KARACHI: Cross-subsidies of the residential and agricultural sectors by the industrial and commercial sectors hamper the overall growth of the economy, as high electricity prices have a negative effect on energy consumption and this ultimately leads to less industrial growth and therefore slows down economic growth.
This was mentioned in a policy advisory board working paper of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) titled âUnfair Power Tariff for Trade and Industry Policy Advisory Board – Impact of Cross- Subsidization â.
The Policy Advisory Council – FPCCI aims to provide expert research-based contributions for policy advocacy, ease of doing business initiatives and formalize business community contributions on policy to various government departments, ministries and institutions.
Cross-subsidization is the practice of financing one sector of the economy to the detriment of another, which is quite evident in Pakistan’s electricity sector. The industrial and commercial sectors are charged more than consumers in the residential and agricultural sectors.
The shortfall for DISCO, by keeping NEPRA and GoP taxes and levies at zero, at the weighted average tariff (WAT) of Rs.16.53 / unit, amounts to Rs. 269 billion. Most of this loss is incurred by the âResidentialâ and âAgricultureâ sectors; the loss of the residential and agricultural sector is around Rs.303 billion and Rs.65 billion, receptive; industry, bulk supply and commerce sectors have a surplus of 98 billion rupees.
The residential and agricultural sector, on average, pays a tariff below the recovery rate (RRT), Rs. 18.32 / unit, while all other sectors and consumers pay much more than these rates. Consumers in the industrial and commercial sectors pay on average Rs. 4.06 / unit and Rs. 11.5 / unit more than RRT. Consumers in the commercial and industrial sectors pay 63% and 22% more than the recovery rate, thus subsidizing the deficit sectors.
Industrial and commercial tariffs are lower than residential tariffs in many developing countries, especially countries that have prioritized their industrial growth, namely Vietnam, South Africa, Morocco, Indonesia and the United States. Kenya. African countries like Mali, Uganda and Togo, which have lower nominal GDP per capita than Pakistan, prioritize their industries and charge lower trade tariffs.
As a semi-industrialized country, Pakistan’s industrial and commercial sectors should be given priority in order to stimulate economic activity. In the EU, 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 United States, where there is a retail market for electricity, industries and commercial consumers pay about 40% less than residential consumers in all states.
The price of electricity constitutes an important part of the total cost of production for the industrial and commercial sectors; they should be billed at a price to recover the costs of generating electricity, but in Pakistan they are over-billed to subsidize other sectors.
The higher tariffs undermine the overall competitiveness of the industry and therefore; it is imperative to reduce the costs of these productive sectors in order to help our industry regain its competitiveness. It is proposed to tax the commercial and industrial sector at the weighted average tariff (WAT), excluding taxes and surcharges.
If for fiscal year 2020-2021 the WAT had been billed, 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 to subsidize the poor residential consumers with the rich domestic consumers. Second, low-income consumers can receive subsidies directly through the Ehsaas program, which will also help control the abuse of the current regime of tariff concessions based on the amount of consumption.
Copyright Business Recorder, 2021