Withdrawal of RCET spells danger for Punjab’s industrial growth: study

ISLAMABAD: Punjab faced an imminent threat of deindustrialisation as a consequence of withdrawing the Regionally Competitive Energy Tariff (RCET) on the industrial sector, a study conducted by the Pakistan Institute of Development Economics (PIDE) warned.

The study found that a 1 percent increase in energy tariffs would result in the layoff of 3 employees on average in Punjab textile units. With a 55 percent increase in energy tariffs, each firm in Punjab would lay off 172 employees. With a 97.59 percent increase, each firm would lay off 304 employees.

The total number of unemployed with a 97.59 percent increase in energy tariff would be 90,431 in 297 working textile units (organized sector) in Punjab in a year. On average, the closure of about 38 more units in Punjab is also expected in a year.

The study also found that a 1 percent increase in tariff would decline export revenue by 0.23 percent. With a 55 percent increase (RLNG-based tariff) and 97.6 percent in energy tariffs (with cross-subsidies), an export share would drop by 12.65 percent and 22.45 percent in Punjab firms.

Non-availability and high gas costs for Punjab firms have severely affected their net profit margins. This also translates into lower exports growth in Punjab. The average growth in export sales in Punjab from 2015 to 2022 was 7 percent as compared to 11 percent growth in exports from Sindh firms.

One percent increase in energy costs will decrease net profit (without taxation) by PKR 0.28 billion (keeping other factors constant). With RLNG-based energy costs in the next year, net profit for a firm (on average) will decline by PKR 14.9 billion.

With 100 percent reliance on grid electricity, net profit (on average for a firm) will decrease by PKR 26.5 billion. With such a huge loss, the smaller firms will be unable to sustain themselves and shut down their operations.

One percent increase in tariff will contract domestic sales revenue by 0.09 percent. If the firm uses RLNG-based electricity, the domestic sales revenue will decrease by 4.95 percent; with grid-based electricity, its domestic sales will contract by 8.78 percent. In other words, a 1 percent increase in tariff will contract total industrial revenues (output) by 0.32 percent.

It means that including cross-subsidy (97.6 percent in energy tariffs) will decrease firms’ output by more than 31 percent. Even using RLNG-based electricity, the output in Punjab firms will decline by more than 17 percent.

The study suggests that the current tariff mechanism must be revised to reduce electricity prices in Pakistan. Tariffs should be based on the actual cost of services to all consumer categories. The best way is to move to a flat linear tariff without cross-subsidies and consumer differentiation.

To avoid any gas price disparity, there is a need to revisit the gas pricing policies. Pakistan should de-regulate and liberalize the natural gas sector and its pricing structure. Let all consumers compete for market share in gas (local) and RLNG.