EDITORIAL: World Bank Vice President for South Asia, Hartwig Schafer, playing the lead role in Pakistan's energy sector, met with Energy Ministry officials led by Minister Hammad Azhar to discuss energy sector reforms, a major component of the International Monetary Fund's (IMF's) 6 billion dollar Extended Fund Facility (EFF) programme. The need for further discussion arose subsequent to Federal Finance Minister Shaukat Tarin's rejection of the harsh upfront time-bound conditions agreed by his predecessor in February 2021 on the grounds that they would stifle growth and consequently generate lower tax revenue and fewer employment opportunities. This led to the sixth mandatory IMF review talks remaining inconclusive, deferred till September 2021.
An alternate plan would be tabled, so pledged Shaukat Tarin in a virtual meeting with the World Bank on 30 April 2021 led by Schafer, that would consist of staggering the power tariff increases agreed earlier in view of the then third Covid-19 wave (currently Pakistan is facing the fourth Covid-19 onslaught). Schafer reportedly agreed to review the new energy sector reform proposals and one would assume that the recent meeting was part of the process of tabling new proposals and their review by the World Bank officials.
There is no doubt that the range and extent of the issues besetting the energy sector are daunting, not only because of the sustained appalling performance of the sector which the incumbent government, like its predecessors, has been unable to improve, but also because any attempt to achieve full cost recovery, the overarching objective of multilaterals, implies raising charges to levels that stifle growth, employment, as well as upset the kitchen budget of the common man - a situation that the country witnessed during the first nine months or so of the EFF.
Into its third year in power, the PTI government continues to blame previous administrations for the poor state of the energy sector claiming that: (i) excess supply coupled with capacity charges payable in dollar equivalent rupees to powers producers - the Independent Power Producers (IPPs) and inefficiently run government-owned generation plants - remain the major problem though the government is hard pressed to explain why load shedding continues to this day in spite of excess supply; the government has successfully negotiated with the power producers but has not met its pledge in terms of payment to those established under the 2002 policy given an ongoing investigation by National Accountability Bureau (NAB) and has failed to adjust the excess profit by a few against what it agreed to pay is baffling; and (ii) the intractable circular debt has risen to 2.3 trillion rupees end June 2021 (up from 1.2 trillion rupees inherited by the Khan administration). The government is claiming that the rate of the rise in circular debt has been contained though this cannot be independently verified. Hammad Azhar recently tweeted that "ECC has approved the financial setoff mechanism for government IPPs. This means that the receivables and payables between the government entities have balanced each other. This will lead to a reduction of 116 billion rupees in the circular debt stock." It is, therefore, important to note that the main contributor to the circular debt stock is the unpaid subsidies and in this context, it is relevant to note that the government has budgeted a 330 billion rupee subsidy for the sector in the current year while the demand was for 501 billion rupees, implying an allocation less than 171 billion rupees.
The World Bank reportedly argues that the short-term measures (tariff increases) did not contain the circular debt and external factors like Covid-19 and higher international price of oil, reversed the earlier gains insisting on dealing with underlying structural issues that include inefficient discos, untargeted subsidies and lack of competition in the energy market. A case has been prepared for the establishment of the Competitive Trading Bilateral Contracts Market; however, the work is painstakingly slow with sector experts challenging its implementation anytime soon. The World Bank acknowledges the burden of reforms on all stakeholders but argues that all must share in the burden (producers, distributors, consumers and government) for the solution of problems once and for all. There is, therefore, an urgent need to improve governance of the sector which cannot be achieved without sharing of the burden by all stakeholders; however, as the major player in the sector, the government must begin to undertake reforms by ensuring that the subsidy needs of the sector are met initially, and targeted subsidies through Benazir Income Support Programme or the Kamyaab Jawan Pakistan programme continue, even if it means cutting expenditure from some other current expenditure item. Improving sector performance by penalizing the poor performers must also be vigorously pursued.
Copyright Business Recorder, 2021
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