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Story Highlights
  • The Government of Pakistan has implemented energy subsidy reforms, but electricity subsidies are poorly targeted and not reaching those most in need.
  • A recently published study examines the current subsidy system and assesses the potential to improve outcomes through alternative targeting and program design.
  • A qualitative assessment of households’ attitudes and experiences shows that access to affordable electricity is crucial and effective compensation measures should be designed to protect vulnerable households against increasing costs.
Pakistan: How to Protect Vulnerable Households while Reforming Inefficient Energy Subsidy Systems
By Ezgi Canpolat, Thomas Walker

In Pakistan, many households are finding it difficult to access affordable and reliable electricity. Families struggle to pay their monthly bills, often cutting spending on other essential household needs. Routine daily power outages for up to 8 hours are impacting household’s socio-economic well-being. In addition, less than satisfactory customer service by utilities is making the situation worse. As the World Bank’s Energy Strategy (2013) emphasizes, ensuring access to affordable and reliable energy is crucial to ending poverty and achieving shared prosperity

“Twice we had to delay our electricity bill payments as we had to use the money kept aside for the bills to pay for my daughter’s medical expenses,” says N. a housewife living in the Khyber Pakhtunkhwa province whose daughter has a chronic disease requiring regular travel for treatment. She describes that often, she and her husband had to cut household expenses on basic needs such as food and their children’s education to keep their electricity on. “One of my sons stopped his studies at 12th grade because our financial condition did not allow us to keep paying his tuition,” she says. In addition to struggling with higher electricity costs, the family often experiences 5-6 hours of power outages, which makes it difficult do household chores and use electric appliances.

In 2014-15, the Government of Pakistan spent almost US $2 billion on electricity subsidies, but they are poorly targeted as the majority of the subsidy benefit goes to non-poor households. They also distort incentives to improve service delivery in the sector as they enable suppliers to produce at an inefficient cost.

H., from Islamabad, a recipient of Pakistan’s national cash assistance program, Benazir Income Support Program (BISP) explains how BISP is a crucial form of support as she keeps aside some amount of her cash payments for covering bills including electricity. However, the cash assistance she receives is only a fraction of the large electricity costs she has to pay. H. describes how she had to cut back spending on food and clothes for her children in order to pay her electricity bills.

These narratives echo the results of a nation-wide qualitative assessment of household and service provider attitudes about and experiences with energy use, affordability, service quality and compensation. The qualitative assessment was conducted as part of a multi-disciplinary research which is analyzed in a recently published Policy Research Working Paper, Residential Electricity Subsidies in Pakistan: Targeting, Welfare Impacts, and Options for Reform. The working paper examines the economic and social implications of the current system of residential electricity subsidies, and assesses the potential to improve the system’s outcomes through alternative targeting and program design. In addition to the qualitative assessments, the paper draws on the findings of national household survey data, electric company data on household electricity consumption, and a welfare database.

The study suggests ways to improve the targeting of subsidies that take into account the needs and concerns of the households as examined during the qualitative research. Focus group discussions and in-depth interviews with household members revealed that the stress of struggling to pay high costs, and regular power outages is taking a toll on family life, health, education, and economic activities. Low-income households—in particular urban slum residents and beneficiaries of the country’s main welfare program—mentioned resorting to illegal electricity connections because they could no longer cope with increasing electricity costs.

Long hours of daily outages have far reaching negative impacts on the community. Respondents from various occupational groups—shop owners, tailors, and daily wageworkers—complained that power outages negatively impact their income levels. The outages force women to perform household chores manually increasing their workload and reducing the time that can be spent on educational and income-generating activities. As women are more likely to operate home-based businesses, power outages disproportionately disrupt their income–generating opportunities.
Pakistan has state-of-art targeting and registration mechanisms available to deliver better-targeted assistance but more push is needed to shift to a different targeting method.

In 2011, Pakistan developed a national Proxy Means Tests (PMT) database for the BISP which could be used to target assistance to households based on their welfare levels. Providing bill credits in place of price-based subsidies would make billing simpler and provide equal assistance to all targeted households. Other forms of assistance can help encourage consumers to use formal electricity supply, cutting down on non-technical losses in the sector. The qualitative research, for instance, identified a need for more flexible payment options, and points to waiver of late payment fees for the poorer households as a way of helping to keep them connected. Measures such as connection fee waivers and amnesty on illegal users could also help attract more consumers back into the formal system.

Governance is another key challenge. The qualitative research revealed a general lack of trust in electricity service providers and a poor perception of governance in the sector. While much is being done by the government to address the lack of trust, public perceptions could be further improved with sufficient communication and public awareness raising activities.

Experience from subsidy reform programs worldwide stresses the importance of developing an effective communication plan from the beginning. The qualitative research revealed that many lower-income households are unaware that there are electricity subsidies, and do not understand the need for tariffs to increase. There is a perception that prices are already too high, encouraging the use of illegal connections. To ensure the reform is publicly accepted, it is crucial to develop a communication strategy to increase public awareness about subsidies, the planned reform, and measures to make electricity more affordable for those most in need.

The Government of Pakistan took the initial step of embarking an energy subsidy reform agenda. Now is the right time to discuss how to switch to an efficient way of targeting subsidies, which will address the needs and concerns of the low-income households, to ensure households’ access to affordable and reliable energy, and to communicate the rationale for reforms to its citizens.

 

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