards.

Although Finance Minister Dr Abdul Hafeez Shaikh said on Thursday that the new boards of directors’ names have been finalised, the Prime Minister has yet to give an approval.

The official sources said the power sector’s financial woes also augmented due to the pending outstanding dues of the Pakistan Electric Power Company, as the provinces have refused to clear all dues because of a dispute over the exact size of claims. The federal government has estimated over Rs80 billion dues – a claim that is hotly contested by the provinces.

Published in The Express Tribune, January 24^th, 2011.