Why not cut the power subsidies?

KARACHI: In a country so chronically short on cash, one would expect a political – or at least technocratic – consensus on fiscal responsibility and conservatism in Pakistan.

Yet it appears that Pakistanis are no more rational than any other nation on earth: we want our government to provide us all the services in the world without charging us anything in taxes. In fact, unlike other countries which at least have the decency to ask for low taxes, most Pakistanis claim it as their birthright to demand no taxes at all! The subject of tax evasion is a discussion for another day but one would like to focus on at least prioritising the government’s spending, trying to ensure that the most important things get taken care of first.

In this column, I would like to focus on subsidies, and how most of them can, or at least should, be removed from the budget. The Federal Government budgeted a grand total of Rs132 billion ($1.6 billion) in subsidies to various sectors. Admittedly this is a big reduction from the Rs252 billion ($3.1 billion) budget that the government spent last year on subsidies. But there is still a long way to go towards reducing them.

The single largest recipient of this government largess has been the power sector with the Water and Power Development Authority (Wapda) and the Karachi Electric Supply Company (KESC) accounting for about 51 per cent of the total subsidy budget. There is no good reason why private companies such as the KESC should receive government subsidies. And there is no good reason why the government should subsidise power when its attempt, and subsequent failure, to subsidise energy costs is what caused a near-complete paralysis of the entire energy chain in the first place.

The government should rip the bandages when it comes to power: a removal of the subsidies will cause prices to shoot up and will hurt consumers in the short run, but having a steadier supply of power will ultimately help the economy get back on its feet again. Once the government is no longer involved in the food chain, companies will be able to charge what they want for power, and private producers will fill in the energy production gap and reduce or even eliminate the blackouts.

This happy scenario, of course, is somewhat oversimplified, has many risks and cannot take place overnight. But it must ultimately happen if the country is to move to a situation where is can sustain both fiscal discipline and energy production. As for the fact that it will also mean that Pakistan will have expensive power, one has this to say: even at the high rates being charged today, the average blackout costs businesses four times as much in generator fuel and maintenance when compared to the cost of electricity off the grid.

Given the 12-hour blackouts in most parts of the country for much of the year, even a doubling of tariffs would be cost effective. This is obviously not the optimal solution, but it is certainly better than what we have now.