More on rationing

Pakistan’s unsustainable energy policy

Dr Bari’s article “Rationing Issues” (Pakistan Today, Dec 20) omitted some important factors that affect the conclusions that one can draw from his analysis. He suggested that, when supply is limited, one option for the government is to ration supplies for the poor who would have to stand in long queues to collect their entitlements. This is equivalent to load shedding in the case of gas and electricity.

Rationing (or load shedding) imposes significant extra costs that Dr Bari omitted from his article.

First, one must include the economic cost of unpaid labour incurred as a result of time spent standing in queues. Technically, this is known as the shadow priced cost of unpaid labour, “value of time”, and is a real economic penalty or opportunity cost. People could be earning income instead of standing in queues.

Then there are the inevitable bribes that accompany any government-controlled rationing scheme. Hence, rationing imposes significant extra costs on the poor.

The unofficial black-market price (for those who do not want to wait) would become equivalent to the combined value of time spent standing in queues and the cost of “facilitation” payments. Therefore, the economic cost to the poor is equivalent to the black market price.

In the case of electricity rationing through load shedding, the effect is once again to transfer additional costs to the poor especially. With a high incidence of load shedding, the community is forced to bear the cost of a large number of inefficient, noisy, polluting standby generators with a significant increase in the requirement for fuel to be imported to run them. In addition, the additional labour required to operate the generators and damage to appliances affected by power spikes and power interruptions further increase the cost of the community. These costs are either transferred directly to those who use the generators, or indirectly through the costs of commodities sold through enterprises that require standby generators.

Therefore, one can argue that rationing or load shedding is inefficient economically. Both measures impose large extra costs, tangible and intangible, on the whole community without any useful gain.

I have conducted an analysis of recent trends in power prices in Pakistan using data available from the Ministry of Finance and the State Bank of Pakistan. After allowing for official consumer price inflation (CPI), the official metered price of electricity has significantly decreased in real terms for most consumers over the last few years while remaining relatively constant for high consumption consumers. This price, of course, is only a small proportion of real power costs that have to include standby generators, fuel, maintenance, labour etc. However this official price determines cash flow to the power companies and sends a strong price signal to consumers who often are not aware of the full cost.

When compared with the overall significant increase in the cost of energy worldwide over the same time span, this suggests that the Pakistan government has chosen to decrease energy prices, thereby increasing subsidies. The predictable result has been supply shortages because insufficient funds are collected to cover the cost of providing the energy, and a decreasing price encourages wasteful use of energy.

My interest lies in researching engineering practice, originating with observations that the cost of engineered services such as water supply and electricity is much greater for end users in Pakistan than it is in countries like Australia and the USA. The most extreme example is clean potable water which costs between 20 and 50 times as much in Pakistan per thousand litres as it does in Australia. In Australia, clean safe drinking water is delivered to taps in houses and businesses at approximately 2 dollars per tonne and is available at high pressure, 24 hours per day. In Pakistan the cost is anywhere from $40-$90 per tonne depending on how the water is obtained, including factors such as the value of time spent carrying and preparing safe potable water. If this sounds surprising, consider the cost of 20 litre plastic water bottles, and remember that you need 50 for a tonne of water. In terms of energy used at the point of application, electricity costs are 3-5 times higher than in Australia, in real cash terms, after allowing for the costs of standby generators, reduced life of appliances, poor maintenance and inefficient design.

These differences are hard to explain, given that the necessary technology is available to anyone who wishes to acquire it, and well publicised. I have concluded that most of the difference can be explained by differences in engineering productivity: the ability of engineering enterprises to provide a reliable service at a given level of quality and cost. Unfortunately, engineering education programmes world-wide provide inadequate preparation for young engineers to overcome these issues.

There are some new technologies that could help with electricity, gas and water supply rationing (load shedding), however they need extensive testing and development to understand how social and community factors would interact with these technologies. The privately owned mobile phone systems demonstrate that high-tech engineering can work in an environment like Pakistan providing a high quality service at much lower cost than the government monopoly they replaced. New technologies could do the same for water, gas and electricity services.

In the meantime, the only policy option available to the Pakistan government is to gradually increase prices to encourage greater efficiency in energy and water use that will occur through market responses. Currently there is significant obvious wastage in the use of water and electricity in Pakistan.

The appropriate way to safeguard the interests of the poor is to provide compensation payments funded from taxes collected through energy distribution. Energy taxes, like taxes on petrol, are reasonably easy to collect as part of the energy distribution system. In Australia, the government is now distributing social welfare benefits through community organisations and charities, sidestepping most of the impersonal bureaucracy of government social welfare agencies.

Reducing the price and rationing the commodity, as demonstrated by the current situation, is highly inefficient, penalises the poor, cripples the economy, and holds most of the country in a state of near destitution. This situation can be changed if enough people desire improvements.

The writer is Winthrop Professor at The University of Western Australia. He has extensively studied engineering practice and the economics of public utility infrastructure in Pakistan, India and Australia since 2001.