Wednesday December 07, 2022

Energy subsidies, efficiency must for growth

September 19, 2018


LAHORE: The decision to increase gas tariff is the right step, but the concessions granted to the exporting sector, though badly needed, should have been conditional to improvement in efficiencies.

The opposition would certainly oppose the decision merely for the sake of opposition. Those opposing the move should come out with an alternate plan to stop yearly bleeding of Rs152 billion by the power distribution companies.

Out of this loss, Rs50 billion pertains to gas theft, while the remaining is the difference between the costs at which these companies purchased gas and the tariff that they applied. These companies would still suffer an annual loss of Rs58 billion because of gas theft.

They are duty bound to eliminate theft which brings in to question the competence of the gas distribution companies. The petroleum minister should warn the management of these companies to deliver on this count or be prepared for accountability.

As far as the exporting sectors are concerned, the government has not increased the rates of piped gas that were already competitive for all the exporting industries except Punjab.

The woes of the exporting industries in Punjab have also been addressed, as Finance Minister Asad Umer announced Rs44 billion subsidies on imported gas, which would bring uniformity in gas prices throughout Pakistan.

The Finance Minister has also announced to make adjustment in power rates for exporting industries in due course.

These are good measures and likely to boost exports. This is a stop gap arrangement. The subsidy would increase with the increase in exports. It should be made conditional to improvement in efficiencies over yearly basis.

Take for instance the case of the spinning industry, where 90 percent of the spindles

are power inefficient because of old technology.

The new high-tech spindles consume 40 percent less power. This means that we are subsidising power inefficiency to the tune of 40 percent.

This subsidy was necessary, as the textile sector was under extreme pressure for the last seven years. It would boost the industry.

However, it should have been conditional, and the government should have asked each industry to improve power efficiency by at least 10 percent per year, which in other words means upgrading technology by 10 percent each year.

This way the government would not have to increase the subsidy even if the exporting industry grew by 10 percent.

In case of failure to improve power efficiency, a tariff penalty of 5 percent should be slapped on the defaulting mill. This would force the exporters to improve efficiency. The need for subsidy would increase every year if the industry failed to upgrade its technology.

This is in the interest of the exporters as well. Foreign investment was not coming to Pakistan because of high power and gas tariff.

Now that the tariff for exporting industries has been lowered, the Chinese would start relocating their industries to Pakistan.

The inefficient Pakistani industries would be booted out of the market by the efficient Chinese industries.

This measure would attract only export-oriented foreign investors, as for non-exporters the tariff would remain high.

It has been learnt that the present regime has conveyed its concern to the Chinese government on the absence of industrial investment in Pakistan under the China-Pakistan Economic Corridor (CPEC) initiative, as Pakistan would become a trading state in the absence of industrialisation.

When CPEC was started, the Chinese asked the government of Pakistan to show patience because the country faced acute power shortages.

Chinese made major investment in the power sector so that some of their industries could be relocated to Pakistan. The power shortages have been addressed to a large extent, but the high tariff was a barrier.