Power tariff hike


Editorial July 01, 2010

With the most recent 7.6 per cent increase in power tariffs, the total rise in electricity prices has come to 60 per cent since September 2008, when the country underwent a major economic and financial crisis. Given the enormity of the government’s fiscal deficit, and the IMF’s insistence that all subsidies be withdrawn, the tariff hike was inevitable. The only surprise is that the rise was not higher. From the economic standpoint, the increase is justifiable. The government subsidises electricity by a substantial margin even now and at a time when it can barely afford to pay its own bills, the government cannot reasonably be expected to subsidise the bills of the entire country. In addition, subsidies have distortionary effects on the economy, encouraging overconsumption of resources and misaligning the incentives to invest in the subsidised industry. Were this the extent of the problem, we would support the government wholeheartedly in its decision. But as it turns out, that is not the entirety of the power crisis. There are several other factors that need to be taken into consideration, most notably the fact that the cost of electricity production in Pakistan is high not just because of input costs but also because of the massive discrepancy between the number of units produced and the number of units billed, mostly due to theft, but also due to technical defects in the grid and transmission equipment.

The issue of theft has grown to the point where it can no longer be ignored. The KESC, for example, has begun a citywide campaign to shame people who steal electricity through the infamous “kunda” system. Yet the KESC is just a private company. It does not have the power to enforce the law. While it can temporarily shut down the electricity of those who do not pay their bills, it cannot continually police a city that is geographically six times larger than New York City. The simple fact of the matter is that the government needs to enforce the law and ensure that power theft is cut down to a minimum. And then there is the issue of political connections being utilised to pressure power companies, even privately-owned companies such as the KESC, to let power thieves off the hook and continue to supply them with electricity even when they do not pay their bills. This intolerable abuse of authority and power must stop. The government must clean out its own house if it is to have even a whisper of a hope of solving the chronic power crisis.

Finally, there is the issue of the independent power producers, many of whom have been given absurdly profitable deals that continue to increase their revenues regardless of whether or not their costs actually go up. The Hub Power Company, for example, gets paid in dollars for its power supply and the cost is automatically adjusted for inflation in the US, in addition to the increased cost that the government bears as a result of the depreciation of the rupee. We understand the need to attract investment in the power sector, but is it really necessary to go that far in bending over backwards to accommodate investors? This country has an abundance of natural resources. It has, by some accounts, the second largest reserves of coal in the world and neighbours a country with the second largest gas reserves in the world. Both of these are exceedingly cheap alternatives to the current oil-dominated power generation system in the country. The government must seek to promote investment in power projects that focus on these two resources.

Published in The Express Tribune, July 2nd, 2010.

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