Government subsidies intended to make electricity affordable often benefit a broader population than intended, including affluent consumers, according to a report published by Competition Commission of Pakistan (CCP) on State of Competition in the Key Markets in Pakistan with Significant Presence of State-Owned Enterprises Power Sector.
Subsidies are per se anticompetitive, particularly in Pakistan, these have been proved to be non-targeted and inefficient for the last several decades. Subsidies have distorted market dynamics and have placed a heavy burden on the state budget. There have been abrupt changes in subsidy policies, such as sudden reductions or removals without adequate safety nets for vulnerable populations, creating social and economic disruptions.
It is pertinent to mention here that the budget allocation for the Inter-DISCOs tariff differential in 2023-24 is Rs. 150 billion, a decrease from the Rs. 225 billion allocated in the previous fiscal year 2022-23. Since FY 2007, the government has paid over Rs. 3.4 trillion as subsidies. Out of which, about 81 percent are for the policy to maintain the same tariff across the country.
Due to fiscal constraints, the government had most of the time delayed the payment on account of subsidies, thus adding to the circular debt. Apart from the financial burden, this equity move by the government is counterproductive. It leaves no attraction for efficient DISCOs to further improve or remain efficient and offers no incentive for the poor and loss-making DISCOs to reduce losses and become efficient.
The government administers the effective uniform tariff that companies charge their consumers and compensates the DISCOs for the difference, commonly known as Tariff Differential Subsidy (TDS). Companies with tariffs lower than the regulated rates are not permitted to pass on the benefits to their consumers. Instead, they impose a Tariff Rationalizing Surcharge (TRS) on their consumers to reconcile the difference.
Consequently, consumers served by more efficient DISCOs indirectly subsidize those served by less efficient ones. This practice of cross-subsidization hampers efficiency and inadvertently encourages inefficiencies.
The legal basis for a uniform tariff is provided through the amendment to the NEPRA Act in 2021, and National Electricity Policy 2021 also affirms the continuation of the uniform tariff. The report suggested that revamping the present tariff differential subsidy to the DISCOs is crucial.
The current uniform tariff system in Pakistan, where the same electricity price applies across the country regardless of location or efficiency of the DISCOs, hinders competition and creates an uneven playing field.
To promote a more competitive market, it is important to revise the uniform tariff and consider all inefficiencies. If the government intends to subsidize a particular area or consumer, it should be done through other channels, rather than as a part of the tariff design applicable to all.