Richest benefitting most from electricity subsidies

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Subsidies on electricity to the richest 20 per cent of population have been significantly reduced from nearly 40 per cent to 29 per cent during the last three years. However, the richest of the rich remain the greatest beneficiaries of electricity subsidies in Pakistan.
World Bank’s recently conducted study estimates that the share of electricity subsidies for the richest 20 per cent in Pakistan declined from nearly 40 per cent in March 2008 to 29 per cent in March 2011. Research reveals that under March 2011 tariff structure, it has been estimated that over 90 per cent of residential electricity consumers are net subsidy recipients; or in other words, less than 10 per cent of consumers pay more than cost-recovery level. Study terms these improvements fragile in nature, because despite improvement in benefit incidence, biggest beneficiaries of electricity subsidies would still be the richest 20 per cent of population. It indicates that significant improvement in benefit incidence and fiscal implications can be largely attributed to reduction in real cost of supply as a result of reduction in oil prices since March 2008. If average cost returned to March 2008 level in real terms, almost all improvements in benefit incidence and fiscal burden would be lost, the research underlines.
Research highlights that Pakistan’s electricity sector is in real crisis. Despite investments in generation capacity, electricity demand continues to exceed supply, with blackouts as long as 8–10 hours per day in cities and sometimes double that, in rural areas. It is widely recognised as a severe obstacle to growth and poverty reduction. It points out that in November 2010 government was forced to rent the world’s largest power ship to boost generation capacity. Meanwhile, government’s inability to finance its commitment to fund subsidies, inefficiencies of sector entities, including low collections, delays in determination and notifications and increased cost of fuel imports contribute to an increasingly severe circular debt problem.
Study advocates, “While significant reforms including tariff increases have been implemented, further adjustments are needed to stem the electricity crisis.” It suggests that in the short run, there is a need to implement fuel price adjustment policy in true spirit, in place since August 2009. With oil prices now resurging, and fiscal burden and benefits incidence so dependent on cost of supply, continuing these adjustments will help prevent deterioration in fiscal burden of subsidies. It underscores that it is more important to move tariff rates further towards cost-recovery level, along with revisions on tariff structure. Although multiple increases have been passed on in tariff rates since March 2008, even then tariff structure is still far from a cost-recovery level. As global oil prices resurge, more drastic and timely tariff adjustments will be necessary to make significant improvements in fiscal and distributional implications of electricity subsidies.
To achieve cost-recovery level, research recommends tariff structure revision as an option. It suggests simplification of tariff structure, means reduction in numbers of slabs from three to four and reevaluation of existing slab thresholds, to add more consumers in cost-recovery slab. Furthermore, special attention is required to understand how poor might be protected from such changes; some poor households consume a relatively large amount of electricity. It estimates that approximate 25 per cent of the poorest quintile consume more than 100 kilowatt hours per month. Rs75 minimum charge for lifeline users needs careful reconsideration. Because of minimum charges, average cost of electricity for many lifeline users is far higher than other users, even though their marginal rate is the lowest. Having a lifeline tariff is ineffective alongside Rs75 minimum charge, research maintains. Study suggests that despite improvements in distribution of subsidy benefits, rich households still receive a disproportionate share. There is a need of alternative policy instruments such as a targeted conditional cash transfer program will likely be more efficient in protecting the poor. In this situation, a package of policy instruments could be considered, including gradual transition from subsidies to conditional cash transfers. Pakistan could benefit from Iran’s experience, which recently introduced similar program, report concludes.
Circular Debt (Inter-corporate Debt): Circular debt is created when end-customers (both public and private) do not fully pay their electricity bills and government is not able to fully furnish its commitment to fund subsidies paid to distribution companies. As a result, distribution companies are unable to pay their power purchase cost to Central Power Purchasing Agency (CPPA) or single-buyer, who in turn is unable to fulfill his obligation to power generation companies. And power generation companies and independent power producers (IPPs) fail to pay fuel suppliers. Fuel suppliers in turn default on their payment to refineries, gas producers and international fuel suppliers.
In addition, high dependence on imported oil (and associated price volatility in 2009 and 2010), system of electricity subsidies in particular is a major cause of intercorporate debt issue. This includes inability for distribution companies (DISCOs) to pass on cost of electricity to customers, along with an inability of government to pay tariff differential subsidy (TDS), difference between applied tariff and determined tariff in a timely manner.