Governments' primary objective in subsidizing a sector and/or subsector/essential commodity is to protect the vulnerable and/or to protect the country's critical productive base - decisions which are not divorced from political considerations. To assess the efficacy of a subsidy requires analyzing whether the protection of the vulnerable is the overriding concern or whether politics has played a greater role in the decision.
Prior to evaluating the efficacy of the subsidy regime in Pakistan, it is relevant to identify what has guided the bulk of allocations on subsidies in this country. Administrations, past and present, have allocated funds to existing subsidized utilities/consumer items; and the largest recipient of government subsidy to-date has been to equalize the tariff for all distribution companies (Discos) as each Disco has a different cost largely attributed to different rates of bill collections. The item is titled inter-distribution tariff differential and the more poorly performing a Disco the higher would be the subsidy.
A report prepared by the World Bank dated 6th June 2014 titled Reforming Electricity Subsidies in Pakistan: Measures to Protect the Poor states: "The Government of Pakistan provides several subsidies to electricity consumers; in 2012-13 (FY13), these collectively amounted to 1.5 percent of GDP. By far the largest is the Tariff Differential Subsidy (TDS), which comprised 96 percent of electricity subsidies in FY13. The TDS is a payment from the government to compensate electricity utilities for the difference between their cost-recovery tariffs and lower actual tariffs charged. The government uses the TDS to set a single national tariff for each consumer type and to provide additional subsidies to some consumers. In FY13, half of electricity subsidies went to households, one quarter to industry, and the remainder to agriculture and low-consuming businesses".
The report adds that changes/reforms including modifying the tariff structure to limit heavy users' access to concessional rate as well as a switch from all slab benefit to previous slab benefit and increasing tariffs on the top three slabs has reduced subsidies for higher levels of consumption but added that despite adjustments "only 28 percent of electricity subsidies reach the poor. First, electricity consumption is only weakly related to poverty, so many non-poor households pay the concessional tariffs granted to low electricity users and thus benefit from subsidies....This policy is still protecting the vast majority of households, even those in the top quintiles. Second, even though the October 2013 notifications notably reduced subsidies for the heavier users, they still granted a net subsidy to households using up to around 500 kWh per month, many of which are non-poor. Third, electricity subsidies provide no benefit to households without electricity access." The better alternative, the World Bank argues would be to top up the monthly Benazir Income Support Programme and "indexing the BISP monthly cash benefit to inflation... and to use the existing National Poverty Registry to objectively determine which households are poorest."
There is however no doubt that the Sharif administration has reduced subsidies in comparison to the PPP led government (2008-13). In terms of budgeted subsidies the PPP government allocated 122.7 billion rupees in 2011-12 for Wapda and 24.5 billion rupees for K Electric (with revised/actual allocation for Wapda of 419 billion rupees and 45 billion rupees for K Electric); however PPP's tenure was marked by a massive rise in the international oil price and in marked contrast the incumbent Sharif administration has been lucky in that oil prices have been, on average, one-third of what were prevalent during the PPP tenure. This enabled the incumbent government to reduce subsidies to 117.8 billion rupees last year (19.8 billion rupees more than what was budgeted) and project a further reduction to 95.4 billion rupees in the current year.
However, in this context, it is relevant to note that as per a briefing by the Water and Power Ministry to the Economic Coordination Committee of the Cabinet on 13 February 2016, the government levies a tariff rationalization surcharge (on an electricity bill of 5000 rupees a surcharge of 1000 rupees is payable or a whopping 20 percent) and 150 rupees financial cost surcharge every month thereby implying that the Sharif administration did not pass on the entire international oil price reduction to domestic consumers.
Be that as it may, inter-Disco tariff differential is budgeted at 60 billion rupees in the current year, half of what was budgeted in 2012-13 (but there were no arrears that year) while the arrears listed in the budget documents for 2016-17 were 16.3 billion rupees last year (though the budgeted amount was 19 billion rupees) and in the current year again 19 billion rupees are budgeted. It is highly unlikely that the Finance Ministry would release the arrears as budgeted especially given the widening gap between the budget revenue and the actual revenue. Failure to release the full amount of the budgeted subsidy would compound the liquidity issues of the sector thereby fuelling the intractable circular debt. Thus adding on the arrears reflects the budgeted amount for inter-Disco tariff differential at 79 billion rupees.
In addition, during the Zardari tenure budget for 2012-13 noted the pick-up of interest payment for Term Finance Certificates at a whopping 55.7 billion rupees while this amount is not itemized in the 2016-17 budget at all. If the oil prices inch further upward this year then given that the Sharifs are in election mode subsidies would rise.
Subsidy to K-Electric was budgeted at 24.5 billion rupees in 2012-13 (actual disbursement was 45 billion rupees) while Dar budgeted 20 billion rupees in 2015-16 but actual disbursement was more than double at 53.4 billion rupees last year - higher than during the Zardari years.
Subsidies are extended to the Utility Stores Corporation, and for Passco (to undertake wheat operation and sugar freight subsidy). Subsidy to USC was 2 billion rupees in 2012-13 while it was budgeted at 7 billion rupees last year (actual disbursement was 5 billion rupees) and the same amount is budgeted for the current year though the Ramazan package is one billion rupee less than last year and payment of sugar arrears envisages 5 billion rupees this year in comparison to 4 billion rupees budgeted last year (with actual disbursement at 2 billion rupees). Clearly politics is playing a major role in the decision to reduce or increase the disbursements for subsidizing consumer items on sale in USCs (with the objective of achieving a more sustainable deficit) though political considerations would assume greater importance given that 2018 is an election year.
The Sharif administration has massively increased the budgeted subsidy to Passco for commodity operations - from 4 billion rupees during the Zardari tenure (though actual release under this head was 18.6 billion rupees) to 10 billion rupees released last year with 15.3 billion rupees budgeted for the current year.
Subsidies during the Sharif administration included 25 billion rupees extended under the farm package as cash grants of Rs 5000 per acre for cotton and rice growers - money that was hijacked by the influentials. No data is available on how much was spent by the government to pick up the interest rate on farm loans, a subsidy, again as part of the September 2015 farm package. And finally the government has given an indirect subsidy to exporters through tax concession amounting to 100 billion rupees as part of its export package. This is not to undermine the continuing emergent need to reform the tax system and render it fair, equitable and non-anomalous.
To conclude, ideally subsidies must be targeted to the poor and vulnerable and the best means to identify the poor is through the BISP. However, with the country clearly in election mode it is doubtful if the incumbent government would be able or willing to reduce subsidies due to political considerations.