The budgeted subsidy of Rs 220 billion for the power sector may not be adequate for the current fiscal year if no decision on rationalisation of tariff structure, improved efficiency in the system through reduced transmission and distribution losses and better fuel mix is taken as soon as possible, sources said.
A senior official of Finance Ministry said that energy policy to be unveiled by the government would determine the quantum of power sector subsidies for the current fiscal year. Power sector subsidies for last fiscal year exceeded budgetary allocation by a whopping 89 percent; and total subsidies to the power sector escalated to Rs 348 billion against the budgetary allocation of Rs 184 billion.
The official said that official numbers of last fiscal year's budget are expected to be finalised in the next two days. Sources on condition of anonymity said that the International Monetary Fund (IMF) has also raised serious concerns over doling out huge subsidies to the power sector and has urged the government to take politically challenging decisions with respect to power sector reforms to qualify for new programme under Extended Fund Facility (EFF).
Subsidy to Pepco has been allocated Rs 165 billion and Rs 55 billion to KESC. The government allocated Rs 134 billion in 2012-13 budget to Pakistan Electric Power Company (Pepco) and Rs 50 billion for Karachi Electric Supply Company (KESC), which was subsequently revised upward to Rs 264.9 billion for Pepco and Rs 84.317 billion for the KESC.
Sources in the Finance Ministry said subsidy on electricity over the medium-term is planned to be gradually phased out and targeted to the vulnerable while reliance on income support programme would be enhanced. The subsidy policy for power sector is aimed at transitioning from general subsidy regime to targeted subsidy with a gradual phasing out of overall subsidy to the power sector. The focus would therefore be on ensuring sustainable financial flow in the system through full cost recovery and curtailing losses in the system. Tariff structure would be simplified so that it is reflective of the cost of production per unit of electricity.
The rationalisation of tariff structure, improved efficiency in the system through reduced transmission and distribution losses, better fuel mix, improvement in receivables of Discos are expected to be policy initiatives to stop future build up of circular debt and minimise the need to subsidise electricity.
In reply to a question about the factors responsible for circular debt, sources said that inter-corporate debt is created on account of differential between National Electric Power Regulatory Authority (Nepra) determined and notified tariff by government, shortfall in collection of billed amounts, price differential between gas and diesel, higher losses than allowed by Nepra, late payment surcharge, and delay in recovery of fuel price adjustment. The recovery of outstanding receivables of distribution companies (Discos) is essential to clear the inter-corporate debt against the large payables of power sector.
The allocation of Rs 220 billion power sector subsidy for the current fiscal year includes: (i) Rs 150 billion subsidy to Pepco on account of inter-disco tariff differential, (ii) Rs 3 billion tariff differential for agri tube wells in Balochistan, (iii) Rs 12 billion for payment of electricity receivables from Fata, (iv) Rs 100 million on account of exchange rate differential for USAID's grants to generation companies and (v) Rs 55 billion subsidy to KESC.
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