ISLAMABAD - Pakistan has assured the International Monetary Fund (IMF) that it will create a dedicated police force for all power distribution companies (DISCOs) and recognize electricity theft as a cognizable offense which is necessary for improved DISCO governance and enforcement capability. Pakistan has also assured the IMF that the country will strive to reduce capacity payments as they pay arrears, either by renegotiating PPAs with a new strategy or by lengthening the duration of bank loans, depending on adequate budget space and CDMP implementation progress, IMF said in its country report on Pakistan .
The same principle applies to the assumption of PHPL amortization by the federal budget. We will also continue to refrain from netting out cross-arrears (unless they are independently audited); using “non-cash” settlements (e.g., payables against the reimbursement of on-lent loans to DISCOs); and issuing government guarantees (e.g., for PHPL-issued Sukuks to transfer CPPA-G payables to PHPL)
To improve distribution efficiencies as the most critical part of managing the CD flow, Pakistan is taking measures toward improving DISCOs’ performance, efficiency, and governance by bringing private sector participation in the form of long-term concessions arrangements as a step towards ultimate divestment or privatization, Pakistan has assured the IMF.
Towards this end, Pakistan plans initiation of work which includes engagement of a transaction advisor by end-April 2024 and the development of a transaction structure, DISCO selection, and way forward thereafter, said the report. Over the time this reform is expected to facilitate a significant reduction in the cost of distribution.
On institutionalize anti-theft procedures, IMF has been told that “Our enhanced and sustained anti-theft efforts, which have yielded Rs 46 billion from September 7 to October 31, are expected to improve collections while demonstrating our commitment to reforms in this area to potential concessionaires.
The sustainability of our anti-theft campaign requires the institutionalization of these recent initiatives. Formal approval of an anti-theft law by the legislature, including the creation of a dedicated police force for all DISCOs and the recognition of electricity theft as a cognizable offense, is necessary for improved DISCO governance and improved enforcement capability.
The country is also planning, that an independent monitoring system through officers outside the DISCOs for 2,500 high-loss feeders is required to be implemented through the Power Planning and Monitoring Company (PPMC).
Other reforms underway and communicated to the fund, include accelerating the green energy transition as per the 2021 National Electricity Policy, which mandates an increased share of variable and cheaper renewable energy in the generation mix. Progress toward this was recently made with the update of the IGCEP in 2022. As an annually updated plan, we are currently working on Integrated System Planning that includes a 2024 IGCEP to be accompanied by the first ever Transmission System Expansion Plan (TSEP). Both plans will be submitted to NEPRA for approval in April 2024; and seek NEPRA’s approval of the Commercial Code to set the procedures, rights, and obligations that govern the trading in the new wholesale market (expected to be launched in April 2024), and thus improve its efficiency.
Pakistan has also assured the IMF that the country will end the cross-subsidy to fertilizer sector in March 2024, while entirely end the subsidization of fertilizer products through gas price cross-subsidies, with any subsidies being provided by explicit on-budget subsidies from July 1, 2024.
According to the plan submitted by Pakistan to IMF for the reduction of price disparities between regions and industries, and within industries, it is noted that the plan includes gradually seeking moving toward prices provided to the fertilizer sector that are closer to cost-recovery, gas provided to a section of the fertilizer sector receives a large cross-subsidy from industry and upon expiry of the current fixed concession fee tariff agreement, the cross-subsidy will end in March 2024, said the IMF country report on Pakistan.
Similarly, Pakistan is working on equalizing rates between export and non-export industries. Pakistan will also entirely end the subsidization of fertilizer products through gas price cross-subsidies, with any subsidies being provided by explicit on-budget subsidies from July 1, 2024.
Regarding better targeting subsidies, it was informed that after the residential subsidy reform in 2022, Pakistan is taking further steps in the multi-year subsidy rationalization plan that focuses on tube wells, subsidies which primarily benefit large agricultural users. In Punjab, Sindh, and Khyber-Pakhtunkhwa provinces, the first phase of the reform will remove the government subsidy only. For this reform, the plan to seek approval from the Federal Cabinet and NEPRA on a concrete proposal by end-FY 2024, with implementation to begin in the first quarter of FY 2025. The second phase will eliminate one-third of the cross-subsidy for tube wells with implementation to begin in FY26. The country is also exploring various options to replace agriculture tube well subsidies in Baluchistan
On the reduction of incentives for captive power, the IMF was informed that the pricing structure for non-domestic consumers will continue to be refined via semi-annual notifications, including for the December 2023 determination, with the goal of directing scarce resources to more efficient assets, phasing out captive power in the near term, and transitioning captive power users to the electricity grid, in line with the Cabinet Committee on Energy decision of January 2021.
Accordingly, the prices for captive power users will be increased where network distribution and reliability are present, whereas other captive power users should make the transition to the electricity grid within twelve months, at which point prices will be increased to the RLNG-equivalent. To bring the use of captive power generation to a conclusive end by January 2025, the government will announce a plan to make the use of this generation uneconomic by end-March 2024.