Industry deplores ‘knee-jerk U-turns’ in economic policy

January 24, 2020

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Businesses deplore increase in power tariffs. — AFP/File
Businesses deplore increase in power tariffs. — AFP/File

ISLAMABAD: The government and the country’s big businesses entered into a serious tug of war over electricity tariff that has increased by almost 35 per cent on average over the past 18 months.

Pakistan Business Council — an alliance of about 82 of the largest Pakistani business houses claiming about 18 per cent share in the country’s revenue and GDP — accused the government of "knee-jerk U-turns" in policy matters, negatively affecting the country’s competitiveness and investor confidence.

All Pakistan Textile Mills Association (Aptma) — an association of about 400 textile units — earlier criticised the government for backtracking from its commitment to provide electricity to export industry at a fixed rate of 7.5 cents per unit to compete in the global market with India, Bangladesh and others.

The Power Division, on the other hand, said it had not withdrawn any committed facility but the subsidy to exports sector was allowed only to the extent of ‘base tariff’ and other factors and surcharges would have to be borne by the industry. It said the decision to not allow any additional cost other than base tariff concession was jointly taken by various ministries because of limited budgetary space.

The controversy emerged after the power division on January 13, 2020 directed the Distribution Companies (Discos) to bill all additional charges like financial cost surcharge, Neelum-Jhelum Surcharge, taxes, fixed charges, quarterly tariff adjustment and fuel price adjustment in addition to 7.5 cents.

Points to reversals in power price for exporters, tax credits for investment and import duty reduction for mobile phones

The Aptma in a letter to Energy Minister Omar Ayub Khan quoted his ministry’s notification of Feb 8, 2019 that said the ECC had clarified that zero-rated industry would be charged 7.5 cents per unit only and all other mentioned elements (financial cost surcharge, Neelum-Jhelum Surcharge, taxes, fixed charges, quarterly tariff adjustment and fuel price adjustment) would not be charged to the zero-rated industry but would be part of the subsidy claim to be picked up by the government.

In a strongly-worded statement, the Pakistan Business Council said it was disappointed "by yet another knee-jerk U-turn in government policy" which if not reversed threatened Pakistan’s exports and could discourage investment in capacity and capability.

"On Jan 1, 2019 the government had announced an all-inclusive tariff of 7.5 cents per unit for the five export sectors," the PBC said in a statement released on Thursday.

"This enhanced the competitiveness of Pakistan’s exports. However, barely a year later, on Jan 13, the Ministry of Energy instructed Discos to charge add-ons and surcharges amounting to 70pc, raising the aggregate cost to 13 cents per unit. To make matter worse, the add-ons and surcharges will apply retrospectively i.e. from Jan 1, 2019."

The PBC deplored that this was not the first policy reversal with retrospective effect on business. "Earlier, the Finance Act 2019 cut the tax credit to half for investment in plant and machinery already made or to be made by June 30. It also totally withdrew the 10pc tax credit previously allowed on investment between July 1 and June 30, 2021, even if the same had already been committed."

"Policy U-turns, especially with retrospective effect do not bode well for export competitiveness, import substitution, investment or employment”, the PBC said, adding all these factors were critical for Pakistan’s economy. “How are Pakistan’s exports when subjected to 13 cents/KWh expected to compete with those from India and Bangladesh at 7-9 cents/KWh and China between 7.5-10 cents/KWh”, questioned the PBC and wondered how exporters could be to pay the difference of tariff arising from the retrospective U-turn when it was not factored into the price of exports already made?

As if that was not enough, the PBC questioned as to why “exporters should be encumbered by legacy, inefficiency and idle capacity costs of our poorly managed energy complex” as the 7.5 cents/KWh cost already included a margin of 5.27 cents to cover distribution and fixed costs.

A third recent example of a policy U-turn is the reduction in import duty on mobile phones. The council said the import duty was increased to encourage local production and was followed by several investments but has now been withdrawn. It called upon the government to review each of these U-turns, restore the competitiveness of Pakistan’s industry and promote investment.

The PBC said the ministries were “working in silos” and “chasing revenue to meet a ministry’s short term target, in the process sacrificing the long term health of business and the economy.”

A Power Division spokesperson said the government provided the 7.5 cents per unit in base tariff and the difference between the base tariff and the concessionary rate was to be plugged by the federal government. At present, approximate benefit of Rs7.30 per unit was being given in lieu of the peak units and Rs1.50 per unit on off-peak rates to them. “This subsidised regime is continuing and has not been withdrawn,” he said.

Based on various representations from Aptma, the financial implications were discussed with the Finance Division and other divisions including Ministry of Commerce and Textile. On account of no budgetary allocation for the purposes of the demanded relief in 2018-19 or in the current financial year, the Finance Division communicated that, being pass-through items, the same should be duly recovered from export oriented industry.

However, further additional subsidy claimed in the context of all remaining components of cost of electricity would be recoverable from such consumers per the notified tariffs, after incentivising the base rate through the concessionary rate.

“The additional costs reflected periodic adjustment are not covered by such subsidies and if they are not charged to the “industry”, the burden would have to be shared by the domestic, agricultural and commercial consumers” the spokesman said.

Published in Dawn, January 24th, 2020