ISLAMABAD: Ministry of Finance (MoF) has reportedly expressed its inability to extend subsidy of Rs 350 billion to Industrial Support Package (ISP) for Discos and KE for three years, arguing that international commitments do not allow such concessions, well-informed sources in Power Division told Business Recorder.
Prime Minister's Advisor on Finance, Dr. Hafeez Shaikh, met Prime Minister Imran Khan on October 26, 2020 after an Economic Coordination Committee (ECC) meeting where the summary of industrial support package was discussed.
Secretary Finance, Naveed Kamran Baloch, who has been nominated Executive Director for the World Bank, clearly conveyed to the ECC that international commitments such as agreements with the International Monetary Fund (IMF) and World Bank are not supportive of such incentives.
On October 21, 2020, a high-level meeting presided over by Prime Minister Imran Khan had approved electricity rates of Rs 8 per unit for industrial sector on incremental consumption but the ECC did not approve it. The amount of subsidy for Discos will be Rs 229 billion whereas KE's share will be of Rs 120 billion.
Power Division has already suggested that the government increase power tariff by Rs 6 per unit to bring it at par with cost of generation, which is one of the key demands of international financial institutions.
The approval of industrial support package without taking international financial institutions on board in the middle of talks with the IMF for resumption of the Extended Fund Facility programme, will send negative signals, the sources added.
The source said Power Division informed the ECC that in recent months, various factors including COVID-19 and slow industrial growth resulted in reduced electricity demand. The average energy demand decreased by approximately 1.05% at generation level in FY 2019-20 from FY 2018-19. There was a significant amount of idle generation capacity in the system for which the system has to pay capacity charges under the contractual and regulatory requirements. Moreover, efficient committed generation fleet of local coal, hydel, RLNG and nuclear shall be added to the system by FY 2023. In order to evaluate the modalities for reviving the industrial growth and utilize efficient generation capacity on sustainable grounds, the Prime Minister chaired a meeting on 21st October 2020 on the agenda of Industrial Support Package (ISP) for power sector.
During the meeting, the proposal for sale of electricity to all industrial connections at Rs 8/unit on additional consumption for next three years was approved. The proposed price of Rs 8/kWh was based on a subsidy of Rs 4.96 per unit to be budgeted and provided to keep the impact of circular debt neutral. The presentation suggested that accelerated incremental growth in the industrial sector can be achieved through predictable, certain and subsidized pricing mechanisms.
Benefits to the economy as a result of increased electricity consumption in LSM and SME sectors were also presented. Power Division had previously carried an analysis on the marginal cost of electricity generation and a proposal for the provision of incremental off-peak power at marginal cost. This proposal was based on the principle of no subsidy and was also circular debt neutral. It was also directed that the current system of peak and off peak tariffs should be discontinued considering surplus power available. Elimination of peak and off peak rates will increase the average rates of base consumption of industrial consumers from Rs. 15.90 kWh (off-peak) to Rs 16.87 kWh. Further, the generation constraints in the summer 2021 do not allow elimination of this price signal. In addition to the above, the price elasticity of incremental demand is also not known ex-ante and may increase the overall incremental marginal cost and affect power balance of the system.
The sources said the support package for industrial and captive consumers (excluding K-Electric Consumers) will be for three years i.e. from November 2020 till October 2023. The following options are submitted for consideration of the ECC: (i) incremental rate of Rs 12.96 /kWh may be charged to all industrial consumer categories, excluding zero-rated industrial consumers, on the incremental consumption over their respective historical consumption or established benchmark for a period of three years i.e. from November 2020 till October 2023; (The proposal is subsidy neutral); (ii) OR incremental rate of Rs 8.00 /kWh may be charged to all industrial consumer categories, excluding zero-rated industrial consumers, on the incremental consumption over their respective historical consumption, or established benchmark for a period of three years i.e. from November 2020 till October 2023. The estimated subsidy requirement for this option is approx. Rs 243 billion for three years. The corresponding subsidy shall be budgeted by the Ministry of Finance and released on actual sales under this package on a monthly basis to Power Division.
The sources said Dr. Hafeez Shaikh observed that the proposal relating to the supply of power at lower prices to the industrial sector excluding K-Electric and zero-rated industries was 'indeed a good initiative. However, authentic analysis was required in terms of expected benefits.
The Finance Secretary while endorsing the point of view, clarified that huge subsidy shall be involved in case of providing electricity @ Rs 8.00 /kWh to the industrial sector. Moreover, international conditionalities also had to be taken into account.
The Deputy Chairman Planning Commission stated that Karachi being the biggest city of the country was ignored in the proposed package. Therefore, the Chairman ECC argued that there was a need to revise the proposal after carefully analyzing the financial impact involved, international conditionalities, package for Karachi and the conditions on which the foreign exchange could be available.
Copyright Business Recorder, 2020