Energy subsidies dilemma expose failings of Pakistan state

Pakistan is being urged to cut its energy subsidies in order to resolve supply problems that have led to chronic electricity shortages. But the debate on reducing energy spending touches upon a more fundamental failing of the Pakistani state: a near total inability to get the population to pay either tax or energy bills.

Theoretically, maintaining artificially low prices for electricity should see the proportion of paid bills rise. But PEPCO, the national power company, has seen collected revenue fall over the past year.

The national utility lost over $1 billion in unpaid bills in 2010. The drop comes despite the fact that natural gas – the main source of energy used to generate electricity – was subsidised to the tune of $3.5 billion in the last fiscal year.

PEPCO’s fortunes are indicative of a wider problem of revenue collection in Pakistan. Less than 1 per cent of Pakistanis pay income tax and tax collection as a proportion of GDP is the lowest in South Asia at 9 per cent. If subsidies were removed, bills would go up, making it less likely that the remaining 99 per cent of the population will start paying its bills.

It is only oil-rich countries in the Gulf, where governments are funded by oil revenues, who perform worse on the tax-to-GDP ratio than Pakistan. But Pakistan has little oil and its natural gas reserves are depleting. The country faces a gas shortfall of 2.5 billion cubic feet and a GDP budget deficit of nearly 6 per cent. The failure to increase tax revenue and reduce the deficit saw the IMF stop dispersing payments on an $11.3bn loan to Pakistan last year.

Failing to pass on the costs of power generation to the consumer is a dangerous game. Abolishing subsidies would see the government accused of being anti-poor. But, given the high levels of tax evasion, the fact is that subsidies disproportionately benefit the wealthy. Pakistan’s Federal Board of Revenue has identified 700,000 rich people who pay no tax and the IMF has warned of the dangers of free-riding by large companies.

A report commissioned by Carnegie, the US think-tank, last year claims that Pakistan’s tax evasion is caused by “poor legal frameworks with regard to revenue extraction; corruption in the form of a predatory class that privileges certain sectors; and elites who cut deals with the state to avoid taxation”.

The short-term dilemma facing the government is whether or not to risk unpopularity by cutting subsidies in the face of overwhelming evidence of their ineffectiveness. But this also exposes an endemic weakness of the state itself: the military, landowning and political elite will avoid paying their fair share.