Why not cut the power subsidies?

April 26, 2010

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.

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JJ | 11 years ago | Reply You are correct; the scenario presented here is heavily oversimplified. Skyrocketing electricity prices don't hurt only consumers, they also hurt industries and limit production. Of course, we are all aware that production in Pakistan is frequently damaged severely by power outages, but it is incorrect to ignore the issue of affordable power and it's role in economic growth. It would also have been relevant to point out expensive electricity is not solely the outcome of subsidy removal, but also due to a variety of duties and surcharges imposed by the Govt. of Pakistan. These are of course important from a federal revenue collection standpoint, but nevertheless deserve a mention in your write up. Lastly, I am curious to know where you get your data from. In particular, how did you conclude that"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". I have commented on your articles before for similar reasons and I am surprised that a publication like yours, aspiring to a high caliber, has not restricted the usage of unreferenced numbers.
Nadir El Edroos | 11 years ago | Reply We need to face facts. The day of cheap energy is long gone. Right now things are bad, yet global oil prices are yet to rebound above the $100 level. The government should remove the subsidies and all for electricity prices to rise. Instead, finances should be diverted to improve the quality of buildings, in terms of insulation and weatherizing them to reduce energy waste. Coupled with the economic incentive to use less power and state support to improve domestic and commercial energy use power shortages may be overcome. Assuming that electricity prices are going to fall any time soon in fool hearty. Hopefully, the government will start making these hard decisions sooner rather as later. As more time passes, the government will become wary of upcoming elections and baulk at any talk of removing subsidies.
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