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Power tariff hike!

10 April, 2013

By Dr Kamal Monnoo


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In this new era of economic trade-offs or 'imperfect solutions' (as some economists are calling it), the policy choice on which way to tilt, or to opt for a combination of policy choices from opposing spectrums, largely depends on the skill and vision of the economic managers.

At a time when the world as a whole is going through one of its worst phases of recession, often referred to these days as the 'Great Recession', the battle in prescribing the 'right' remedial prescription between the traditional Keynesian and Friedman Schools has also simultaneously heated up, since both struggle to find real-life examples around them.

For example, in a recession, should governments reduce budget deficits or increase them; do zero-interest rates stimulate economic recovery or suppress it; should welfare benefits be maintained or cut in response to high employment; should depositors in failed banks be protected or suffer big losses; does income inequality damage or encourage economic growth; will market forces create environmental disasters or avert them; is government support necessary for technological progress or stifling to innovation; and, last but not least, especially in our context as Pakistan plunges into darkness and its manufacturing risks coming to a grinding halt, should the government be raising power tariffs by about 60 percent in one go or will it be unfair to make the consumers pay for governmental inefficiency and corruption?

Fortunately, we do not have to worry on most of the above counts, as we seem to have found the ideal solution: just do not appoint economic managers and, hence, no real decision making would be necessary.

In the 90 days timeout of the interim setup - an ideal opportunity to tweak the management structure - we, ironically, have no Finance Minister, a Commerce Minister with an absent track record on area of expertise, and the heads of Planning and State Bank of Pakistan, perhaps, being rewarded for failure.

The National Electric Power Regulatory Authority (NEPRA) is recommending an increase in power tariff by more than Rs 4 per unit for all consumers. Based on the revised NEPRA tariff for the Islamabad Electric Supply Company (IESCO), which is the most efficient national power distribution company and if its tariff is used as a benchmark across the country, the increase comes to Rs 4.80 per unit.

If approved, on the domestic side, the consumers consuming 50 units per month will face an increase of Rupee 1 per unit, Rs 2.30 for 100 units per month, Rs 4.80 for 101-300 units per month, Rs 3 for 301-700 units per month and Rs 1.50 per unit for over 700 units per month. If it is not approved, the government will need to provide a subsidy of Rs 400 billion to the power sector.

Currently, the average power generation cost is Rs 11.99 per unit, whereas consumers pay only Rs 8.89 per unit and the government bears the Rs 3.10 per unit tariff differential in shape of subsidies.

Compare this with our neighbour India and in particular with the State of Haryana (previously a part of East Punjab, India); we witness a similar endeavour by them to reduce power sector subsidies, thereby shifting some of the burden away from the national exchequer. The authorities on April 1, 2013, took another 13 percent increase, making it a second double digit increase in less than a year.

Further, they resolved that electricity rates in future will be determined under a telescopic tariff structure, which has been re-categorised into two groups for the industrial users: 'optimal' and 'non-optimal' users, and four instead of the previous three groups for the domestic consumers - 40-100 units per month, 41-101 units per month, 101-250 units per month and 251 and above units per month.

Head on head when compared with Pakistan and converted into Pak Rupees, their average power comes to 12 per unit as against the present 8.89 per unit in our case. The proposed Rs 4 per unit increase would take our tariff to 12.89 per unit.

From a regional perspective (eight members of SAARC), India and Pakistan already have the highest power tariffs and, perhaps, it is in this vein that one feels it would not be sensible to take a decision on the level of power tariff increase that places us right at the top of the South Asian power tariff table. Such a thing would, indeed, be disastrous for competitiveness and investment.

At the same time, Pakistanis need to understand that while, in the long term, there remains a strong case of consumer rights and the danger of supporting inefficiency and corruption by adjusting the wrong end of the equation - meaning that, raising the power tariff instead of bringing down the cost of power production - regrettably, there are no short-term solutions to bringing about structural reforms in the power sector.

Therefore, at least for now to keep the engine of the economy running, it is recommended that the government should go ahead and implement a level of increase that allows it to maintain its power generation at reasonable levels. However, simultaneously, not cripple the common consumers - an 'imperfect solution', but best under the circumstances.

Though after doing so, it then becomes imperative that the government undertakes without further delay the power sector reforms that entail rebalancing the fuel mix, focus on alternative solutions, and allow for structural changes to provide space to the private sector and encourage private-public partnerships.

The economy is like driving a car through a Formula-1 grand prix where you need to successfully manage the curves, intelligently use the breaks with the accelerator, remain focused, refuel and change tyres when necessary at the pit stops, but, most importantly, 'not' to slow down. And the energy in this race is like the oxygen without which it will not be possible to go across the finishing line.


The writer is an entrepreneur and economic analyst.
Email: kamal.monnoo@gmail.com

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