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October 21, 2020

Subsidies help dodge circumstantial pressures


October 21, 2020

LAHORE: Subsidies are temporary measures to shield businessmen and public from circumstantial pressures created by market imperfection or bad governance. Subsidies are withdrawn when these pressures subside.

This in fact is a global norm. Unfortunately, it is not so in Pakistan. Subsidies have become a permanent feature of our budgets.

We have been providing power subsidies for instance to the poor for the last three decades without any conscious effort on the state’s part to increase their incomes to the level where they could afford to bear actual power charges.

In the meantime, the power rates continue to regularly go up due to corruption in power distribution and transmission system. The power subsidy for the poor also increases correspondingly.

The result is that we are incurring a deficit of Rs1.2 trillion yearly in power sector due to mismanagement and corruption. This is in addition to about Rs250-300 billion power subsidy provided to two slabs of consumers.

The first consuming less than 50 units/month and the second using up to 300 units/month. It is interesting to note that the subsidy on up to 300 units is availed by all consumers having single phase meter. The higher charges start after consumption exceeds 300 units.

The power tariff in Pakistan is the highest in the region though we produce 40 percent of our power through water, 10 percent through coal, 30 percent through gas and 10 percent through nuclear power stations.

The balance 10 percent comes from solar, wind and furnace oil. This is an ideal power mix better than our neighbouring countries. But our cost of power production is 30-40 percent higher because of naked corruption that no government has been able to control.

It seems that the benefits of this corruption are passed on to the highest level by the entrenched mafia that impacts their resolve to eliminate corruption.

We are regularly subsidising domestic gas consumers, and fertiliser producers through cross subsidies in other sectors of the economy. Then there is gas theft that has ballooned in last one decade to above ten percent. This theft called the unfound gas is charged from all consumers, including industrial consumers.

It is an enigma for economists that the most affluent segment of the country, comprising 22 percent, gets piped gas at one fourth the rate paid by the rest of the 78 percent population that use liquid petroleum gas or coal/wood as kitchen fuel.

The 22 percent piped consumers have a strong voice in the power corridors, while the 78 percent poor LPG consumers are voiceless. It is also true that there is a lot of hue and cry if there is any increase in gas or power rates since every consumer knows that the tariffs are higher on account of corruption in the system.

Therefore, the state, instead of getting rid of corruption and other issues in the transmission and distribution of electricity and gas, continues to subsidise different consumers. These subsidies are withdrawn after the government succeeds in removing those pressures through better governance.

Improved governance and creation of awareness among industrial and domestic consumers about energy conservation is a possible way to minimise the impact of regular increase in gas and petroleum tariff.

In the current governance scenario increase in energy tariff is a reality and the people of Pakistan would have to live with it. However, the inefficient use of power in Pakistan by industrial, domestic, and commercial consumers inflates their electricity bills by 15 to 25 percent.

Similarly, the gas bills increase by over 50 percent due to inefficient gas appliances. It has been pointed out time and again that energy-related bills can reduce significantly if proper conservation methods are adopted and awareness in this regard is created among the users.

This goal can be accomplished through joint efforts of the state (the state must be firm and sincere in this regard) and the consumers. It is a documented fact that most of the gas appliances available in the local market have energy gas efficiency use of 30-40 percent against 85 percent or above energy efficiency of appliances used in the developed and many emerging economies.

Inefficient appliances are cheaper and do not conform to the internationally accepted standards. This way we waste at least 50 percent of the gas we receive.

Domestic consumers are the main users of natural gas in Pakistan. The government lacks the writ to ensure supply of standard gas equipment. The state would have to improve its regulatory institutions and ensure that only efficient gas appliances are marketed.

As far as electricity is concerned the losses occur due to various reasons. The use of substandard copper wires is common in the country.

Copper offers least resistance to electricity and the electricity wastages are zero. On this count alone the wastage ranges from 10-15 percent.

Inefficient machines consume up to 40 percent more electricity. Industrialists are encouraged by state subsidies to use inefficient equipment.

The government must put its foot down and ensure industrialists use efficient equipment. It must also make sure that the domestic market is not supplied sub-standard appliances to reduce wastage.