Fixing perverse incentives
We hope Government will realise that the best way to reduce subsidies is to crack down on theft.
Virtually every analysis of Pakistan’s energy sector has found that more than half of the problem originates in the very high levels of theft, which the government seeks to pay for through unsustainably high subsidies. PHOTO: FILE.
It seems that the only way to get Islamabad to do the right thing these days is to get the International Monetary Fund (IMF) to impose it as a condition to one of its (unfortunately) recurring bailouts, and even then, success is far from guaranteed. But the latest condition imposed by the IMF, which calls for the state-owned utilities to distribute power outages throughout the country based on rates of theft and bill recovery, is a good one and we hope the government will adopt it as policy.
Our reason for supporting this policy, which we have articulated in the past, is simple: if the government wants to crack down on theft and uncollected bills in the electricity sector, it should start by eliminating people’s incentive to do so. Why would anyone believe the government’s promises to crack down on theft to be credible if it keeps supplying electricity to people who do not pay their bills?
And unlike many of the policy proposals from the IMF, this one has the advantage of being derived from Pakistan’s own experience. The privately owned Karachi Electric Supply Company (KESC) has had remarkable success in bringing down line losses by reducing or even eliminating power outages in areas of low theft, while shifting the burden onto areas with very high theft levels. The KESC has returned to profitability after nearly two decades of running losses and is able to invest in upgrading the power infrastructure of the largest city in the country.
Virtually every analysis of Pakistan’s energy sector has found that more than half of the problem originates in the very high levels of theft, which the government seeks to pay for through unsustainably high subsidies. The Nawaz Administration has admirably set itself the target of eliminating the need for subsidies.
We hope it will realise that the best way to reduce subsidies is to crack down on theft, and the best way to crack down on theft is to stop rewarding bad behaviour amongst unscrupulous consumers. Only then can the country’s energy system move on the path towards financial sustainability.
Published in The Express Tribune, November 21st, 2013.
Our reason for supporting this policy, which we have articulated in the past, is simple: if the government wants to crack down on theft and uncollected bills in the electricity sector, it should start by eliminating people’s incentive to do so. Why would anyone believe the government’s promises to crack down on theft to be credible if it keeps supplying electricity to people who do not pay their bills?
And unlike many of the policy proposals from the IMF, this one has the advantage of being derived from Pakistan’s own experience. The privately owned Karachi Electric Supply Company (KESC) has had remarkable success in bringing down line losses by reducing or even eliminating power outages in areas of low theft, while shifting the burden onto areas with very high theft levels. The KESC has returned to profitability after nearly two decades of running losses and is able to invest in upgrading the power infrastructure of the largest city in the country.
Virtually every analysis of Pakistan’s energy sector has found that more than half of the problem originates in the very high levels of theft, which the government seeks to pay for through unsustainably high subsidies. The Nawaz Administration has admirably set itself the target of eliminating the need for subsidies.
We hope it will realise that the best way to reduce subsidies is to crack down on theft, and the best way to crack down on theft is to stop rewarding bad behaviour amongst unscrupulous consumers. Only then can the country’s energy system move on the path towards financial sustainability.
Published in The Express Tribune, November 21st, 2013.