EDITORIAL: Federal Finance Minister Shaukat Tarin, together with members of the federal economic team as well as Governor State Bank of Pakistan Dr Reza Baqir, held a virtual meeting with the Managing Director (operations) of the World Bank Axel van Trotsenburg which has a lead multilateral role in power sector reforms in Pakistan. Two reservations raised by Trotsenburg during the meeting have been previously publicly raised by the West (including the United States), and all multilaterals headed by an American, European and Japanese (the World Bank is headed by the US, the International Monetary Fund by a European and the Asian Development Bank by a Japanese). First, Pakistan must provide a level-playing field to all investment followed by noting that the Chinese power projects installed in Pakistan under the China Pakistan Economic Corridor did not conform to this criteria. Trotsenburg took this a step further and queried as to why there was no reported progress on the Chinese agreeing to the same concessions that were recently successfully negotiated with Independent Power Producers (IPPs). It is relevant to note that the IMF’s second to fifth review documents uploaded on the website this month stated that “the authorities and more than 45 private IPPs signed formal agreements on renegotiated PPA terms that will result in savings of about 1.8 percent of GDP over the next two decades of remaining life of these IPPs (inclusive of IPPs under the pre-1994/1994/2002 and renewable energy 2006 policies).” Irrespective of the fact that the first payment agreed by the authorities to the IPPs due end March 2021 remains stalled as a consequence of the ongoing investigation by National Accountability Bureau (NAB) the Fund has set a new structural benchmark of payment of 180 billion rupees by end May to IPPs. The response of the Pakistani team was to state that negotiations with China are ongoing.
In Pakistan’s defence it is relevant to note that China entered the Pakistani market under the CPEC umbrella when no other country at a government or private level was willing to engage with us.
A related solution proposed by the Pakistani team was early termination/buyout of oil-based IPPs at a discounted value of one billion dollars or else it would cost the exchequer 450 billion rupees in aggregate capacity charges over the average seven remaining years of their contracts. Disposal of 11 plants, the team pointed out, would benefit Pakistani consumers to the tune of 60 paisa per unit. And all new wind and solar IPPs would be auctioned off as a model to be installed with aggregate dispatch factor of 45-50 as opposed to 20 for solar and 30 percent for wind while following the principle of a MW added for a MW displaced to deal with excess capacity. Trotsenburg responded that he would get back to the team on this proposal as no doubt the Bank would make its own calculations.
Second, Trotsenburg urged the government to abandon all coal fired projects as they are not environment friendly. The Pakistani team thankfully did not point out that the responsibility for this policy rests with the previous administration, as had been the previous practice, but instead argued that Pakistan wishes to use indigenous instead of imported coal to run these plants (as cost per unit of electricity would be lower) and that the government is proposing conversion of already commissioned two imported coal fired IPPs and Jamshoro-1 plants under construction to Thar coal from existing blocs 1 and 2.
And finally, there was also a discussion on extending the number of phases for a rate rise. And the Pakistani team proposed (i) subsidy to those using up to 300 units per month; the World Bank is resistant to this proposal arguing that subsidy to those using up to 200 units can be justified while others must pay the actual cost; (ii) rationalizing taxes for example there is a discrepancy between sales tax billed by IPPs at 117 billion rupees while the total billed to consumers was 202 billion rupees (a discrepancy of a whopping 73 percent).
Given the constraints under which the power sector operates today there can be no immediate solutions other than those highlighted by the Pakistani team. However, for the medium to the long term the government must translate the recommendations made by (i) the Dr Waqar Masood-led subsidy cell which concluded that at present the government provides a total of 4 trillion rupees subsidy every year (4.5% of the GDP) which needs to be targeted to the poor and vulnerable; (ii) pension reforms proposed by the task force must be implemented to ensure that the government’s rising burden is shared with the pensioners as in other countries; and (iii) institutional reforms begin to be implemented as per the outcome of a task force report submitted late 2018 early 2019 though inexplicably the reforms remain stalled while its head remains a special assistant to the prime minister to this day.
Copyright Business Recorder, 2021
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