Feb 21 - 27, 2011

Are energy prices high in Pakistan and are the current and projected increase in energy prices especially electricity are justified? The proposed increase in electricity tariff over and above the increases already made may become a political bombshell. There may be genuine economic dislocation of people and may result in non-payments and increased theft and pilferage, nullifying the purpose for which these increases are being made or proposed to be made. There are difficult questions involved. If compared with the purchasing power and generally low incomes of the people, energy prices are generally high.

In South Asia including Pakistan, there is a unique and welcome aspect of energy tariff that small and poor consumer is charged much less than others, in some cases the rates are just a pittance, if compared with international rates.

However, now business community is protesting loudly, as while they may be rich personally but there businesses are poor and operate in low margin regime, whether exports or domestic market, except for the monopolists and cartel members who may be able to extract or pass on rather undue profits and prices.

In most developed countries, the reverse is true. Large customers are charged lower rates on account of lower overhead and processing costs. In some cases, industrial tariff is kept artificially low to boost competitiveness or regain it. Chinese prices are a case in point but that may have more to do with the exchange rate issue. A more indicative policy pricing would be France, where one of the lowest or perhaps the cheapest energy tariff is maintained partially artificially, although cheaper nuclear and hydro energy has more to do with it. The most expensive energy rates are found in most of Europe and Japan, except those countries like France, Sweden, and Norway where there are cheaper nuclear and hydro resources. Elsewhere in Europe, energy is severely taxed on one account or the other. Gasoline and diesel are taxed at 100 per cent and even more, while electricity is being indirectly taxed due to rather excessive feed-in tariff for renewables.

The cheapest energy is found in most of the Middle Eastern countries where oil and petroleum products are usually priced below crude oil prices. The other country is USA, where energy is minimally taxed. There is hardly 15 per cent tax in the US on diesel and gasoline, resulting in the cheapest motor fuel among the advanced countries. In Pakistan, both retail and wholesale prices of energy have been traditionally low. Hydro and gas based electricity are the examples. Also gas itself, which has been priced less than half of energy cheap and abundant America. Over the last many years, GOP has been subsidizing electricity: the last year's subsidy was of more than 1 Rupee per unit resulting in budgetary deficits and circular debt.

We used to have relatively cheaper electricity due to cheap gas and hydropower. Over the years, the incidence of gas and hydro has been decreasing in the total package, and the share of expensive and imported oil has been continuously increasing, generating pressures for tariff increase. Unfortunately, due to non-implementation of any hydro scheme and lack of any major discovery of natural gas due to lack of adequate level of exploration activities, the traditionally cheaper energy resources are getting eclipsed.

Imported gas, whether LNG from Qatar or Pipeline gas from Iran is no cheaper. It is being increasingly linked with oil and that at very high rate of 75-80 per cent.

If reliance is increasingly on imported fuel, there is no economic case for cheaper energy than elsewhere because almost every input including power equipment is imported (except work force), costing more due to extra transportation and logistics. There is a strong moral and welfare case, however, to try to minimize the energy prices as much as we can and search for solution that may bring the prices down by whatever margin that may be possible and feasible. Bulk of our population is poor who are insulated from inflation. Energy is a necessity, used in transportation, cooking and living. Let us examine what are the options and potential available to us in this respect.

There are no quick fixes other than finding the money from somewhere and meet the shortfall. Money comes from taxes which most of us evade. Consequently, we are one of the least taxed countries of the world. It can come from royalties of oil, which we do not have and can only dream or pray about.

In the mean time, government should take the business leaders in confidence and explain its difficulties and constraints and invite their proposals. They may come out with ideas on reducing tax evasion by their community, enhancing government revenues and its ability to continue to provide subsidies to the energy sector. However, they are more likely to come with a demand to levy income tax on wealthy landlords. Secondly, the real incomes of the average person in Pakistan are going down. There is an urgent need to promote income generating employment opportunities. At present level of general unemployment and under-unemployment, almost nothing is affordable. Genuine land reforms and income tax on agriculture may be the need of the hour.

Finally, there may be some scope of negotiating with the IMF for doubling the adjustment time to two years, reducing the increase to 12 per cent per annum than the present 24 per cent in one go in one year. Another immediate option available to the government is to negotiate with IMF a zero tax-subsidy regime for the whole energy sector, whereby taxes on petrol and diesel and other energy inputs balance out subsidies on electricity. Alternatively, government may examine the possibility of substantial tax cut on petrol and diesel which would go a long way towards controlling the runaway inflation and would make the increases in electrical tariff more acceptable to people.

In the medium term, there is a lot that can be done towards bringing down energy prices in the country and would be a subject of our next section in this series.