World Bank study reveals that electricity subsidies are only benefiting richest households however correlation between measured power consumption and household welfare is frail.
Research contained in the study says that despite cuts in tariffs on heavy users, electricity subsidies continue to be poorly targeted. Residential consumers are charged tariffs based on monthly electricity consumption, with the most generous subsidies provided to households with low and moderate usage.
The effectiveness of this targeting mechanism as a social protection policy relies on the premise that measured electricity use is closely related to household welfare, says the study titled ‘Residential electricity subsidies in Pakistan’, released on Tuesday.
Even after the recent reforms, the group receiving the greatest share of electricity subsidy expenditure remains the richest 20 per cent of the population. The average subsidy for the richest 20pc of households is 40pc higher than that for the poorest 20pc.
Moreover, there is a strong seasonality of electricity consumption, with both rich and poor households consuming more in the summer months.
This pushes even the poorest households into higher-tariff slabs, increasing their bills substantially. Conversely, many richer households drop into the more heavily subsidised and lifeline slabs during the winter months.
Based on qualitative research, the study finds that in spite of the subsidies, low- and lower-middle income households in the country struggle to afford their basic electricity needs.
Some households reported being forced to reduce expenditure on food, health and childcare in order to afford electricity bills. Such coping mechanisms particularly affect women, who are the main consumers of electricity at the household level.
Aside from affordability, residential electricity users are most concerned about the reliability of supply and quality of customer service.
Electricity is central to the lives of modern households and their lives are disrupted by long hours of loadshedding common in recent years.
The stress of coping with the high cost and low reliability of electricity 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 programme — mentioned resorting to illegal electricity connections because they could not afford to pay their bills.
In addition, the research revealed a general lack of trust in electricity service providers and a poor perception of governance in the sector.
The qualitative research findings revealed that many lower-income households were unaware that there were electricity subsidies, and did not understand the need for tariffs to increase. There is a perception that prices are already ‘too high’ and this encourages the use of illegal connections.
The analysis shows that consumers are primarily concerned about affordability, reliability of supply, and issues related to transparency and accountability. Consumers do not trust the accuracy of their bills and perceive corruption in their interactions with service providers.
The government could also put in place or strengthen grievance redress mechanisms and provide training to staff to address consumer concerns in a manner that builds trust. Such a mechanism will be essential to manage the transition away from universal subsidies, and to deal with appeals to selection decisions under a new targeting method.
To further strengthen citizen engagement, a ‘social compact’ approach could be adopted, the study says, referring to a formal arrangement in which the views of citizens are sought at regular forums at the local level, and actively incorporated in policy making.
The assessment findings indicate that electricity is central to the lives of low-income and lower-middle-income households and that households struggle with electricity costs and resort to coping mechanisms.
Low-income households, especially residents of slums and Benazir Income Support Programme beneficiaries, use illegal electricity as a way to cope with increasing electricity costs.
The majority of consumers do not trust their bills, and believe that the amount does not reflect their actual consumption. Almost none of the respondents were aware that the government provides electricity subsidies. Overall, the negative attitude of respondents towards the electricity service is a result of frustration with unreliable supply and perceptions of poor sector governance.
Despite struggling to afford electricity, respondents appear willing to pay higher prices provided service quality improves and governance problems are addressed. However, most respondents are sceptical that such improvements will take place.