Power reforms – look beyond revenue

A lot is on the cards in the energy sector, under the ADB financed Energy Sector Reforms and Financial Sustainability Program. Subprogram 1 of the project is underway, of which a few actions have been taken prior to the funding, such as released of tariff differential subsidies to put an end to unfunded power subsidies, and incorporating the previously unadjusted tariff backlog to the tune of Rs469 billion.

What is puzzling is the government’s word to the ADB which says that FY21 tariff will be announced before July 2020, which will have corrected the annual notification cycle for the very first time. The puzzling bit is that the tariff notification for FY20 misses a mention, which goes on to show, there are no plans to announce fresh tariffs for January 2020, and it will rather be settled through quarterly adjustments and periodic reviews.

Bear in mind that the FY20 electricity tariff schedule was supposed to be announced by end-September 2019, as per the agreement with the IMF. And it was not just another criteria, it was one of the structural benchmarks, which seems to have been waived, as the plans are now to focus on announcing the tariffs for FY21, before the fiscal year starts.

More structural changes are supposed to be made before 2019 comes to an end, and that includes amendments to the Nepra Act to ensure full automaticity of the quarterly tariff adjustments and eliminating the gap between the regular tariff determination by the regulator and the notification by the government. These are relatively straightforward events, and should be swift and easy.

Next bit is the circular debt reduction plan, which is surrounded by ambiguity. The flow of circular debt accumulation has come down substantially, has been duly acknowledged by the ADB. The monthly addition has come down from Rs38 billion earlier to Rs21 billion now – and the government intends to put it down to Rs6 billion per month by FY21.

This means an additional revenue measure of at least Rs180 billion is in line for FY21. It remains to be seen, if the room is created within the subsidy scheme of things, as hinted in the papers, that subsidies will only be targeted to extremely poor segments. As of now, power subsidy extends to nearly 80 percent of domestic consumers – which is surely not the best targeted approach.

What is of note is that the circular debt reduction is mostly meant to be dealt with revenue measures, and the other side of reforms does not seem to be on the forefront. The plan includes “using the sale proceeds of some generation assets, divesting power subsector transmission and distribution of SOEs, rolling tariff subsidies” amongst others. This apparently needs substantial funds to be implemented, in the words of Hafeez Shaikh.

The plan spread across three subprograms looks decent, but hardly new. It is almost 2020, and Pakistan is still talking about devising a National Electricity Policy and an Integrated Energy Plan. These documents have surely been talked about and seen before. The whole process of reinventing will only be worth it, if it sees the light of the day. Also, when the plan is to eliminate circular debt accumulation in three years, one wonders how practical will the affordability aspect of the reform process be. Just for reference, the program aims at reducing the cost of electricity from 10 cents per unit to 7 cents. Good lucki doing that, with all the capacity payments!