June Issue 2015

In the run-up to budget season, politicians of all shapes and stripes are scrambling to throw subsidies at voters — but rarely explaining how they will pay for these subsidies.

Successive governments have spent a major portion of the amount allocated for subsidies on the power sector. The PML-N government earmarked a subsidy for Rs 180-185 billion for power consumers but had to raise the amount to Rs 222 billion as the subsidies were used up in just eight months. The purpose of the subsidies is to keep a uniform tariff across the country since Nepra sets different tariffs for the various power distribution companies. The government then equalises the tariff differential through subsidies. Along with this, domestic consumers consuming 50 to 300 units per month are given a special subsidy too.

Analysis by experts has found that only 10 per cent of the total subsidies go to the poorest households — defined as those consuming 50-100 units a month. The rest goes to the middle class and the rich. The World Bank, in a 2014 report titled, ‘Addressing Inequality in South Asia,’ slated the subsidies as unjust and regressive.

What makes these subsidies even more unfair is that the government ‘pays’ for them by borrowing from the State Bank of Pakistan. This causes greater inflation, which once again hurts the poor disproportionately. “The one thing we need to understand is that subsidies are not a free lunch,” says Asad Sayeed, an economist from the Collective for Social Sciences Research. He adds, “In other countries with progressive taxation, taxes collected from the rich are utilised for the benefit of the poor. This is used in a vertical way to provide social security. In Pakistan, thanks to regressive taxation, the practice is perhaps more horizontal in nature.”

The problem is magnified when it comes to gas subsidies. The country was told it had gas supplies sufficient to last us decades. Now domestic and industrial users are already facing chronic gas shortages.

Asad Sayeed recalls how matchsticks were more expensive than gas when he was a child. That those reserves are severely depleted, according to him, can be blamed on government policy. “When General Musharraf came to power, his government, without a proper allocation mechanism, encouraged the use of natural gas as an alternative to furnace oil and diesel at the industrial level and to the transport sector on subsidised rates. Providing natural gas at such low rates to the CNG sector and industry was indeed a subsidy for the rich and did not benefit the poor. This ill-advised approach has deprived the country of valuable reserves.”

Now we have to import LNG to deal with the shortages. The government is unclear on its pricing mechanism for imported LNG, but the price will be higher than for domestic gas. Therefore, consumers are unwilling to buy LNG so, as a last resort, the government will have to increase the price of domestic gas.

Gas subsidies also have a provincial component. Fahd Ali, a political economist from Habib University in Karachi, says all provinces, other than Punjab, produce more gas than they are consuming. Hence a full 45 per cent of the gas subsidies go to Punjab, making it a regional subsidy for the wealthiest province in the country.

In addition, says Ali, subsidies usually help industry more than domestic users. For example, the fertiliser industry is given both subsidised gas and direct subsidies so that the price of fertiliser can be kept low. But the subsidies end up helping only dealers as price fluctuations in the market and artificial shortages force farmers, in dire need of fertiliser, to buy at whatever price they are quoted by the producers.

The 2014-15 budget allocated Rs 16 billion to the producers and importers of fertilisers, but the amount was held back after a dispute between the Ministry of Food Security and fertiliser companies. The government wanted fertiliser companies to print an agreed upon price on fertiliser bags but the companies refused, citing fluctuations in market prices.

A further example of the misuse of power subsidies are those granted to the agriculture sector. Musharraf had started a flat subsidy of Rs 4,000 for growers, with the rest of the subsidy to be paid for by the federal and provincial governments on a 6:4 ratio.

In Balochistan, where there are officially 15,000 tubewells — although there are also a lot of undocumented tubewells –  the subsidy was withdrawn by the PPP government in 2012 but they restored it later. Out of a total power bill of Rs 50,000, the grower has to pay only Rs 6,000 while the rest is shared by the federal and provincial governments.

Experts have their doubts about the efficacy of these subsidies. They claim the subsidies are disrupting the underground water table and so its benefits are being accrued only by the growers while harming the rest of the population. Usman Qazi, a development consultant and strategic planner who has worked with the UNDP and NDMA, maintains that, “If the government charges a subsidised flat electricity rate for the agricultural tube wells that leads to indiscriminate mining of water as there is no cost for using extra water. And the difference between the actual cost and the subsidised amount is deducted at source from the federal divisible pool.”

He questions claims that the subsidies benefit locals. “Is it a programme for cash transfer to locals? If so, then the amount should be directly given to them rather than encouraging them to run economically non-viable farms and use scarce water. It effectively means that to keep no more than 35,000 individuals afloat, the future of half a million people is being devastated.” He continued, “Why, for instance, is the poor shepherd grazing his sheep in Kharan not given a subsidy per sheep? People should be encouraged to use water more efficiently and if the usage of energy is metered, one will have to adopt more careful methods of irrigation to minimise costs.”

Ghulam Sarwar Ronjha, president of the Growers Association (Anjuman Zamindaran) in Lasbela, has been lobbying K-Electric for many years to install meters at individual tube wells as growers often refuse bills that are charged on an average basis. He further complains that K-Electric then strong-arms the growers into paying.

“We have been asking the company to install those meters which are used by QESCO in the rest of Balochistan or at least those tested in QESCO labs and not the tampered ones used by KE,” said an associate of Sarwar. He added, “The government is paying Rs 44,000 in subsidies but still the growers are forced to pay Rs 20,000 or more or have their electricity disconnected. And despite pledges of providing electricity for at least 16 hours a day, we are getting an average of 10-12 hours a day while the company cites various technical reasons for the unscheduled loadshedding.”

The solution, Fahd Ali believes, lies in the government providing more viable solutions like solar power and other alternative sources of energy to growers in remote areas. Such creative ideas, rather than tired and regressive policies like subsidies, should guide government-spending decisions.

This article was originally published in Newsline’s June 2015 issue.