Reinventing Pakistan's welfare state: Replacing energy subsidies with targeted transfers

A welfare state faces two fundamental challenges: targeting people who need support the most and delivering the benefits in a cost-effective manner. In some developing countries, weak data leads to poor targeting, while weak institutions lead to poor delivery mechanisms. This means that these limited benefits are often availed by the less deserving, leaving less behind for the poor.

Therefore, to meet social objectives and dole out support, developing country governments instead turn to subsidising common, visible goods such as food or energy. These subsidies, while offering some relief to the poor, often end up disproportionately benefiting those who are already well-off.

Pakistan's energy subsidies are the perfect example. Vast sums go into subsidising the price of energy for consumers, mostly for the benefit of the rich. In Pakistan, electricity subsidies in 2019 alone amounted to 193 billion rupees ($1.25 billion), more than the yearly budget of Pakistan's flagship income support programme for the poor ($1.16 billion in 2019 for the Benazir Income Support Programme, or BISP). Many of these subsidies are unfunded line items on the government's budget, draining the coffers of utility companies. Buffeted by widespread theft, the result is a perpetual debt crisis for the sector, leading to an erratic supply of electricity throughout the country.

The new government in Pakistan is now looking to replace energy subsidies with targeted transfers, either through direct income transfers or targeted in-kind transfers. The Ehsaas ('compassion') programme, launched by the Prime Minister Imran Khan in 2019, brings together all initiatives designed to help the poor under one umbrella.

This project aims to construct an unprecedented administrative database that links income and energy expenditure data across all segments of Pakistani society. The database will serve as the basis for determining future targeted transfers, notably a proposed energy subsidy overhaul that would replace existing price-based subsidies with income-based transfers.