The International Monetary Fund (IMF)’s much-awaited First Review report was made public last week, and the details must have been a big sigh of relief for many. Remember that the next IMF tranche will be accessible in mid-March 2024 – when (hopefully) the newly formed government will have settled in the office. Better still, the majority of the benchmarks and conditions to access the last tranche of the ongoing SBA, pertain to end-December 2023 cut-off – most of which stand already met.
That said, the one new Structural Benchmark (SB) that stands between now and the third tranche is the notification for Ogra’s semiannual gas price adjustment, by February 15, 2024. The new SB talks about automatic notification of semiannual gas price determinations within 40 days of the regulator’s determination, as per the amended Ogra Ordinance. The report mentions December determination by Ogra numerous times. The only problem is that there has not been a determination on the Sui companies’ revised petitions for FY24 estimated revenue requirements.
Of course, the revised price notification is still a possibility, as the 40-day period is the maximum allowed limit. But for that to happen, the regulator’s determination has to be made first, and there is every chance the SB deadline will be missed, which could potentially delay the second review and subsequent disbursement of last tranche.
Be that as it may, the gas sector reform as laid out in the IMF report sounds very promising and could be the answer to the woes that have resulted in the sector’s arrears surpassing that of the electricity sector. The reform process is planned to be carried out in close consultation with the World Bank, but the onus of implementation will remain on authorities, from implementing timely tariff notifications to fighting different lobbies in the next phase of eliminating cross subsidies.
The most important aspect of the reform process is the planned phasing out of captive power usage. Implementation will remain the most critical aspect, as this was first approved by the Cabinet Committee on Energy back in January 2021. Use of natural gas for captive power generation has ballooned in the past few years –the share of captive power generation for both state-owned distribution companies surpassed that of general industries.
The plan is to make captive power generation piped on natural gas uneconomical, allowing transition time to those not connected with the grid. After 12 months, the price of gas for captive generation will be equivalent to that of LNG. The plan to completely eliminate the use of captive power generation by January 2025 is slated for March 2024. The plan sounds music to the ears, if only it finds willingness to be implemented.
Another critical reform laid out is that in the fertilizer sector – that could be even more difficult to implement for a variety of reasons. The subsidization of fertilizer products through gas price cross-subsidy is scheduled to end beginning July 2024, and any subsidy will be provided explicitly in the budget. This is a massive step in the right direction – but can it be taken is the big question.
Another area of critical importance is adopting the weighted average pricing model for indigenous and imported LNG. Mind you, the bill that allows weighted average pricing is already in the filed for nearly two years, but the relevant ministry has not been able to formulate guidelines to implement the same. If implemented, full cost recovery will go a long way in addressing the ever-increasing gas sector arrears. All in all, the program looks promising, but one that could face many a hurdle on the implementation course.
Comments
Comments are closed.