More generation means more subsidies

As the tenure of another government comes to an end, the financial state of the power sector has witnessed little change. With the budget announcement almost here, the government is expected to dole out subsidies to the tune of around Rs189 billion of which Rs135 billion will be allocated for Tariff Differential Subsidy (TDS).

Even though the subsidy amount for the power sector which stood at Rs464 billion (2.3percent of GDP) in FY12 has been brought down to Rs217 billion (0.7 percent of GDP) in FY16, the latest proposed budgetary allocation is much higher than budgetary allocations in the previous two years.

For example in the previous budget, allocation for power sector subsidy was Rs118 billion and the current allocation is almost a 57 percent increase over this amount. Then there is the circular debt which had crossed the Rs900 billion mark recently. The government has started clearing some of it with Rs53 billion paid to power producers while another Rs134 billion will have to be paid soon.

This culmination of financial affairs is a direct result of the power sector policies that the incumbent government has pursued. The core tenet behind PML-N’s mantra was increasing generation which undoubtedly has been achieved.

But little has changed on the electricity distribution front. Recovery still remains a major issue while infrastructure investment is non-existent. Again, the aftermath has been failure to collect power dues which has in turn affected the entire power sector supply chain- from oil and gas companies to IPPs.

Adding more mega-watts to the system means less load-shedding. But as this year’s budgetary allocations show that the subsidies will increase as a result. All this when the government’s fiscal space is already restricted and debt burden has increased.

Focusing on generation might have been the easiest way out but it might also bear the most cost to the national exchequer. Privatisation of DISCOs which should have held equal if not more significance than power generation has been swept under the rug by the incumbent government. At the same time, the government has resorted to imposing power surcharges to make up for inefficiencies of government institutions and bill defaulters.

If the International Monetary Fund (IMF) is approached by the next government, the financial state of the power sector will certainly be a major talking point. The fund will almost certainly start pushing for an upward tariff revision while calling for curtailing subsidies to the power sector at the same time.