The government is all set to increase electricity base tariff under the agreement with International Monetary Fund (IMF) in the name of Annual Rebasing (AR) and power sector subsidies reforms, as the Fund has warned that existing increases in power tariff are insufficient to stem the accumulation of quasi-fiscal losses.

The AR of about Rs 0.66 per unit will be based on tariff petitions of power Distribution Companies (Discos) and for all categories of consumers whereas increase of Rs 0.95 per unit under the garb of Subsidy Reforms Plan will burden only unprotected consumers. Both the tariffs are with the National Electric Power Regulatory Authority (NEPRA), which will announce them at a feasible time. Lifeline consumers using up to 200 units monthly will be eligible for subsidy.

According to IMF’s Sixth Review under the Extended Arrangement under the Extended Fund Facility released on Saturday, energy sector is in a precarious state because of long-standing deficiencies. Over the past decade, they have resulted in an unsustainable stock of arrears, i.e., Circular Debt (CD) that affects the entire power-gas/petroleum chain and weighs on the financial sector, budget, and real economy. Sectoral viability eroded further during FY 2021, despite the collection of deferrals granted in FY 2020, as the authorities continued to delay regular price adjustments and grant temporary subsidies.

The Fund says that CD flow in the power sector reached 0.6 percent of GDP in FY 2021, growing to 4.8 percent of GDP at end-FY 2021.

More generally, the CD flow has remained well above the levels expected since the start of the program, mainly because of the delay in tariff adjustments, high debt costs, and operational losses by Distribution Companies (DISCOs). This includes 1.9 percent of GDP held by PHPL. Each month of delaying an adjustment of Re. 1 per kWh adds about Rs 8.5 billion to the stock of arrears.

The authorities remain guided by the CDMP to achieve an ambitious and sustained decline in the accumulation of power sector arrears.

They have followed through with their monthly monitoring scheme since spring 2021, and also updated the CDMP regarding its underlying assumptions and reform progress (in close consultation with World Bank, Asian Development Bank, and IMF staff).

The Staff stressed that the regular implementation of tariff adjustments in line with established formulas is critical to lend credibility to the newly independent energy regulator, halt the accumulation of arrears, and implement the CDMP.

The authorities noted that the delays aimed to alleviate the cost of the COVID-19 pandemic to the population, support the economic recovery, and dampen persistent inflation.

As the economy has gained momentum, they have implemented all pending tariff adjustments in two steps: (i) the FY 2020-Q4 quarterly tariff adjustment (QTA) on October 1 (end-September 2021 SB), along NEPRA’s scheduled QTAs covering FY 2021-Q1/2 in October and FY 2021-Q3 in November; and (ii) the remaining FY 2021 annual rebasing (AR) on November 5 (June 1, 2021 SB).

The FY 2022 Annual Rebasing (AR) is on track to be notified by February 2022 as per the updated CDMP, which will help contain monthly fuel price adjustments (FPA).

The authorities concur that a subsidy reform is needed to effectively protect the vulnerable, introduce more fairness, and reduce budget costs. Key elements are a smaller group of subsidized consumers and a more progressive tariff structure.

To this end, Pakistan completed some reforms in September, which however failed to reduce total net subsidies (as previously envisaged in the end-June 2021 SB).

Supported by the World Bank, the authorities will; therefore, seek cabinet approval by end-January 2022 (new end-January 2022 SB) for: (i) removing the previous slab benefit; and (ii) increasing the effective tariff of the unprotected slabs by at least PRs 0.5 per kwh.

The next step would be for NEPRA to approve the new tariff structure by end-February 2022.

The authorities remain committed to working with the World Bank and ADB to: (i) reduce commercial and technical losses (including by introducing smart metering, cutting off delinquent consumers, and scaling up the transmission and distribution infrastructure to be at par with generation capacity); (ii) improve DISCO governance and accountability, introduce private participation, and progress with their phased privatization; (iii) introduce competition; (iv) actively seek similar PPA renegotiations with other groups of power producers, including state-owned; and (v) implement the recently approved National Electricity Policy 2021.

The authorities also agreed that gradually absorbing maturing publicly-guaranteed PHPL debt into cheaper central government debt (such as the 0.1 percent of GDP through FY 2021) will strictly depend on adequate fiscal space in FY 2022 and beyond.

They also intend to use several proceeds to reduce the CD stock, including privatization proceeds from power sector assets and recoveries from the outstanding stock of receivables.

The next step would be for NEPRA to approve the new tariff structure to be approved by the Nepra by end-February 2022 includes: (i) a more stringent eligibility criterion for protected consumer slabs (based on households’ maximum usage from the previous 6-months consumption rather than the average over the previous 12 months); (ii) a lower threshold for protected consumer slabs (of 200 rather than 300 units per month, reducing the share of protected consumers from 93 to 46 percent); (iii) a breakdown of the unprotected 301-700 units slabs (into slabs of 100); and (iv) an expanded definition of lifeline consumers (also covering residential consumers with 50-100 units per month).

It will not only help restore the sector’s financial viability, but also tackle its adverse spillover on the budget, financial sector, and real economy. In this regard, steadfast implementation of the IFI supported Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable.

Substantially lowering supply costs, however, will require a modern electricity policy that: (i) ensures that PPAs do not impose a heavy burden on end consumers; (ii) tackles the poor and expensive generation mix, including wider use of renewables; and (iii) introduces more competition over the medium term.

Pakistani authorities acknowledged that they implemented the completion of the FY 2021 annual rebasing (AR) by November 5, 2021 (June 1, 2021 SB). The GoP estimates that this delay implies lost revenue of about Rs 60 billion.

Parliament adopted key amendments to the NEPRA Act in August 2021, thereby making permanent what had been temporarily enacted through a presidential ordinance in March 2021.

Most importantly, this establishes two crucial powers: (i) the regulator’s power to determine and notify quarterly tariff adjustments (QTAs) for capacity payments; and (ii) the government’s power to levy surcharges over and above the system’s revenue requirements under the NEPRA Act.

On this basis, NEPRA implemented the first two QTAs falling under this new regulation for (PRs 0.90 and -0.07 per kwh for Q1 and Q2 FY 2021, respectively) in October 2021, together with the last QTA under the old regulation (PRs 0.83 per kwh for Q4 FY 2020 (end-September 2021 SB).

Pakistan authorities acknowledged that the regular implementation of tariff adjustments in line with the established formulas for the QTAs and monthly fuel price adjustments (FPAs) is critical for the credibility of our revised CDMP. Against this backdrop, the authorities expect NEPRA to notify the next QTA (covering Q1 in FY 2021) in December 2021.

Pakistani Authorities also expressed their aim to replicate the success in renegotiating PPAs with other groups of power producers, including those owned by the government to achieve a notable reduction in capacity payments.

“We expect to follow a similar approach by first signing a MoU and then converting them into binding contractual agreements,” IMF report quoted Pakistani officials as saying.

The Authorities maintained that they are advancing plans to privatize two RLNG power plants and expect to complete the process by end-June 2022, with proceeds to be channelled to debt reduction and poverty reduction programs.

The story was originally published in Business Recorder on January 6, 2022.