Politics of power

The temperature of the politics of power sector in this country has been raised as the government upped the price of electricity for all consumers – industrial, commercial as well as domestic. The economic rationale: unless there is full cost recovery the sector will be unable to support demand.

Total generation as provided by the Ministry of Water and Power was 9378.8 Gwh at a total cost of 59.9 billion rupees at a rate of 6.38 rupees per unit. After including other charges the Central Power Purchasing Authority revised the rate upwards to 6.54 per unit. And the electricity rates paid by consumers are a lot higher. The latest surge in power tariff is set to impact domestic consumers with those using 200-300 units facing a 72.6 percent increase in rates – from Rs 8.11 to Rs 14 per unit. Those using 301-700 units of electricity will now face a 30% increase in the power rate – from Rs 12.33 per unit to Rs 16 per unit. Worst hit still are those high-end consumers who use more than 700 units of electricity per month they will now have to pay Rs 18 per unit instead of Rs 15.07 per unit starting this month.

The question is whether the recent tariff increase envisages full cost recovery? There is a consensus amongst experts that full cost recovery would imply a tariff of no more than 12 to 13 rupees per unit – a recovery premised on the fact that while furnace oil used by the 1990s Benazir Bhutto-led PPP approved Independent Power Producers (IPPs) is the most expensive fuel source given its escalating international price yet it contributes 7070 MW to our total generational capacity of over 21000MW. Hydel, nuclear and gas have a capacity of around 11,200 MW (though hydel output varies significantly from season to season) and are relatively much cheaper fuel sources for generation of electricity. The recent raise in tariffs imply that Pakistani consumers are being made to pay the price for furnace oil, rather than a median rate; or in other words a very high cost attributed to the continued inefficiency in the sector including non-payment and theft which the government has been unable to control and which is being passed onto those consumers who religiously pay their monthly bills. This approach is reminiscent of the tax system in this country which all analysts are agreed is unfair, inequitable and anomalous: those who pay taxes are more burdened each year while the evaders continue to operate outside the legal economy.

But what is generally ignored is the fact that our electricity is also taxed at the rate of 17 percent general sales tax. Thus as the energy bill rises the total levy collected would also rise in absolute terms. It is inexplicable that a government which claims to be pro-business continues to impose a tax on electricity which has rendered its price for our industrial and commercial sectors higher than that prevalent in other regional countries making our products uncompetitive internationally. In addition a withholding tax is also levied on electricity bills and Federal Board of Revenue’s (FBR) data reveals that 9-10 major components of withholding taxes, which contribute around 91 percent to total withholding tax collections, include electricity. Collection of withholding tax on electricity bills was around 16.026 billion rupees in 2012-13 against 14.6 billion rupees in 2011-12, reflecting an increase of 9.5 percent. The recent rise in electricity prices would therefore lead to a major increase in tax collections under this head. Why would a government tax this sector that has led to many industrial units operating at lower than capacity and struggling to get orders from abroad as well as contributing to higher domestic prices is obvious: such a tax is easy to collect and is credited to the treasury without any effort on the part of the FBR to deal with its own inefficiencies as well as leakages estimated at more than 500 billion rupees per annum.

Finance Minister Dar has taken credit for wiping out the bulk of the circular debt at one go which effectively led to an increase in generation in Independent Power Producers (IPPs). Three facts need to be highlighted which undermine Dar’s claim that the elimination of the circular debt was a landmark achievement in that it met the objective of reducing loadshedding. First, the circular debt was eliminated during Shaukat Tarin’s tenure as Finance Minister but as the money for the purpose was necessarily borrowed it increased the government’s indebtedness with a consequent impact on the budget deficit and inflation. While Dar has refused to state that the money was borrowed (and parked in last year’s budget in an attempt to hold the PPP-led coalition government responsible) yet economists are agreed that the money simply was not available and therefore could not have been raised without increasing the government’s indebtedness. Second to eliminate the debt without first dealing with the inefficiencies in the system, which granted is not within Dar’s domain, would simply lead to a re-emergence of the debt. That this has in fact happened is evident from data released by the Ministry of Water and Power. Thus the drive to bring the electricity defaulters and thieves to book has really not paid the dividends expected and at the present pace of accumulation of circular debt by the end of the current fiscal year it would reach the same levels as before the circular debt retirement in June this year. And finally by borrowing expensively to pay-off an energy sector debt may have been considered a good policy for an accountant yet for an economist a better option would have been to pay off half the circular debt and invest the remaining into energy sector generation as well as transmission improvement projects.

Disturbingly Pakistani governments have to also contend with the politics of power! The Pakistani nation has been subjected to indignation by members of the opposition whenever a government in power has attempted to increase the price of electricity. The PPP-led coalition government was frequently subjected to opposition outrage whenever it upped the price of electricity and the present PML (N) government too is being subjected to outcries of denigration for similar decisions. And the irony is that specific reform measures in the power sector have been identified through consultations with multilateral and bilateral lending agencies and therefore have not changed from government to government.

The ideal situation would be for an All-Party Conference on the energy sector where taxes on electricity must be debated as well as ways to control the inefficiencies within the system. However, with the Finance Minister Dar refusing to even take the national assembly into confidence as to the source of 480 billion rupees for inter-circular debt retirement and the associated rate of interest this seems unlikely. It is hoped that Prime Minister Nawaz Sharif takes cognisance of the need for an APC and discussions on the components of our energy bill.