WAPDA is teetering on bankruptcy because its deficit has soared to Rs 67 billion. Therefore Mr Ishaq Dar, the finance minister, wants to increase everyone’s electricity bills by 15% immediately. But Mr Gohar Ayub, the water and power minister, wants the rates to be reduced so that relatively more power is consumed. The end of both ministers (increasing WAPDA’s revenues) is the same but the means they advocate are diametrically opposed. Who is right?
Until recently, every WAPDA chairman has argued for a rate increase in every cabinet meeting on the subject under every government to date. Yet, despite a steep climb in rates, WAPDA’s deficit has grown. This means that the argument is deeply flawed and misplaced.
To be sure, deficits can be reduced by increasing revenues. But increasing power rates is a highly dubious way of increasing WAPDA’s revenues. Its deficits can also be reduced by combatting theft, reducing transmission inefficiencies and abolishing hidden subsidies. This has been partly demonstrated by WAPDA’s new chairman, General Zulfikar Ali, who has injected about Rs 6 billion into the WAPDA kitty in three months by fixing the fixers. But, apart from putting a stop to the free electricity granted to WAPDA employees, there is precious little the good general can do about the subsidies to agricultural tubewell owners, to FATA and to Azad Kashmir. That is an issue for the federal government to resolve. If any subsidy is politically required, it must be tagged to the federal budget instead of being shoved into WAPDA’s balance sheet.
The question of increasing revenues by increasing power rates in a recessionary economy is problematic. It is related to the price and demand of power, or its price elasticity. If a given percentage increase in flat power rates should lead to a smaller percentage decrease in the demand for power, there should be an absolute increase in WAPDA’s revenues. But if a given percentage increase in power rates leads to a bigger percentage decrease in the demand for power, absolute revenues will fall. The alternative is equally true. A calibrated reduction in power rates could lead to a surge in consumer demand and an increase in revenues. Has NEPRA, the power regulatory body considering a rate increase, done its homework and determined the price elasticities of demand for power by various categories of consumers? Have detailed references to WAPDA’s economic and operational inefficiencies, its cost overruns, its financial imprudence and its dismal service standards been taken into account? If not, there is no justification for a flat 11% increase in power rates.
There is an additional factor which merits consideration. Mr Ayub and General Ali claim that we have a potential power surplus on our hands in excess of 2000 MW which translates into idle capacity costing WAPDA about Rs 25 billion annually in payments to the IPPs. If that is true, we must ask why the export power rate demanded from India by Mr Dar’s ministry is 7 cents PKW (India is demanding 2-3 cents PKW) while that currently charged to the Pakistani consumer is equivalent to about 10 cents PKW? Indeed, if a surplus is available, why shouldn’t the Pakistani consumer benefit from it in the form of reduced power rates instead of the foreigner?
The case for a reduction in power rates for domestic consumers as demanded by Mr Ayub and General Ali is therefore quite strong. Our arguments in favour of it last year (TFT Editorial “IPP Policy is Misplaced”, May 17-22, 1998) bear repeating: “While it goes about firmly restructuring WAPDA, the government should offer incentives to domestic consumers so that the 2000 MW in excess capacity is mopped up swiftly. This should take the form of a downward sliding scale of electricity rates related to increased consumption by various types of users. The advantages of this approach are obvious enough. It will help reduce the cost of excess power. It will make our industry more competitive in the international arena by reducing its power input costs. It will considerably enhance the value of the government’s moral pressure on the IPPs to voluntarily reduce their profit margins and power rates. Above all, a reduction of electricity rates across the board will yield a political bonanza to the Sharif government at a time of great difficulty”.
The same sort of arguments can be applied to the income tax system. The more complicated the tax system, the greater the disinclination of the tax payer to cough up and the greater the disposition for administrative corruption. Similarly, the greater the government’s yen for raising tax rates or imposing additional taxes, the greater the determination of the citizen to resist such encroachments. In the end, government revenues remain stagnant while the underground economy continues to grow.
The point we are making is simple. If WAPDA wants to be viable, it should slash its operational inefficiencies, curb its corrupt practices, reduce its power rates and provide good service. If the government wants to raise its revenue base, it should simplify the tax system, abstain from corruption, reduce tax rates and give value for money to the people. It’s time the physician healed himself instead of trying to heal us!