The future is electric

More than one-third of Pakistan’s imports is essential transportation fuel. Almost $5 billion of fuel is used by two-wheelers, and three-wheelers for transportation.

There are more than 30 million two-wheelers in the country, making up more than 40 per cent of the total adult male labour force – estimated to be 70 million. External price shocks continue to affect household budgets, while economic growth remains constrained by the availability of foreign currency that can be used to finance consumption-oriented growth.

On the flipside, Pakistan has a surplus energy generation capacity and continues to struggle with ramping up electricity consumption due to high tariffs. A negative feedback loop through which higher prices (determined through a cost-plus mechanism) result in lower consumption further increases tariffs, as the fixed costs of capacity payments are spread over a shrinking base of electricity units consumed.

In the first instance, we are importing energy, and burning precious foreign currency reserves for this. In contrast, in the second instance, we have surplus electricity generation capacity, but cannot think beyond cost-plus tariff determination to increase energy consumption through electricity. To reduce the reliance on imported fuel for transportation, there exists a strong case for accelerated roll-out of electric mobility options, which can utilize excess electricity generation capacity.

Public transportation options exclusively relying on electric, or electric-hybrid vehicles can significantly reduce private consumption of fuel while enhancing mobility for the people. The availability of affordable public transportation not only reduces reliance on imported fuel, but also enhances the ability of people to seek better employment opportunities, and higher wages since the cost of transportation is reduced.

The availability of public transportation has a net positive impact on household income, as a mix of both increased wages (through better mobility) and reduced spending on fuel. Rolling out such projects exclusively through electric buses can also partially solve the overcapacity problem in the case of electricity – albeit a lot more structural changes will be required for that to be successful.

Such transportation projects must be executed in a modular manner. Mega public transportation projects rolled out in the country over the last decade entailed ripping up existing infrastructure, and replacing it with new infrastructure, eventually leading to significant capital costs, and cost overruns, as well as extended delays. A modular approach through public-private partnerships can accelerate the roll-out of such projects, wherein the government can set parameters for service delivery, and auction routes to private parties which can then bid for routes.

There may be cases where certain routes may not be viable – in those cases, the government can provide the necessary subsidies to make the project feasible. It is important to note here that the subsidies rolled out must be compared with the potential fuel savings, as well as improvement in household income – rather than be viewed in isolation. Through such a structure, the government can roll out public transportation projects running on electric vehicles in a fairly short period, providing valuable relief to the people at the same time.

The government of Punjab has recently launched a scheme for subsidizing motorcycles, of which only a small percentage are electric motorcycles. It makes little economic sense to subsidize petrol-fueled motorcycles when a completely new market can be carved out for electric motorcycles. In China, and many Southeast Asian countries, the proportion of electric motorcycles continues to increase, catalyzed by the presence of battery swapping stations. Through such battery charging, and swapping stations, two-wheelers, and three-wheelers alike can quickly swap out their batteries, instead of getting a refill of fuel. The savings from switching to electricity from petrol are significant, and directly impact overall household budgets – and eventually fuel imports at a macro-level.

A compelling case exists to create an electric mobility emergency, which targets both public transportation and private mobility solutions. Any such policy actions earlier were largely restricted to reducing duties on electric vehicles exclusively for the ultra-rich in the country. For a change, the government may actually formulate policies for the vast majority of the country that continues to struggle with reducing purchasing power, amidst the increasing cost of transportation.

A two-tiered approach can be taken for mobilizing capital, and support for it, a policy framework for public-private transportation projects, with clear service delivery parameters, and a route auction mechanism. Rolling this out to the provinces can further accelerate the process. The government has been charging a Petroleum Development Levy on the sale of petrol, and diesel for the longest time. Reallocating it for incentivizing public transportation would align with the spirit of the levy, rather than it being a vanilla source of revenue for federal budgetary support. The government needs to make budgetary allocations for the people, rather than friends and family.

The next policy framework is to incentivize and encourage the manufacturing of electric buses, two-wheelers, and three-wheelers in the country. Such a policy framework should also cover parameters for charging and swapping stations, making it a plug-and-play solution. Incentives can be provided for the manufacturing of such vehicles through tax breaks, or duty differentials, such that it is cheaper to develop an ecosystem of electric vehicles in the country.

The future is electric. Our present is excess power generation capacity, and increased reliance on imported fuel. Both these problems can be solved through an accelerated rollout of electric mobility solutions through a mix of public-private partnerships, and ecosystem development of electric vehicles. Such interventions will not require much capital outlay from the government, but they will require the will and the imagination to do something different. Public transportation has one of the highest social impacts; one simply can't go wrong with this, unless it is by design.

The writer is an independent macroeconomist.