Government extends subsidy on power tariff for another year

The government has decided to extend subsidy on power tariff for another year and the amount projected for the financial year 2011-12 is Rs 239 billion. According to the Budget Strategy Paper 2011-2012 approved by the federal cabinet in its meeting on May 11, the government will lower the subsidy payout on electricity bills with an aim to removing the subsidy by 2012-13.
The government recently increased power tariff by two per cent across the board and another two per cent will be raised in June 2011. However, power tariff estimates will be finalised once Pakistan Electric Power Company (Pepco) submits its business plan to the federal government.
According to budget strategy paper, power sector reforms have been underway encompassing structural reforms including dissolution by Pepco by June 30, 2011, a new commitment of federal government. Earlier, the former Minister for Water and Power, Raja Pervez Ashraf had announced dissolution of Pepco by December 31, 2010. However, critics of Raja Pervez Ashraf maintain that the objective of this measure was to sideline Tahir Basharat Cheema, the then Managing Director.
The Finance Ministry has claimed that overall reforms are based on better governance, supportive legislative framework, financial measures, supply side intervention, demand side management and recovery measures. Under these heads a number of interventions have resulted in improved efficiency of Gencos and Discos. Reforms have resulted in reduction of tariff differential subsidy for Wapda envisaged at Rs 256 billion at the start of financial year 2010-11 to Rs 156 billion.
The Board of Directors (BoDs) of seven Discos and NTDC has been reconstituted. The BoDs of Gencos and Central Power Purchase Agency (CPPA) are being reconstituted. Finance Ministry envisages that the reform process would deepen. Tariff rationalisation will be further strengthened with amendment in Nepra Act for direct tariff notification for full cost recovery tariff.
Nepra argues that it determines power tariff on the basis of full cost recovery but federal government with the responsibility to issue the notification of a change in tariff, extends subsidy to equalise tariff across the country, except Karachi. Finance Ministry has briefed the cabinet that tariff rationalisation and technical, financial and managerial audit of Discos is expected to reduce the tariff differential subsidy to Rs 50 billion in financial year 2012.
Budget strategy paper also disclosed that Pakistan's development partners are providing support to the government in addressing the electricity issue through technical and financial assistance including the Asian Development Bank, World Bank and United States Agency for International Development (USAID). According to the Finance Ministry, the issue of inter-circular debt will improve with an expectation of picking up of the financial year 2010 unpaid subsidy amount after reconciliation. This may be placed in Power Holding Private Limited (PHPL) along with Rs 301 billion already served through the budget.
With the reform process taking strong hold and with no unexpected exogenous shocks to the system, it is expected that the tariff differential subsidy will be eliminated by financial year 2012. Stronger demand side management through programmes like Compact Fluorescent Lamps (CFL) and other conservation measures will ensure that supply demand gap will continue to be managed at acceptable levels. In the medium term and long term the government remains cognisant of the need to alter the energy mix with more reliance on hydel and renewable energy sources. For the current year, Rs 240 billion have been allocated to electricity subsidies. To reduce subsidy on electricity a number of initiatives are required including gradual increase in tariff, restructuring of power sector, altering the electricity generation mix and investing in alternative energy.