Revenue at the heart of power reforms

“Pakistan’s economic reform program is on track,” says the opening statement of the IMF’s Executive Board’s first review of the ongoing programme. But the ‘track’, it seems, is only getting longer and bumpier. The power sector performance, reform progress and future course of action take the center stage for all the right reasons – and the Fund seems to be in no mood to waste time, as evidenced by visibly-modified structural benchmarks and details of the action plan going forward.

The usual rhetoric of improving collection, reducing losses, and strengthening the discos’ board finds its way in the report. But not the part of structural reforms that largely remains missed. And the focus continues to be on the revenue aspect of adjustments. The tariff adjustments in power sector have been going on, prior to the Fund programme – and it only intensified after it.

Some of it is painful, but necessary, such as making up for the FY19 tariffs, delayed notifications, and unbudgeted subsidies. The Programme earlier had a structural benchmark related to amendment in Nepra’s Act by end December 2019 to automate the tariff-notification process and eliminate the delay in notifications. This time around, the IMF has gone one step ahead, issuing a revised structural benchmark giving the government the powers to reintroduce the tariff surcharges over and above the system’s revenue requirement.

The noble reason presented in the report is to stem the accumulation of arrears. But any surcharge over and above the automated tariff adjustments in lieu of both capacity and fuel charges is simply a fiscal measure. Besides, it can also be an insurance policy for the likely non-compliance on account of collection and losses.

Then there is the whole subsidy debate, which now seems to be heating up. The budget FY21 is supposed to have “better targeting of subsidies for domestic, industrial and agriculture users”. ‘Better targeting’ here simply means the current mechanism will be reviewed and the axe is likely to fall on domestic sector subsidies – 78 percent of which is cross subsidized. Reducing the absolute amount on subsidy may not be an easy call, given the hike in tariffs since the last budget.

Also, the January 2020 tariff adjustment on account of Q2FY20 will also make room for Rs73 billion to be recovered in lieu of Net Hydel Profits. This is over and above the adjustment on account of capacity charges. The ‘reform’ also aims at addressing the inherent flaw in Nepra’s assumption of 100 percent recoveries from disco. This makes room for another built-in increase in determined tariffs going forward. A similar amendment in Ogra Act is also in the works to streamline and rationalize the gas tariffs. The power sector reform process must not be hijacked by revenue motives only – as the first review clearly shows.