Electricity: Record subsidy after record tariff hike

14 Jun, 2023

In what was largely a budget pinned on “hope things fall in place” and what the central bank Monetary Policy Committee found somehow on the “slightly contractionary fiscal” side – subsidies have once again topped the list among non-interest non-military expenditures. Like yesteryears, over 85 percent of the budgeted subsidies are aimed at the power sectors.

The budgeted power sector subsides at Rs894 billion are 67 percent higher year-on-year, and comfortably the highest ever, beating FY22 budgeted amount by nearly Rs300 billion. One must not forget that the record-high allocation for power subsidies comes right after record-high increase in consumer tariffs in FY23, as the government under the IMF directives, eliminated various subsidies and raised base tariffs by never-before-seen magnitude last year.

The budgeted amount is one thing, and actual spending is another. In the last 15 years, actual subsidy expenditure has been 73 percent higher than the budgeted amount and 61 percent higher in median terms. K-Electric seems to have emerged as the biggest recipient of subsidy – as approximately Rs300 billion has been earmarked for the privatized entity, of which Rs127 billion are under the head of arrears on tariff differential subsidy.

Recall that TDS arrears have long been a conflict between the federal government and K-Electric, with both parties entering litigations. It was only late last year when the two parties started to negotiate, and a solution was in sight. The allocation suggests that an amicable solution has been reached at, in principle – which should now also ease KE’s concerns. This should also ideally lead to KE honoring the payables it owes to various entities – from power producers to fuel suppliers – as stuck arrears were often cited as the reason for KE’s inability to clear its dues.To put things in context, the allocated subsidy for KE amounts to Rs18/unit billed to the consumers. Not very long ago, Rs18/unit was not even the average nationwide tariff on electricity. The cost of inefficiency over the years is simply mind boggling.

No less than Rs310 billion have been allocated for IPPs and Rs205 billion for inter-disco tariff differential. Considering IPPs roughly contributed two-third of the power generation – this translates into Rs7 for each IPP unit billed. Pakistan is apparently more towards the end of the circular debt management plant implementation stage where bulk of adjustments – both in tariff and slab categorization – have already happened. Yet, the subsidy bill remains hefty. And it will continue to be so, because ad hoc measures during the year, such as concessional power for one influential group or another, or unfunded subsidy for the domestic sector, keep coming back.

More importantly, with the system losses as high as they are, the starting point will always be north of 20 percent of the generation cost. Pay as much as you want, settle as much dues as you like, sitting idle on the efficiency front and hoping that raising tariffs will take care of the mess, will only lead to more missed subsidy targets and heavier allocations, year after year.

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