Hafeez raises the alarm: 'Superfluous' subsidies can invite IMF's ire
ISLAMABAD: Prime Minister Advisor on Finance and Revenue, Dr. Abdul Hafeez Shaikh, has reportedly warned the government that provision of "superfluous" subsidies in power sector can create hurdles in release of next tranche from the International Monetary Fund (IMF), well-informed sources in told Business Recorder.
Dr Shaikh, who recently held discussions with the Fund on webinar, expressed his reservations at the approval of a subsidy of Rs 21 billion (Rs 14 billion for Discos and Rs 7 billion for KE) for the industrial sector across the country, targeted to extend support to the poorly performing industrial sector. However, since Prime Minister Imran Khan approved the package for the industrial sector, Advisor Finance, had no option but to approve it.
The sources said Dr Shaikh's comments came during the federal cabinet's meeting held on November 3, 2020 when the ECC minutes of revised support package for industrial electricity consumers were presented for ratification.
During the ensuing discussion, it was pointed out that the same tariff for K-Electric and other consumers, and not passing the Fuel Price Adjustment (FCA), as proposed by the Power Division was not approved by the ECC.
Some Cabinet members argued that passing on the FPA may raise the tariff and dilute the benefit to the industry. The government has reportedly decided to allocate Rs 21 billion subsidy from Covid-specific stimulus package to supply cheap electricity to industrial consumers of Discos and KE.
Dr. Shaikh highlighted the apprehensions of the IMF and warned that too many subsidies to the power sector could delay the release of next tranche. Energy sector's circular debt has already crossed Rs 2.3 trillion mark because the government has not implemented the circular debt capping plan agreed with the Fund in letter and spirit.
The IMF has reportedly emphasised the need for full-cost recovery from electricity consumers for which an increase of Rs 6 per unit would be required. However, at this point in time neither the ailing industrial sector nor the commercial or domestic consumers have the capacity to bear this increase. Political considerations today make it untenable for the government to take such a tough decision.
Prime Minister Special Assistant on Revenue, Dr. Waqar Masood, will give a detailed presentation on rationalization of subsidies and grants to the Cabinet on Tuesday (today).
On November 3, 2020, it was pointed out that the following portion of the decision taken by ECC was inadvertently omitted from the minutes of ECC in respect of -industrial consumers connected with K-Electric network: "Rate of Rs.12.96/Kwh may be charged for industrial consumer categories B4 and B5 of K-Electric from November 1, 2020 to June 30, 2021 for off-peak hours on incremental consumption basis over their consumption in corresponding months of the period March 2019 to February 2020. Decision for extending this package for these consumers will be taken in June 2021. Nepra shall review and finalize benchmarks of reference consumptions for new consumers and the package will be applicable to all hours of the day during the period when time of use tariff for industrial users is discontinued."
According to the decision, to impact of the Fuel Price Adjustment (FPA) shall be passed on to the industrial consumers on incremental consumption basis and Nepra will issue a necessary notification in this regard, the sources added.
Sharing details, sources said in compliance with Prime Minister's Office directions of October 22, 2020 Power Division submitted a summary for consideration of ECC on October 26, 2020. Subsequent to the said ECC meeting, high-level meetings were held at Prime Minister's Office (PMO) on October 26, 2020 and October 29, 2020.
During those meetings, a revised proposal of extending the package for three years, effective from November 2020 to October 2023, was discussed. It was also proposed during the meetings that the package may be extended to industrial consumers of K-Electric (KE) on the same pattern. The objective of the package was to spur industrial growth. There was an underlying assumption that there would be external benefits of the package, including but not limited to, increase in industrial activity, enhanced tax revenues, increase in employment and increase in export earnings. Estimation and quantification of these benefits was not the role of Power Division under the Rules of Business, 1973.
After a detailed discussion in two consecutive meetings, the ECC took the following decisions: (i) discount of Rs 4.96/kWh would be offered from the incremental marginal rate (Rs 12.96/kWh) for industrial consumer categories (B1, B2 & B3) from November 1, 2020 to June 30, 2021 for off-peak hours on incremental consumption basis over their consumption in corresponding months of the period March 2019 to February 2020 (the reference period would be adjusted to exclude COVID months). In this case, an estimated subsidy requirement shall be approximately of Rs 14 billion which shall be provided by the Finance Division from COVID Economic Stimulus Package on actual consumption basis for each month; (ii) the rate of Rs 12.96 /kWh may be charged for industrial consumer categories (B1, B2 & B3) from July 1, 2021 to October 31, 2023 for off-peak hours on incremental consumption basis over their consumption in corresponding months of the period March 2019 to February 2020. In this case, there is no subsidy requirement;(iii) rate of Rs 12.96 /kWh may be charged for industrial consumer category B4 from November 1, 2020 to October 31, 2023 for off-peak hours on incremental consumption basis over their consumption in corresponding months of the period March 2019 to February 2020. In this case, there is no subsidy requirement and; (iii) new industrial consumers having no reference consumption available in the period of March 2019 to February 2020 shall be offered the same package through slab-wise consumption structure.
For KE consumers, (i) discount of Rs 4.96/kWh, from the base rate, will be offered for industrial consumer categories (B1, B2 & B3) from November 1, 2020 to June 30, 2021 for off-peak hours on incremental consumption basis over their consumption in corresponding months of the period March 2019 to February 2020. In this case, an estimated subsidy requirement for K-Electric shall be approximately of Rs 7 billion which shall be provided by the Finance Division from Covid Economic Stimulus Package on actual consumption basis for each month and ;(ii) new industrial consumers of K-Electric may be offered the same package through slab-wise consumption structure.
However, the Cabinet in its meeting held on November 3, 2020, approved that rate of Rs. 12.96/Kwh may be charged for industrial consumer categories B4 and B5 of K-Electric from November 1, 2020 to June 30, 2021 for off-peak hours on incremental consumption basis over their consumption in corresponding months of the period March 2019 to February 2020. A decision for extending this package for these consumers will be taken in June 2021.
The subsidy amount will be reconciled every month on actual incremental cost/base tariff between Power Division and Finance Division. Guidelines shall be issued to Nepra for incorporation of the proposed package in the regulatory framework. After recommendation of Nepra, notification of the proposed package in the official gazette will be issued by the Power Division.
Copyright Business Recorder, 2020