EDITORIAL: A recent consolidated report on State-Owned Entities (SOEs) released by the Finance Ministry noted a long-known factor accounting for ever-rising subsidies to the power sector: 660 billion rupees subsidy on account of inter-disco tariff differential, a policy designed to ensure that throughout the country there is a uniform tariff that has an inbuilt element of cross-subsidy between different categories of consumers.
The equity envisaged in such an approach maybe politically salutary though it is an economically disastrous policy as it has accounted for an annual rise in subsidies which, with the ever narrowing fiscal space requiring ever larger reliance on domestic and foreign borrowing, has been catastrophic on other key macroeconomic indicators.
If one adds the element of rising receivables and distribution and transmission losses due to the ageing systems in place, one is faced with the looming prospect of default that can only be staved off by more borrowing, and overwhelming evidence of this can be seen in not only a rise in government borrowing but also from the fact that Pakistan is currently on its twenty-fourth International Monetary Fund (IMF) programme.
The dependence of the privatised K-Electric on government subsidy (315 billion rupees budgeted for the current year with 171 billion rupees under the head of tariff differential) as well as reliance on the national grid, which is an outcome of administered uniform tariff with inbuilt element of cross subsidy by the sector regulator under the guidance of the government, does not provide a good example for privatising other distribution companies.
The argument that private sector would naturally perform better, a mantra that has been voiced by most administrations, including the incumbent one, does not take account of the fact that the government-administered tariff with inbuilt cross subsidy and the consequent inter-disco tariff differential is an economically flawed policy and the government needs to ensure that a privatised or privately managed company (SOE) is not operating in a monopoly situation and open the field for competition with an element of a tariff that would only be subject to approval of the regulator to protect against exploitation in a monopolistic context.
Be that as it may, there are other major lacunae in the power sector, including the signing off on contracts with independent power producers, which are a serious cause of concern today with foreign exchange reserves of 8.2 billion dollars as on 4 January 2024, barely enough to meet three months of imports leave alone allow for import of fuel to run the plants and full repatriation of profits.
With the take-or-pay contractual obligation signed under the China Pakistan Economic Corridor (CPEC) the government is liable to pay irrespective of whether the plants produce electricity or not and as has been reported for the past year and a half the Chinese companies are getting increasingly restive due to failure of the government to meet these obligations.
What is, however, disturbing is that administrations, including the incumbent government, continue to shy away from implementing structural changes in this sector and are instead passing on the buck to the hapless consumers under the guise of achieving full-cost recovery that includes sector inefficiencies and flawed past policies, impacting negatively on households’ quality of life and industrial sector’s output and consequently employment levels.
Recent efforts to contain power theft have proved efficacious and released around 70 billion rupees; however, a sector burdened by a circular debt of over 2.6 trillion rupees this is a drop in the ocean.
And, therefore, these anti-theft measures need to be supplemented with structural reforms dedicated to not changing but transforming the supply-side of electricity; otherwise, the circular debt will continue to mount and with it the financial woes of this sector will merely deepen whose costs would have to be paid for by a citizenry increasingly unable to meet its kitchen budget.
Copyright Business Recorder, 2024
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