The World Bank has offered financial assistance and risk guarantee for investor comfort in a bid to encourage private sector participation in the management of ailing power distribution companies (DISCOs).
As efforts are underway to hand over management control of DISCOs to the private sector, the Power Division has drawn up an innovative plan to reduce circular debt in the energy chain. The division intends to appoint the International Finance Corporation (IFC), an arm of the World Bank, as transaction adviser for handing over management control of DISCOs to private investors.
According to the sources, the division has circulated a summary for its presentation to the Cabinet Committee on Energy (CCOE) for approval. In the summary, it has called for removing all DISCOs from the government’s privatisation list and picking Hyderabad Electric Supply Company (Hesco) and Gujranwala Electric Power Company (Gepco) for first transactions to hand over management control.
It has also advocated the need for setting up a ministerial steering committee and a technical working group.
Power Division officials were of the view that the process would be completed in collaboration with the Public Private Partnership Authority.
The energy ministry has outlined an action plan containing timelines and responsibilities for the transactions, the process for which will begin immediately after approval of the cabinet. Sources believe that the entire process may take six months.
In a recent meeting, the minister of privatisation pointed out that the matter fell within the domain of the Cabinet Committee on Privatisation and objected to its presentation to the CCOE.
Secretaries of the cabinet, power and the Privatisation Commission were directed to expedite work on the proposal.
Sources revealed that the Ministry of Energy (Power Division) had also chalked out an innovative plan for reducing the circular debt. As on November 30, 2023, the power sector circular debt stood at Rs2,703 billion while the petroleum sector’s debt reached Rs3,022 billion.
Under the proposed plan, the Power Division said the circular debt would be restricted to only the public sector companies with a neutral budget and zero leakages.
It envisaged total debt settlement of Rs1,268 billion and an increase of Rs25 billion in the Federal Board of Revenue’s (FBR) tax receipts.
Read 20-year licences issued to seven DISCOs
It proposed that late payment surcharge of Rs133 billion should be settled and adjusted in books of public sector companies. However, the settlement will require some financing.
It requires prior clearance of the plan from the International Monetary Fund (IMF), Ministry of Finance and board of directors of public sector companies. Final approval will be sought from the cabinet.
Sources said that the minister of energy would consult with the minister of finance for an agreement on viability of the plan.
Meanwhile, officials emphasised that the current energy tariff design may lead to economic meltdown in the country.
The Power Division has prepared a tariff rationalisation plan as there is mismatch between the cost and revenue structures. In the tariff, 72% of the cost is fixed whereas in the case of revenue, only 2% is fixed.
Around 98% of domestic consumers are getting a subsidy of Rs631 billion while a subsidy of Rs158 billion and other costs are being borne by the industrial and commercial consumers.
It was noted that as compared to regional peers, Pakistan offered uncompetitive industrial rates and had very low fixed revenue. No fixed cost had been imposed on the residential category and it was very low on other categories. Moreover, electricity rates for the industry were high when compared with regional competitors.
Officials said that the finance minister had been asked to lead deliberations by taking all stakeholders on board and finalise a revised tariff design. Subsequently, the Power Division will send a summary to the Economic Coordination Committee (ECC) for its consideration.
Published in The Express Tribune, January 19th, 2024.
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