Subsidy in Federal Budget

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Subsidies have always been a regulator component of Pakistan’s annual budget. But Pakistan is not the only country that provides subsidy. Almost all countries, even the most developed countries such as USA and China, and the poorest of the countries such as DR Congo and Mozambique, provide subsidies. While some countries subsidize certain segments of their economy to support industrial, commercial and agricultural activities and promote their exports, the others intend to support the poor segments of the society. While enhanced economic activities result in overall opulence in the country that ultimately enable it the possibility to take care of its society through subsidized education, healthcare, and other services. Other countries design their subsidies to directly support the poor. In any case subsidies usually create price distortions in society. If the price distortions bring the desired results i.e. expanding economic activities or supporting the targeted poor segments of the society, the money spent on the subsidies would be considered well-spent. But in most cases, distorted prices breed inefficiencies.

Looking at the subsidies in recent two years’ federal-budgets, one will notice that a major chunk of allocated subsidies went to power sector. For the financial year 2017-18 the total allocation of subsidies was Rs. 138.85 billion out of which Rs. 118 billion, constituting 85%, were allocated for the power sector (both WAPDA/PEPCO and KESC systems). In power sector subsidy, 71% allocation was for tariff deferential payments i.e. to maintain uniform tariff amongst the efficient and inefficient distribution companies (i.e. DISCOs). Likewise, for the financial year 2018-19 the total subsidies have been estimated as Rs. 174.75 billion out of which Rs. 149.4 billion, constituting 85%, have been allocated for the power sector (both WAPDA/PEPCO and KESC systems). In the power sector subsidy, Rs. 105 billion have been allocated for tariff differential for various categories of consumers in ex-WAPDA distribution; whereas Rs. 15 billion are estimated as tariff deferential for various consumer categories in KESC system. For these years i.e. FY 2017-18 and FY 2018 – 19 subsidy for utility stores were Rs 4 billion and Rs. 6 billion respectively. Similarly subsidy for PASSCO (for wheat operations / export and sugar export and freight) was Rs. 16.5 billion in FY 17-18 and Rs. 19 billion in FY 18-19. There was no subsidy for fertilizer in the federal budget of FY 17-18 but in revised estimates a subsidy of Rs. 10.8 billion for fertilizers was estimated. It was the same trend that was followed in the previous financial year because in federal budget of FY 16-17 there was no allocation for fertilizer, but the revised estimates showed an allocation of Rs. 25.1 billion.

Besides the budgetary cash subsidies there are various other allocations such as grants for poor such as the allocation for the Benazir Income Support Program, and tax concessions for various economic activities and segments that also qualify under the broad definition of subsidy, especially as defined by WTO. In addition to these there are other segments of economy that may qualify for getting subsidies (or cross subsidies, to say so) though no cash provisioning is provided for in federal or provincial budgets. Distorted pricing of natural gas is one such avenue, where direct subsidies are not granted by government, but lower than the fair prices are determined for certain segments of society and economy. In the not-too-distant past the price of gas was so low for domestic users that some people used to keep flame of the stove burning just to save one match-stick. Then is the cross-subsidized price of gas for fertilizer producers to support farmers and agriculture sector. Nonetheless, many farmer groups claim that the farmer gets a higher price of indigenous fertilizer compared with imported fertilizer.

Regarding the subsidies in power sector, their effectiveness has always been questioned by economists. Rather, World Bank and IMF reports often dub them as a major burden on the economy. Subsidy in power tariff is meant for poor segments of society, which invariably means poor localities. More often than not poor localities mean more power theft. Because distribution companies treat poor localities as low revenue areas, and avoid investing in infrastructure and technology that may help curb the theft and technical losses, poor localities find easier ways to temper with single phase meters or exchange their neutral lines with neighbors or by connecting the neutral wire connection to the ground instead of returning back to electrical meter -conveniently by-passing the single phase meters. Kundas (hooks), reversing the meters, and other cheaper tactics are common in rural areas of HESCO, SEPCO, TESCO, PESCO and others. One may easily witness relentless and imprudent use of window-type air-conditioners in rural areas where people instead of paying regular bills prefer to pay monthly fixed amounts to the lower staff of distribution companies. The subsidized electricity tariffs applicable for those areas not only encourage the people to steal electricity to remain in the most subsidized tariff slab but also provide an easy excuse for the administrators not to invest in infrastructure and technology to bridle the theft. Besides the air-conditioners, people even use inefficient electric heaters for cooking and use coils wound on wooden rods for heating water in winters instead of proper geysers. This inefficient (and stolen) use of electricity is expected to increase because lately the government has increased prices of gas.

The strange thing however is that despite continual piling up of circular debt the government is continuing with direct subsidies for power sector. Recently the government has notified the consumer tariff for various categories in ten distributions companies (DISCOs) through SRO1 (I)/2019 to SRO12 (I)/2019 dated 1 January 2019, by virtue of which instead of national average unified tariff of Rs. 15.53 per unit, the government notified the consumers’ tariffs that translate into an average unified consumer tariff of Rs. 11.95 per unit. This difference may result in in revenue requirement gap of Rs. 371.5 billion for all the DISCOs, because Rs. 15.53 per unit was determined to allow collection of Rs. 1611.503 billion, through sale of 103.8 billion units electricity; whereas Rs. 11.95 per unit with deemed sales of 103.8 billion units will yield revenue collection only to the extent of Rs. 1240 billion. The gap of Rs. 371.5 billion is more than the total budgeted subsidy for FY 2018-19 i.e. Rs. 174.75 billion, let alone Rs. 149.4 billion for power sector or Rs. 105 billion allocated for tariff differential for various categories of consumers in ex-WAPDA distribution companies!

How the government will bridge the gap of Rs. 371.5 billion without deferring payables is difficult to understand. Deferring anything is not a solution because deferred payables are always the liabilities which have to be ultimately paid off. It is also important to note that this gap of Rs. 371.5 billion is in addition to the potential gap in revenue requirement of DISCOs resulted by higher percentage of losses i.e. more than 17 % instead of average 15.53% allowed by NEPRA. Whereas NEPRA may be right in not allowing to pass-through the higher percentage of losses to consumers’, the government would also not be able to support the DISCOs to support them in bridging the financial gap ultimately pushing the issue of circular debt to newer heights. Instead of transferring blame of this financial gap to the power producers there is a need that subsidy allocation by made realistic and pragmatic. There is absolutely no denying the importance of subsidy support to poor segment of the society. However, instead of wasting huge sums in the name of supporting poor that result in increased inefficiency, some money should be disbursed to poor directly and the other be invested in newer technology that may help reduce the technical as well as administrative losses.

The author has 28 years’ experience working in power sector. He can be accessed for feedback and comments at: asifabro@hotmail.com