The government last shared its energy sector reform plan with the International Monetary Fund (IMF) team in December 2018, which envisaged 11 percent increase in electricity tariff, phasing out subsidies for all domestic consumers above 200 units and resumption of biannual revision of gas prices to bring power and gas tariff to cost recovery level under a three-year Fund programme.
Economists on condition of anonymity told this correspondent that without a formal agreement all plans are subject to review by the Fund. They further added that state of the economy in general and electricity sector in particular has changed significantly since December and hence more rigid conditions may be proposed by the Fund.
Finance Minister Asad Umar had shared energy sector reform plan with the IMF team in December that included implementation of energy policy covering all elements of the energy supply chain, demand management, and pricing policy for better functioning of the sector by end May 2019.
Sources further stated that the Pakistan team pledged to develop a three-year plan targeting tariff differential subsidies (TDS) and bringing tariffs to cost recovery along with cost-cutting and efficiency measures to reach full cost recovery in the electricity sector along-with tariff adjustments. The Pakistan team maintained at the time that tariff adjustments will improve resource allocation and efficiency, and ensure cost recovery stranded for more than 24 months.
The Fund was informed that the 11% increase in tariff, which was implemented at the time, would ensure recovery of Rs 1,465 billion out of determined revenue requirement of Rs 1,611 billion by NEPRA for future tariff period of twelve months, including subsidies for the sector.
The recovered revenue requirement, the government side further argued, would include recovery of Rs 166 billion stock of receivables structured in the tariff as prior year adjustment (PYA) and deferred costs of Rs 146 billion Net Hydel Profits (NHP) which would be brought in to the tariff after a 12-month tariff period for recovery.
The prior year adjustment passed through was to be a onetime action and would reduce the stock of circular debt. In addition, the costs of servicing the existing syndicated term credit finance facility, issued to cover some past losses, was to continue to be incorporated into the notified uniform base tariff.
The first step was to incorporate a mechanism to ensure full cost recovery and industrial support package of Rs. 3 per unit as announced by the government was to continue for one year sustained through sectoral efficiency and adjusted with sectoral outstanding liabilities with no fiscal support from the government; the government claimed this had already yielded Rs 13 billion during the July-December 2019.
The sector full cost recovery and efficiency plan would ensure zero flow/build up of circular debt arising out of higher losses and lower recoveries from the end consumers by the Discos.
The government further maintained that this objective would be reached through phased increase of recoveries and reduction of losses resulting in zero flow because of sectoral inefficiencies and from July 1, 2019 these targets would be met through provisions in the amended NEPRA Act.
The tariffs for consumption between 0-300 kWh would be retained for two years, and income support programs would cushion the impact of future tariff increases on the most vulnerable segments of the population. In years 2 and 3 of the program, subsidies will be phased out for all domestic consumers using above 200 units and all other categories of consumers.
The government further pledged its commitment to resume biannual revision in gas sale prices starting from next financial year and would recuperate the remaining revenue shortfall of the previous period in the next three years.
The next revision in gas sale prices is expected in July 2019 depending on determination of revenue requirements for 2019-20 by Oil and Gas Regulatory Authority (Ogra). In this revision, the government committed to eliminate any buildup of arrears in the system while ensuring that all revenue requirements of current period are reflected in the tariffs.
To meet this objective the government pledged to rationalize gas prices to ensure generation of requisite revenue and the rationalization to be dependent on the movement of international crude prices, exchange rate parity and operating expenses of gas companies.