Additional efforts urged: electricity tariffs brought closer to cost recovery: IMF Review

Electricity tariffs were brought closer to cost recovery by increasing base tariff and introducing surcharges - from Rs 8.8 in 2012-13 to Rs 11.9 in 2015-16 - an increase of 32.5 percent according to the final review of the $6.64 billion International Monetary Fund (IMF).
IMF urged the economic managers to take additional efforts to reduce accumulation of energy arrears and address the outstanding stock hovering around Rs 656 billion. The IMF staff in the Twelfth Review under the Extended Arrangement prepared for the Executive Board's meeting held on September 28, 2016, stated that widespread electricity outages, while still present, were gradually reduced through improved supply and demand management, and untargeted subsidies were lowered. The accumulation of arrears was significantly reduced (though a substantial stock of arrears still remains), helped by lower oil prices, improved performance of distribution companies (Discos), tariff rationalisation, and the introduction of surcharges. However additional efforts were needed to further reduce the accumulation of arrears and address the outstanding stock, the review adds.
Ongoing legal challenges to electricity surcharges could affect economic activity and undermine fiscal consolidation. The power sector payables arrears including PHCL were 2.2 percent of GDP in 2012-13 which increased to 2.3 percent of GDP during 2015-16. This includes arrears transferred into PHCL, and SPV (Rs 335 billion). Excluding this amount arrears at end June 2016 were at 1.2 percent of GDP (Rs 321 billion). About two-third of power sector arrears were cleared in June and August 2013 while arrears have been re-accumulated; the pace of accumulation has been substantially reduced. The plan to reduce power sector arrears was updated in July 2016 to take into account the revised strategy to privatise Discos.
The report further stated that electricity subsidies stood at 0.6 percent of GDP by 2015-16 against two percent of GDP in 2012-13. Likewise, Discos' distribution losses have reduced to 17.9 percent in 2015-16 as compared to 18.9 percent. The Penal Code and Code of Criminal Procedures were amended in January 2016 to more effectively address electricity theft. Discos collection rate has also increased from 87.2 percent in 2012-13 to 92.6 percent in 2015-16. Power outages which were nine hours in 2012-13 have reduced to one hour. However, the government claims that industry connected on industrial feeders is exempted from loadshedding whereas industrial units connected on general feeders are still facing 4-6 hours loadshedding. Discos, implementing revenue-based loadshedding, has been strengthened, supply capacity is being increased and quarterly performance targets for collection and loss reduction have been set for Discos.
Pakistan has updated, in consultation with development partners, a power sector arrears reduction plan (July 15, 2016 SB) to take into account changes in the privatization strategy for Discos, the review adds. In order to contain the accumulation of new arrears, the authorities will continue to strengthen Discos' performance by further reducing distribution losses, increasing payment collections, and continuing to set quarterly performance targets.
Furthermore, the government is seeking to revise the regulatory benchmarking for tariff determination and working to resolve outstanding issues with regional governments. In parallel, proceeds from the planned IPOs of Fesco, Iesco and Lesco will be used to reduce the stock of outstanding arrears.
The notification of the multi-year tariffs for Fesco, Iesco and Lesco was further delayed (missed July 15, 2016 SB), owing to the Discos' unresolved dispute with the regulator. Notably, Discos have requested the regulator to revise benchmark distribution losses used for the FY 2015/16 tariff determination in order to reflect higher distribution losses. Staff reiterated the importance of establishing a multi-year tariff framework in preparation for Discos' IPOs and called for the swift resolution of the ongoing litigation and, subsequently, for the resumption of regular tariff notification while underscoring the importance of preserving the independence of the regulator. The authorities indicated their commitment to move ahead with setting multi-year tariffs for Fesco, Iesco and Lesco, to be followed by the other Discos.
The IMF Staff observed that power sector reforms need to be completed to strengthen the soundness of the sector, eliminate outages, and address the system's arrears. The Staff further stated that updated arrears reduction plan is welcomed, including the authorities' commitments to further improve Discos' performance and use the proceeds of planned IPOs to reduce outstanding arrears. Resuming regular tariff notification and establishing a multi-year tariff framework for Discos will be important to ensure cost recovery, attract private investors, and strengthen the regulatory framework. In addition, continuing with the swift implementation of the business climate reform strategy will be important to foster investment and support private-sector-led growth and job creation.
Pakistani authorities have assured the Fund that the government will further strengthen the performance of power sector and resolutely address the stock of arrears. The government has also committed to move forward with Kapco divestment and finalise the transaction by March 2017 and to conduct an IPO in the capital market for Fesco by February 2017, to be followed by IPOs for Iesco and Lesco by the end of FY 2016/17. The government will utilise the IPOs' proceeds to reduce the stock of outstanding circular debt in the power sector. "In parallel, we will continue to improve Discos' performance and reduce the system financial losses," the Letter of Intent by the government states and further commits to continuing to divest its stakes in the Discos in the medium term.