Fixing the economy

As a nation we seem to believe that there is either a magic wand that will make our problems disappear or that undertaking reforms is like fixing an electricity fuse or a leaking tap at home — call an electrician or a plumber to fix the fault.

Moreover, reform is viewed more as a change of rules and procedures that individuals who either established, or had grown up in, the control-oriented and rent-extracting environment can be asked to implement. This is our approach to reforms — energy sector reforms, education and health reforms, financial sector and capital market reforms — isolated and stand-alone.

Unfortunately, the economy is more like a machine than a house. All things within it are interconnected. To be able to fix a leak in one place we have to understand the economy as a whole. To an extent donors are also to blame. Since they are strapped for resources they have a natural inclination to exaggerate the outcome of their proposed policy interventions.

Such expectations have resulted in inadequate and poorly sustained support for reforms, leading to aborted programmes although these are essentially on the right track. The transmission mechanism through which policies lead to expected outcomes is not that straightforward. There are several steps in the process that are subject to uncertainty and delay. So, often it may be necessary to adopt supplementary policies. Without them the final outcomes may fall short of expectations.

This can be illustrated by looking at the mega issue of electricity or power. The common narrative is that by fixing it (as if it can be done in isolation) we can get the wheels of the economy moving. On the face of it, a one-time effort, even if it involves the ‘printing of Rs400 billion’, would improve the availability of power. However, without some decisions of a fundamental nature that would go beyond the realm of the electricity sector this money will only get us mileage for another two or three quarters, after which the problem of circular debt would rear its ugly head again.

It would not be a sustainable strategy without a whole range of far-reaching policy adjustments, demanding that tough political choices be made and provoking strong reactions from powerful vocal lobbies — easier said than done. Before I explain the broader links it is important to note that contrary to the popular myth being peddled by many a political leader that this issue can be resolved in a matter of months, we will continue to experience loadshedding for the next two decades, although the number of hours can be reduced by effecting a variety of policy changes.

To begin with, we have the issues of: a) under-priced energy — the cost of provision (ensuring no theft is simply impossible given the strength of the labour unions colluding with the officer cadre) being higher than the tariff being charged to consumers;

b) the distorted tariff structure which is higher for ‘bulk consumers’/industry than for domestic consumers;

c) consumers of electricity paying their bills regularly in Punjab being punished through higher rates, to pay for free electricity being provided to residents of Fata, Wapda employees, rich farmers in Balochistan, etc. and the higher level of theft in Sindh, KP and Balochistan.

How will these be addressed as they will require a different institutional structure eg DISCOs, or electricity distribution companies, being transferred to the provinces with electricity being provided at provincial boundaries at a uniform price for tariff determination by them? Or should they be privatised? This in turn will require legislative changes regarding the National Electric Power Regulatory Authority’s future role and empowering provinces to set their own tariffs for each DISCO.

As all this will have to be routed through the Council of Common Interests will Sindh, KP and Balochistan accept an arrangement immediately requiring a sharp revision in rates that would be applicable for higher levels of leakages?

Bringing down the price of electricity will require massive investments in hydel power and development of coal (even if we factor in the decline in world energy prices over the next decade thanks to technological advancement and shale gas discovery). Each project would require more than seven years to complete — a period that is beyond the tenure of any government and during which there will be continued loadshedding and the use of scarce funds for schemes with limited visibility and no immediate political returns.

For reasons ranging from country image, an inadequate supporting infrastructure, the tortuous experience of independent power producers in getting paid on time for supplying power etc it will be difficult to attract significant volumes of private investment.

And the government will hardly be in a position to provide the required level of funding without an enormous increase in tax revenues, a restructuring of its development programme through the abandonment of some projects (which may involve penalties for rescinding contracts) and delaying others (with the increase in project costs), cutting subsidies on fertiliser, wheat, etc.

Moreover, a decision will be required on the allocation of a scarce resource — gas — an important input for keeping energy prices affordable. Should this heavily ‘subsidised’ gas be used for power generation rather than as fuel for CNG and industry, or for fertiliser production? This would require a decision on its import and the level of subsidy that the government will be in a position to afford, apart from the cost of suspending provision of gas to five fertiliser companies in which huge investments have been made.

It would also need a change in the bizarre policy governing the determination of tariffs of gas companies SNGPL and SSGC. Presently, they are entitled to a 17.5pc return on assets, which creates incentives to expand systems to add on more consumers for an already scarce resource.

And so on. So, to summarise the arguments above, not only will resolution of the issues of the power sector take time they will also require broader policy reform, well beyond sectoral boundaries, the basic premise of this article.

The writer is a former governor of the State Bank of Pakistan.