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Power sector subsidy reduced by Rs250bn

May 22, 2015


Power sector subsidies were reduced to ensure $506 million disbursement from the IMF before June 30.—Reuters/File
Power sector subsidies were reduced to ensure $506 million disbursement from the IMF before June 30.—Reuters/File

ISLAMABAD: The government made on Thursday a financial adjustment of more than Rs250 billion by deciding to reduce power sector subsidies and gain additional revenue on account of lower oil price to ensure $506 million disbursement from the International Monetary Fund (IMF) before June 30.

The decisions to reduce annual subsidy for the power sector by around Rs100-125bn and block the benefit of reduced fuel price adjustment to smaller electricity consumers (around Rs15-20bn per month) were taken at a meeting of the Economic Coordination Committee (ECC) of the cabinet presided over by Finance Minister Ishaq Dar.

A power ministry official said that two separate summaries had been prepared on the desire and with active participation of the finance ministry in the follow-up of the recent successful conclusion of the seventh review of the IMF programme for Pakistan.

Take a look: Govt, IMF agree plan to end Rs600bn circular debt

Another major achievement of the government on the IMF front was approval by both houses of parliament over the past two days of a law enabling the government to collect Rs145bn through Gas Infrastructure Development Cess.

The ECC decisions would not increase electricity tariff at the outset but they would block a substantial reduction, an official said. Subsequently, the tariff will increase when international oil prices go up.

He said the National Electric Power Regulatory Authority (Nepra) had determined an average reduction of Rs2 to Rs2.80 per unit in fuel price adjustment for fiscal year 2014-15. Based on the existing subsidy level, the average consumer tariff should have been reduced by about Rs1.65 per unit but the government decided to reduce the subsidy to maintain the existing tariff. This will have a revenue impact of Rs100-125 billion.

By doing so, the government has given legal cover to a series of surcharges and special surcharges which have either been challenged or suspended by courts.

The surcharges to be made part of tariff include equalisation surcharges of Rs1.54 per unit and 24 paisa per unit, financial cost surcharge of 43 paisa per unit and Neelum-Jhelum surcharge of 10 paisa per unit (until 2016). Some of the surcharges will be kept in a tariff rationalisation fund under a special escrow account for its use for uniform power rates for all distribution companies.

“The ECC discussed a proposal submitted by the Ministry of Water and Power on tariff and subsidy rationalisation and decided that the current notified average consumer tariff rate along with its components and surcharges will be maintained so that the total average national tariff may not increase,” said a statement issued by the ministry of finance.

The government would continue to subsidise the domestic consumers using up to 300 units per month and agricultural consumers and to pass on the full cost of service as determined by Nepra, it added.

Secondly, the recent spate of reductions in tariff arising out of automatic monthly fuel price adjustment had created a cash flow problem for distribution companies. Under the existing law, the companies had charged an average of Rs9 per unit monthly fuel price last year under a pre-determined reference tariff which started going down as international oil prices fell.

Over the past five months, Nepra had determined Rs2 to 4 per unit reduction in tariff. In some cases, the tariff for consumers using less than 300 units per month fell below the fixed subsidised tariff for lifeline consumers.

An official said that last month the overall impact of fuel-based reduction in tariff amounted to Rs27bn, of which around 65 per cent went to domestic consumers below 300-unit consumption. “Based on fuel price, the monthly impact of this decision can vary between Rs15bn and Rs20bn”, he said.

The official statement said: “The ECC also considered the proposal submitted by the Ministry of Water and Power that full benefit of all negative adjustment on account of monthly fuel cost adjustments will be passed on to all consumers except those who have subsidised electricity tariff. This will ensure that the cost reduction benefits will be passed on to the consumers who are paying higher cost of electricity.”

Secretary of Water and Power Younas Dagha could not be contacted for comments despite repeated efforts. On repeated queries, a power ministry spokesman simply repeated the press release issued by the ministry of finance.

The ECC also approved a provision in renewable energy policy to allow the provinces to facilitate sponsors of renewable projects and enter into tripartite arrangements with the federal government providing sovereign guarantee.

It also approved import of additional 150,000 tons of urea fertiliser for the Kharif season and creation of a buffer stock. On April 23, the ECC had allowed import of 100,000 tons of the fertiliser.

The committee also approved a Rs5 per kg subsidy on sugar for its sale through the Utility Stores Corporation in Ramazan, instead of previously approved rate of Rs3 per kg.

Published in Dawn, May 22nd, 2015

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