All the focus these days is on power generation, and somewhat rightly so, for the acute shortage has long been a bane. What should not be forgotten, is that in the frenzy of adding thousands of megawatts, some very crucial elements take a backseat. Power tariffs and related subsidies seem to have been the least discussed topic in the energy sphere of late, as the debate that revolved around power at any cost seems to have been over.
The World Bank, in a report released in December, focused on the residential subsidies in Pakistan, and the impacts and options for reform. The working paper titled Residential Electricity Subsidies in Pakistan, has given credence to the view this column has long held that the power sector subsidies, like many others, are mostly ill-directed.
The paper observes that despite cuts to tariffs on heavy users, electricity subsidies in Pakistan continue to be poorly targeted. Recall that residential consumers are charged power tariffs based on monthly consumption. The consumers with low and moderate usage naturally receive the most generous subsidy. The study opines that the very principle, on which the whole targeting mechanism is based, appears to be flawed. The mechanism assumes that measured electrify usage in closely related to household welfare. The paper, however, asserts that it is not the case, based on an extensive study.
The correlation between measured electricity consumption and household welfare in Pakistan is relatively weak, meaning that electricity subsidies continue to benefit the richest households disproportionately, reads an excerpt from the report. Recall that the power sector underwent reforms of sorts in 2013, aimed at rationalizing power tariffs. While, it must be acknowledged, the that government has been able to significantly reduce the fiscal stress, the very purpose of subsidies i.e. targeted benefit, remains largely unfulfilled
Consider this: the group receiving the greatest share of electricity subsidy expenditure remains the richest 20 percent of the population, and average subsidy for the richest 20 percent of households is 40 percent higher than the average subsidy for the poorest 20 percent of households. This is surely not why the government should be doling out hundreds of billions of rupees every year.
The seasonality element has been largely ignored in the current subsidy mechanism, which tends to benefit the richest in winters and puts the poorest at disadvantage in summers. The subsidy received by the richest quintile per household averages Rs5590, versus less than Rs4000 received by those in the lowest slab.
All this while Pakistan has a state-of-the-art targeting and registration mechanism to do much better in terms of subsidy allocation. The idea is not to extend the current amount of subsidy, but to channel it properly, which could save Pakistan invaluable money, and be better spent elsewhere.
The World Bank paper goes a step ahead and recommended a strategy around which residential subsidies could be better targeted. There are examples in the region, where better targeted subsidies yielded significant savings. The most effective manner is to use the right tools to determine which segment should and should not be included. The other critical aspect is to ensure effective communication aimed at increasing public awareness about subsidies and planned reforms.
Let us not forget that while Pakistan may have lots of additional megawatts flowing in the system, assuming the transmission network is in place, it will not be cheaper electricity. The need for subsidy would remain or may even increase. Now is a good time to revisit the current targeting mechanism, and be prepared in advance before allocating for the next budget.
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