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ISLAMABAD: The government is considering to follow the Iranian model of restricting fuel and energy subsidies under which market prices are recovered from consumers who are then compensated through a cash grant.
Under its economic reform plan, Iran recently replaced fuel and food subsidies with the cash transfer programme that was praised by most of its critics, including the International Monetary Fund and the World Bank whose largest shareholder, the US, maintains an aggressive posture towards it.
An official told Dawn on Sunday that Iran had adopted the cost-recovery approach under its reform plan last year, done away with subsidies on fuel and introduced the cash transfer programme to make policy changes feasible.
In the first year of implementation -- that was delayed for a couple of months -- Iran is reported to have saved over $6 billion, which is more than the reported Rs500 billion loss Pakistan’s public sector corporations suffer every year.
Pakistan set a target of providing Rs50 billion subsidy to power sector consumers in the current year’s budget, but the amount is now estimated to increase to Rs350 billion, owing to delay in implementation of a cabinet decision to pass on power tariff increases to consumers as the gap between sale price and cost of supply widened to about Rs2 per unit in the absence of any success in the loss-reduction programme.
The official said the Iranian government had complemented its subsidy withdrawal programme with a significant programme of public education and communication, explaining the changes and how people could gain from cash transfers.
“We are considering to adopt a similar approach and pursue a public communication plan to link cash transfers with the tariff increases,” he said.
He said the relationship between the consumption behaviour of rich households and conservation and efficiency would be an important factor of the proposed strategy because there were benefits of increasing tariffs, more for those who could reduce consumption.
“If the pricing signal leads to better management and use of electricity, it will reduce power generation needs, lower costs, increase conservation and reduce the gap between supply and demand.”
The official, who currently works for the ministry of finance to advise on policy reforms, criticised a recent decision of the ministry of water and power under which the benefit of highly subsidised first 100 units was also provided to high-end consumers with monthly consumption of more than 700 units.
“This is misuse of subsidy under which rich people are using cheap electricity for heating swimming pools at the cost of the national exchequer.”
He said the government had firmed up policy recommendations to increase the slab for lifeline power consumers to 100 units per month from the existing 50.
The rates for lifeline consumers will be gradually increased to about Rs10 per unit over two to three years and they will get back the cost of 100 units through bank accounts or vouchers. This will encourage them to contain power consumption.
The pattern will also be used for consumers using up to 300 units per month. All consumers using more than 300 units will be charged a little higher than the cost of power supply with higher rates for high-end consumers.
Officials argued that since the tariff subsidy was untargeted, almost 60 per cent of the Rs350 billion estimated for current year would go to the domestic sector where the richest 20 per cent consumers would enjoy about 70 per cent of the subsidy.
Iran used to extend until last year approximately $100 billion in subsidy a year to its people since the Iran-Iraq war, almost half of which was spent on fuel prices, resulting in one of the highest per capita fuel consumptions in the world -- second only to the US.
It has planned to lower subsidies on fuel and edibles to about $30 billion in five years.
The officials said the Iranian government had started paying $90 twice a month to over 19 million families, covering almost 90 per cent of its population, before withdrawing subsidies on fuel.
Government officials are of the view that the Benazir Income Support Programme can be expanded for payment of electricity subsidies to poor households.
