First review under SBA becomes due: Ministries spurred into action

ISLAMABAD: Ministry of Finance has asked all ministries to implement all the commitments made with the International Monetary Fund (IMF) as first review under the Standby Arrangement (SBA) becomes due.

Secretary Finance, Imdadullah Bosal has written letters to all the concerned Ministries/ Divisions, reminding them of commitments made with the IMF, asking them to comply with all those pledges made with the Fund.

In a letter to Ministry of Energy, Secretary Finance has referred Finance Division’s letter of July 19, 2023, saying that first review under SBA is scheduled for November, 2023; therefore, it is critical that all commitments including structural benchmarks, quantitative criteria, indicative targets and other commitments are met as agreed with the IMF.

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According to Secretary Finance, Memorandum of Economic and Financial Policies (MEFP) agreed with the IMF provides the following indicative targets, structural benchmarks and other actions relevant to Ministry of Energy with the indicative target: ceiling on power sector payment arrears for end September 2023 was negative Rs 155 billion whereas at end December Rs 64 billion.

Structural benchmark notification of the Annual Rebasing (AR) for FY24 will take effect 1 July, 2023, which has already been met.

Other actions as stated in the letter are: (i) containing spending, especially by limiting energy subsidies, also to be reflected in the cabinet approved update of the Circular Debt Management Plan (CDMP) for FY24 by end-July 2023-primarily through notification of the annual rebasing of the power tariff for FY24 in full and with effect from July 01, 2023 as determined by National Electric Power Regulatory Authority (Nepra) in July 2023, continuation of regular tariff adjustments in line with established formulas in a timely manner, and acceleration of structural cost-reducing reforms; (ii) to ring-fence our fiscal program, it is reiterated to continue focus on critically urgent energy sector policies; (iii) our commitment not to introduce any fuel subsidy, or cross-subsidy scheme, in FY23 and beyond; (iv) key priorities, which will also feature in our updated FY24 CDMP that the cabinet is expected to adopt by end-July 2023, which are: (a) ensuring cost-recovering tariffs.

Nepra will continue with automatic notifications of regular QTAS and FPAS in line with established formulas in a timely manner, supported by efforts to spare the protected slabs (as this will help both achieve cost recovery and increase the progressivity of the tariff structure for residential consumers, as intended by the 2022 residential subsidy reform).

To this end, we will further strengthen cooperation between the Discos, Ministry of Power, and Nepra to facilitate swift petition and determination processes; (b) better targeting subsidies.

The letter said after the residential subsidy reform in 2022, we have taken, supported by the World Bank, the next step in our multi-year subsidy rationalisation plan that focuses on tube-wells for large agricultural users.

Given delays, notably related to the field survey in the provinces, we have now reached the consultative stage to devise comprehensive subsidy rationalisation program for tube-wells, keeping in view variable ground water table and enforcement density across the country, and differential spare land availability constraints.

We aim to submit a concrete reform proposal to our cabinet by end-2023, followed by a cost-realistic implementation plan by end-FY 2024.

Accelerating medium-term cost-reducing reforms: After facing some capacity-related delays, we have recently started to accelerate various programmed structural reforms with the help of the World Bank, ADB, and other donors (supported through well-prioritised and complementary conditionality in their programs) that are aimed at reducing commercial and technical losses, improving governance and PPA terms, increasing competition, as well as, reducing generation costs and greening the energy mix.

In FY24 we will continue to improve price signals for inputs. We are engaged in a series of price-setting reforms for end-user gas prices that will ultimately also help reduce power generation costs, notably by ensuring that weighted average gas prices can help channel scarce gas resources to the most efficient gas-based power generator (merit order principle).

Renegotiate remaining PPAs in return for clearing non guaranteed CPPA-G arrears. We will settle up to Rs 180 billion earmarked for IPPs and Government Power Producers (GPPs) with revised PPA terms, using the established contract structure (10-year floating-rate PIBs and 5-year Sukuks in equal parts, or more efficient financial instruments.

We will convert expensive government guaranteed PHPL debt into cheaper public debt. We have only created fiscal space to settle Rs 35 billion of the Rs 164 billion falling due in FY23 from the budget and roll over the public guarantee for the remaining Rs 129 billion.

The letter further noted that as the most critical part of managing the CD flow, we have taken measures toward improving Discos’ efficiency and governance (also supported by the new SOE law and policies). For FY23, while technical losses are expected to be reduced to 16.27 percent from 16.85 percent in FY22, collections are expected to remain at FY22 levels because of the floods.

The measures include a combination of technology, enforcement mechanisms, and introduction of private participation.

The government will pursue other reforms, most notably: (i) accelerate the green energy transition as per the 2021 National Electricity Policy (including by seeking Nepra’s approval of both the annually updated IGCEP and Transmission System Expansion Plan that meets the requirements for an increased share of variable and cheaper renewable energy in the generation mix); and (ii) seek Nepra’s approval of the updated Grid Code and Commercial Code to set the objectives, principles, rules, procedures, rights, and obligations that govern trading in the new wholesale market (expected to be launched in April 2023 – an expectation that remains unmet), and thus to improve the efficiency in distribution.

We are working on the eligibility criteria for market entities expected to be launched beforehand, as per the NEPRA Act.

As per the established principle, we (authorities) will strive to reduce capacity payments, as we pay arrears, either by renegotiating PPAs or by lengthening the duration of bank loans, depending on adequate budget space and CDMP implementation progress.

The same principle applies to the assumption of PHPL amortization by the federal budget. We will also continue to refrain from netting out cross-arrears (unless they are independently audited); using “non-cash” settlements (e.g., payables against the reimbursement of on-lent loans to Discos), and issuing government guarantees (e.g., for PHPL issued Sukuks to transfer CPPA-G payables to PHPL).

We (authorities) have asked our Auditor General to conduct special audits of several SOEs (i.e., SSGCL, HESCO, and PESCO) because of their size and importance in their sectors.

The respective line ministries are currently in the process of defining tile scope and terms of reference in consultation with all relevant stakeholders, and plan to secure the necessary approvals for commissioning the audit by end-FY24.

The sources said Ministry of Energy has met some of the indicative targets, structural benchmarks and other actions while work on remaining tasks is in progress. Ministry of Energy has also shared requisite data with Finance Division.

Copyright Business Recorder, 2023