The writer has served as the chief of the National Health Policy Unit and as an adviser to the WHO, UN, ADB, CIDA and the World Bank. He currently works with a private research group
Global experience of the past 100 or so years has taught us two things. One is that no one can fix prices of things centrally. Needs and supply and other local factors are too fluid and different for each central planner to determine the right price of any commodity. Indeed, many socialist regimes tried and failed for decades until their whole enterprise fell under the weight of their planning. In the US, four petrol pumps facing each other all have slightly different prices. Secondly, governments are too inefficient to manage services. We see that in Pakistan, public sector health services cost two to 10 times more than similar quality of private services.
Contrast these lessons with our lot in Pakistan. We have a ministry of petroleum, an Oil and Gas Regulatory Authority (Ogra), and a state oil company, all giving the government an essential monopoly over the fuel consumed in the country. As expected, the government uses this monopoly to manipulate consumer sentiment rather than improving lives for people by ensuring steady supply of cheap and consistent electricity or petrol. That it acts without any economic rationale is exemplified by the fact that on the one hand, whether you buy petrol in Karachi (where the port and refineries are located) or in Chitral (which gets petrol that is trucked a thousand miles), the cost is the same; and on the other, natural gas is Rs7 per kilogrammes for domestic users, Rs70 as CNG in cars and Rs160 for industrial users. The power sector which is nearly completely publicly owned has typical inefficiencies where despite a 300 per cent reduction in price of petrol, our electricity bills continue to climb and shortages remain rife. Since oil is used to produce electricity, this rise is inexplicable.
When it comes to the 10-plus hours a day of load-shedding, this recent crisis further exposed that this terrible and extractive system is not working. We really must learn from lessons that are well absorbed in nearly every other country. For example: 1) We must switch to a pricing mechanism to manage supply and demand for fuel (petrol, gas or electricity) and move away from central pricing; 2) We should dissolve the petroleum ministry and Ogra as redundant and harmful; 3) we should privatise the state oil company. People are already paying for the energy they use directly (actual price plus taxes) and indirectly (time and opportunities lost while waiting in lines or during load-shedding). Let them decide how their money and time will be spent, by allowing them the choice to purchase energy as they see fit and not as determined by an inept system of colluding suppliers and regulators.
Published in The Express Tribune, January 22nd, 2015.
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Here is a proof how the free market economy works on the energy, that drives the world economy of today.
US$ 1.88 / gallon (about 4 liters of gasoline), that includes state, federal, and local taxes. it was about $2.50 a year ago.
@Always Learning:
Thanks for your valid points. Completely agree.
The fact is that there is no "perfect" system. At 64% of power generation the state is very largely the supplier of electricity. And while only around 37-40% of electricity generation is from oil, the state controls most of the other sources (hydro and the minimal nuclear). This and the fact that the Planning Commission estimates that the government controls around 78% of our economy directly, means we are one of the most socialist economies (Chinese government controls around 35% of theirs)
Also agree with your point on weak states and either private influence or even more perniciously the implications of regulatory capture (as we see in auto industry).
Totally agree with all your points except the last one. Few people (leaders and bureaucrats alike) do their jobs right unless they are made to and as you point out, weak governments can enforce the do it right. Even in better governments, its the people who push for accountability, in our country (and like) the people are simply not empowered to push this.
A number of factual errors around a fundamentally robust argument for market based resource allocation. The facts: 36% of all power generation is in the private sector not zero %. About 37 to 40% of total power generation is from oil not 100%. Private power producers have generation capacity guarantee from government so that they are paid even when they do not produce electricity along with mark up, if that payment is delayed as they inevitably are. In weekly governed states, private sector influence government decision making. Pakistan has seen that in many areas, especially the power sector. That is one of the few reasons for the degraded power sector in Pakistan. Market based decisions sound better on paper than in practice. High barriers to entry limit competition. The private oil companies along with PSO are responsible for the fuel shortage. I can give a number of reasons why the Petroleum Ministry and OGRA are needed. They need better personnel and leaders who do not look after their own interests exclusively.
Then how will they pay for political patronage and the bhatta mafia will turn to antisocial acts due to unemployment.