ISLAMABAD  -  Secretary Power Rashid Langryal has said that the provision of roughly Rs900 billion annual subsidies to electricity consumers is unsustainable, owing to absence of government’s fiscal space for such a huge subsidy, and proposed the payment of subsidy only to the extreme poor consumers through the Benazir Income Support Program (BISP).

The government is paying a subsidy of Rs900 billion to the poor consumers, which includes Rs327 billion budgeted subsidy, and Rs573 billion through cross subsidies, from industrial, commercial and richer households, which alone accounts for another Rs8/unit in the industrial tariff, Secretary for Power Division Rashid Langrial said via a tweet here.

Talking about the policy capture, tax evasion and electricity tariff, the secretary said that industry in Pakistan faces a rather high electricity tariff of Rs 41/unit in Pakistan, making it regionally non-competitive.

For the current year, of this Rs41/unit, Rs 22.16/unit is just the capacity charge which would have been at least Rs 8/unit less if we had same level of demand seasonality as in India, he said. Demand seasonality, in turn, is driven by our upper middle class’s higher penchant for cooling all enclosed spaces in the summer and lower level of industrialisation in the country than in neighbouring India. Pakistan’s demand falls to as low as 9GW in winter season from 30 GW in summer, he added.

What drives lower level of industrialisation in Pakistan, the secretary asked and replied that many things but in large part, it is driven by existing industry’s ability to erect entry barriers by capturing policy space. “For example, we give cheaper gas to large spinning mills but not to smaller power looms so we produce a lot of yarn but less value-added cloth than optimal,” he said. The sugar, fertiliser and textile industry has dominated policy space in Pakistan since times immemorial, resulting in lower level of industrialisation via sub-optimal allocation of factors of production: not only government subsidies and tax breaks but also bank credit, human resource and entrepreneurship.

“So what is today a genuine impediment to performance by our business houses (high electricity tariff) is partially the result of an extraordinary lobbying power of the business houses in the past,” Langrial maintained.

The second most important driver of high industrial tariff of electricity is cross-subsidy component. “We provide roughly Rs900 billion of subsidies to poorer consumers of which only Rs327 billion is budgeted, rest is cross subsidy from industrial, commercial and richer households. This cross subsidy alone accounts for another Rs8/unit or so in the industrial tariff.

“Ideally this subsidy should be provided to poorer households as cash transfer via BISP,” he added. The government does not have a fiscal space for such a huge subsidy and absence of fiscal space is driven by our extremely low tax-to-GDP ratio, roughly 8 percent lower than our eastern neighbour. This low tax to GDP ratio is again largely driven by a sub-culture of tax evasion amongst business houses across the country. So what industrial sector does not cough up as taxes is charged via cross-subsidy in industrial tariff.

Partially holding the business houses for the higher industrial tariff in the country, the Secretary said that had the business houses not succeeded with such flying colours in tax evasion and in erecting entry barriers via policy capture, electricity tariff could have been as low as Rs 25/unit instead of Rs 42/unit.