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Enhancing tariffs: New Energy Policy – III

There is news all round that the power tariff is being increased by 30-70%. We only hope that such a large increase in tariff would not be done abruptly and in one go. Apart from damaging the economy and badly affecting people, it would be politically very costly .Government has already initiated the process of shifting the burden of subsidies to the provinces. It is hoped against hope that some amicable formula emerges. As a part of managing the circular debt issue, increase in tariff has been proposed.

We have mentioned earlier that the circular debt has three dimensions: theft and system losses, high cost of production and lower tariff that does not cover the cost. We will explain the link in the following and see what other steps would have to be taken by the government along with imposing affordable and reasonable increase in tariff ?

Circular debt means non-payment of dues to the IPP sector. It is bad not only because it creates financial problems for IPP restricting and impairing their power generation capabilities further aggravating the electricity shortages, but also because the country’s image gets tardy among investors and lenders which reduces investment flows in power sector creating long-term problems for medium-term and long-term capacities.

The least damage it causes is that debt gets more expensive which increases future power generation costs. The new government has done well to take on the problem in an upfront manner. Circular debt is essentially created by selling electricity at rates cheaper than its cost of production, promising by the government to pay the difference as subsidies and not paying it. Cost of production is high because almost one-third of electricity is lost in the distribution system as theft, non-payment by government agencies, thugs and the powerful. Subsidy requirement is almost the same as these losses. This means that if these losses are eliminated, there would be no subsidy requirement and no circular debt.

This also means that subsidy is actually a compensation/deduction for the bills of the ordinary user who pays his dues regularly and does not steal. If and when System losses (theft) go, the subsidy requirement goes. Should the government then remove subsidy by increasing the tariff or by reducing and eliminating theft and losses. The answer is both, as it would take time to reduce and eliminate losses, as an interim measure, tariff may have to be increased. However, it has to be moderate and graduated to let the economy and consumer absorb the shock in a bearable manner. It should be a smooth curve and not an erratic saw-tooth pattern. Simply speaking, it has to be gradual.

Large and abrupt increases must be avoided. In one year, the increase should not be more than 15-20%. The figures of 30-70% increase that are being discussed are rather horrendous and unrealistic. Even more scandalous and problematic would be the management of cash subsidy that has been proposed. Some foreigner wrote this in his report and our bureaucracy keeps recommending it whenever they get the opportunity. What is the harm in the present system of subsidising the small and poor consumer consuming 100-200 units? Change just for change. It would be wasteful creating another Pandora box.

Some serious and target-based effort would have to be made to reduce theft and non-payment. A 20% reduction per year should be possible, say. Some tough and rough methods may have to be adopted. If one gets the due punishment, 100 get lessons and are prevented from the crime. Charity begins at home. It has to begin from Lahore and from the party supporters and members. On a more systemic and technical levels, Smart Meters should be installed at the sub-stations and transformers to be able to identify the areas where theft is occurring. Identifying the culprits would then be easier. Reducing the standard of service and increasing the loadshedding hours for these areas can be another solution. General Parvez Musharraf used force without planning and tracking and could not achieve much.

There is a theft of about 30 billion units valuing about 3 billion USD per year. Investing 5% of this amount per year and getting a 20-25 % reduction in losses would amount a ROE of 400 % per year, not a bad investment. Fortunately, USAID is assisting on the technical side of T&D losses. There should be more support and enthusiasm for such projects.

Theft and adulteration of furnace oil at the GENCO power stations is an open secret. This not only causes oil losses but damages the plant and machinery as well along with degradation of output-a three pronged loss. Both technical and administrative management is required to tackle these problems. Who will bell the cat? A frontal and wider assault on corruption is required which is a separate subject altogether.

That is why, the government is reportedly taking the easier route of increasing the tariff? That won’t be easy either, at least in the kind of scale of increases that are being talked about. It is an unenviable situation the government is in. However, if persistent and systematic efforts are applied sincerely, goals can be achieved. A thousand-mile journey starts with one step, but it has to be in the right direction.

As said earlier, many small and big steps would have to be taken that will have a cumulative effect. How would the Ministers be able to handle this all? Do we have the right systems of planning and tracking progress. In another article of the series, we would be discussing a useful planning and monitoring system for government departments.

Finally let us see the larger picture. Reforms, restructuring and investments over the next 3-5 yrs would require money. But there is no money in the system, except from the highly-unpopular IMF. The larger and structural question, however, remains. How far and how long can you go with a budgetary deficit of 8.3 percent? Reducing expense and increasing income are the obvious solutions, which has not been done. Extracting more from the existing avenues and news gathering reduction of expenditure of PM house and ban on purchase of new vehicles can hardly be called innovative or courageous.

Without reducing the Military expenditure (Rs one thousand billions, if all items are included) and taxing agricultural landlords, there is no solution to the problems; easier said than done. PML-N is not committed to taxing Landlords, but it is committed to reducing expenditure (all including the military expenditure. I personally heard Nawaz Sharif committing to it during a TV interview) by 30%. MILEX cannot be reduced by 30% overnight but a beginning could have been made with a freeze on escalation.

There would be no security, no independence and the so-called self-respect under budgetary deficits of 8% plus of GDP. Those who live within the means, individuals or nations, are able to maintain self respect and dignity despite poverty. A profligate rich is always begging to buy wine, as Omar Khayyam says in his famous Rubayiaat. History is replete with military power going down under the quiet and not so quiet pressure of the masses. The current law and order situation (terrorism, daily murders and abductions and even the Balochistan situation) in large measures emanates from grinding poverty.

The Terrorism leaders are well fed if not rich but the suicide attacker who wears the jacket is usually abject poor. What more proof do we need to be able to change policies towards social expenditure and people-friendly subsidies? It is hoped that the new government would be able to enter into a constructive dialogue and engagement with the security circles and other stake-holders. It is not easy for a party which has been dethroned illegally twice, but there is no escape from taking the real decisions. Also, without taxing the rich landlords, the much-wanted liquidity cannot be achieved. May it be a tall order?

Akhtar Ali, "Enhancing tariffs: New Energy Policy – III," Business recorder. 2013-08-09.
Keywords: Social sciences , Social issues , Social needs , Social rights , Social development , Economy , Power crisis , Loadshedding , Bureaucracy , Pakistan , GDP , PML-N , IMF , USAID , IPP