Increase in power sector subsidy: Hamstrung by grim lack of fiscal space, FD says ‘no’

ISLAMABAD: The Finance Division has reportedly refused to enhance power sector subsidy in any eventuality due to financial constraints, well-informed sources told Business Recorder.

This assertion came from the Finance Division at a recent meeting of the Economic Coordination Committee (ECC) of the Cabinet when the issue of agreements between K-Electric and Government of Pakistan came under discussion. The government has already budgeted Rs 970 billion as power sector subsidy in 2023-24 with the prior approval of International Monetary Fund (IMF) and World Bank.

The KE would submit its own generation enhancement plan to be duly approved by the Cabinet Committee on Energy (CCoE).

Power sector subsidy: Finance shows willingness to allocate Rs450bn

According to sources four pacts, cleared by the ECC, will be placed before the Federal Cabinet, in its forthcoming meeting for final approval.

On December 13, 2023, Power Division briefed the ECC that K- Electric (KE) was privatized in 2005 as an integrated utility. After privatization, Government of Pakistan continued to supply 550 MW power to KE under a PPA which expired in 2015 under a court order from SHC. After to expiry of the PPA, payables/receivables position between KE and GoP started to deteriorate because of the fact that KE stopped paying on the plea that these payments are to be settled against TDS receivables from GoP but not being paid to KE.

CCoE, in its decision of June 19, 2020, directed to finalize the Power Purchase Agreement for the supply of power to KE from the National Grid. CPPA-G /NTDC/ SSGC and K Electric negotiated various agreements but could not reach a final settlement.

K-Electric and its shareholders have also been agitating at the non-resolution of these issues at various fora. In order to resolve issues/disputes rerated to K-Electric and to improve its cash flows and to streamline the generation of electricity from its power plants, a Task Force was constituted by the then Prime Minister, with Shahid Khaqan Abbasi as its chairman and Federal Ministers for Power, Finance, Maritime Affairs, Minister of State for Petroleum and Federal Secretaries of Power, Finance, Petroleum, Chief Secretary Sindh and Additional secretary (CF) Finance Division as its members. The Task Force held a series of meetings with all relevant stakeholders from August 2022 to Jury 2023. The Task Force report was submitted to the Prime Minister on July 21, 2023 who considered the report and directed Power Division to review it and take further actions on the recommendations in accordance with relevant laws/policy, and take the matter to CCoE and ECC after addressing various aspects as highlighted by the Prime Minister’s office note of August 9, 2023 addressed to Secretary Power Division.

The Task Force decided that the reconciliation of outstanding amounts will be carried out between the parties as of June 30, 2022, based on audited financial statements of respective entities which have been duly reconciled and resultant reconciliation statements have been initialed by the parties. Draft Power Purchase Agency Agreement (PPAA) along with Master Collection Account (MCA) between CPPA-G and KE, Draft Interconnection Agreement (ICA) between NTDC & KE, and Draft Tariff Differential Subsidy Agreement (TDSA) between Government of Pakistan and KE were negotiated and initialed by the parties’. Further, on the recommendation of the Attorney General’s office a draft Mediation Agreement for the settlement of historic dues was also negotiated and initialed by all parties.

During the ECC meeting, it was noted that in the past KE was not able to add capacity as agreed, hence, power had to continuously be supplied from the national grid. Going forward KE under the agreement should manage its generation to avoid undesirable dependence. There should be a thorough future generation plan worked out with timelines, including both green field and brown field projects, and a road map to convert to cheaper fuels. The Power Division should take responsibility to certify and manage the approval of such future plans/road map and get these approved by CCoE. The forum observed that the underlying principle of these proposed agreements should be to bring cost of consumer electricity down.

The forum discussed the case threadbare. Finance Division argued that all the agreements related to ‘Electricity’ are the domain of Power Division, therefore, said agreements should be signed by the Power Division. The Chairperson invited views of the Secretary, Law and Justice Division on signing of TDS agreement, who opined that since the matter involved financial implications in the form of TDS and also involved technical expertise of Power Division, therefore, said agreement should be signed by both Power Division and Finance Division on behalf of the Government of Pakistan.

He assured that it would not set a precedence for any other agreement in future. The forum agreed that both Finance Division and Power Division would jointly sign TDS Agreement. It was further observed that subsidy for power sector was allocated in the budget. In case of any shortfall of funds therein, Finance Division should duly notify Power Division about the shortfall and accordingly CPPA-G may authorize KE to invoke Clause 6.2.4 of PPA for at source settlement of amount equivalent to the indicated shortfall by the Finance Division. The forum agreed to it. It was also pointed out that due to constraints the budgeted subsidy amount cannot be enhanced under any circumstances.

Copyright Business Recorder, 2023