The week in focus

The govt dropped a ‘petrol bomb’ and people are bracing for an ‘electric shock’ in the form of high tariffs.

The ‘explosive’ increase in power tariffs in a bid to restructure the energy sector has caused worries for ordinary citizens and has also led to talk of whether the move will pay in the long run.

In the last fiscal year, the government increased electricity tariffs by 24 per cent aimed at reducing consumer subsidy and bringing down power company losses. This year too, reports are continually appearing in the media, saying that power rates will rise by around 15 per cent to tackle the Rs300 billion inter-corporate debt plaguing companies in the energy sector.

Already, power bills of residential consumers have soared around 50 per cent compared with last year and industries are no exception. How will people who earn up to Rs7,000, the minimum wage set by the government, be able to pay such exorbitant bills at a time when prices of essential commodities are also spiralling out of control?

At the end of last month, the government dropped a ‘petrol bomb’ by increasing prices of petroleum products by up to nine per cent and people are now bracing for an ‘electric shock’ in the form of high tariffs. However, the government may defer the increase in order to avoid an angry backlash.

Head of Equity Research at BMA Capital, Hamad Aslam, termed the plan for a hefty increase in power tariff a ‘short-term solution’ which will harm business and economy in the long run. “Control power theft and wastage and ensure the recovery of consumer bills,” are the measures suggested by Aslam to improve the health of power companies.

The cheap options available for adding to the country’s generation capacity are hydropower and coal resources with the need to shift from thermal power and these, Aslam said, will pay in the long run. Besides, gas reserves are fast depleting which cannot be relied on for power generation on a large scale.

Talks have been going on about the construction of small and big dams for some years but nothing significant has emerged. In the case of coal, studies have proved reserves of billions of tons in the Thar area of Sindh but coal-based power projects are still far from seeing the light of day.

But how will the cash-strapped government get finances for injecting money into new projects? One of the obvious options is to tax the elite and those who enjoy exemptions, which has also been stressed by international lenders in recent times. Aslam also suggested bringing undocumented businesses under the tax net.

Power sector analyst at JS Global Capital, Umer bin Ayaz, said the power tariff hike will enhance the manufacturing cost for industries. In addition to that, inflation will shoot up and savings will be eroded.

He was of the view that in the medium term, power suppliers should bring down their high transmission and distribution losses estimated at an average 25 per cent. For a long-term sustainable solution, they should switch from furnace oil-run plants to hydel sources and renewable energy which will save costs.

Ayaz laid stress on building proper infrastructure and offering good returns to lure investors. However, the deteriorating law and order situation has proven to be a deterrent for investors and the issue has been cited as the reason for falling foreign direct investment.

“Law and order only adds up to the risk premium for investment, meaning if the government offers higher than average returns, investors will be encouraged,” countered Ayaz.

The writer is incharge Business desk for The Express Tribune.

Published in The Express Tribune, November 8^th, 2010.