KARACHI: The cross-subsidisation of the residential and agriculture sectors by the industrial and commercial sectors is hampering the overall growth of the economy, because high electricity prices have a negative effect on power consumption and that eventually leads to less industrial growth and thus slows down the economic growth.
This was mentioned in a working paper of Policy Advisory Board of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) entitled “Policy Advisory Board Unfair Power Tariff for Trade and Industry - Impact of Cross-Subsidisation”.
The Policy Advisory Board –FPCCI aims to provide research-based expert input for policy advocacy, ease of doing business initiatives, and formalize the business community’s inputs on policies to various government departments, ministries, and institutions.
Cross-subsidisation is the practice of financing one sector of the economy at the expense of another sector which is quite evident in the power sector of Pakistan. Industrial and commercial sectors are charged higher than the residential and agriculture sector consumers.
The shortfall for DISCOs, keeping the taxes and levies by NEPRA and GoP to zero, at the weighted average tariff (WAT) of Rs.16.53/ unit, amounts to Rs. 269 billion. The major chunk in this loss is incurred by “Residential” and “Agriculture” sectors; loss from residential and agriculture sector is around Rs.303 billion and Rs.65 billion, receptively; industrial, bulk supply and commercial sectors give a surplus of Rs.98 billion.
The residential and agriculture sector, on average, pay lower than recovery rate tariff (RRT), Rs. 18.32/ unit, whereas all other sectors and consumers pay much higher than these rates. Industrial and commercial sector consumers, on average, pay Rs. 4.06/unit and Rs. 11.5/unit more than RRT. The commercial and industrial sector consumers pay 63% and 22% more than the recovery rate, thus subsidizing the sectors where there is a shortfall.
Industrial and commercial tariffs are lower than residential tariffs in many developing countries, especially the countries that have prioritized their industrial growth, i.e., Vietnam, South Africa, Morocco, Indonesia and Kenya. African countries like Mali, Uganda and Togo, which have lower nominal GDP/capita than Pakistan, prioritize their industries and charge lower business tariffs.
As a semi-industrialized country, Pakistan’s industrial and commercial sectors should be prioritized in order to boost economic activity. In the EU, the industries pay almost 42% less than the residential sector. Industrial electricity tariffs in Denmark, Germany, France and Spain are almost 50% lower than residential tariffs.
In the case of the US, where there is retail power market, the industries and commercial sector consumers are charged around 40% lower than the residential consumers in all states.
The price of electricity forms a major part of the total cost of production for industrial and commercial sectors; they should be charged at a price that allows electricity generation costs to be recovered, but in Pakistan, they are being excessively charged to cross-subsidize other sectors.
The higher tariffs compromise the overall competitiveness of the industry and consequently; it is imperative to reduce the costs for these productive sectors in order to help our industry regain its competitiveness. It is proposed to charge the commercial and the industrial sector at the weighted average tariff (WAT), apart from the taxes and surcharges.
If for the fiscal year 2020-2021, WAT would have been charged, industries and commercial sectors could have saved Rs.96 billion and Rs.85 billion, respectively.
The second solution is to charge the productive sectors at WAT and cross-subsidize the poor residential consumers with rich household consumers. Secondly, the low-income consumers may be paid subsidies directly through Ehsaas Program which will also help check the misuse of the present scheme of tariff concessions based on the quantum of consumption.
Copyright Business Recorder, 2021