No reduction in industrial power prices

Plan for Rs2.70 per unit reduction faces pushback over cross-subsidy concerns

ISLAMABAD:

The International Monetary Fund (IMF) has not endorsed Pakistan's proposal to further reduce industrial electricity prices by Rs2.70 per unit through the complete elimination of cross-subsidies, which the sector is providing to shoulder subsidies to low-end residential consumers.

Energy ministry sources told The Express Tribune that the ministry floated the proposal to further reduce electricity prices for industries by Rs2.70 per unit. This would have provided nearly Rs37 billion relief to the industrial sector for the February-June period of this fiscal year. The annual impact had been estimated at Rs89 billion.

The proposal was shared with the IMF last week, which has objected to it on the grounds that the government should aim at overall power sector reforms. The IMF's objection was that Pakistan should not implement this proposal in isolation. The government is working on a proposal to move from a general to a targeted subsidies regime in collaboration with the IMF. The new regime may be rolled out in July this year, which would address the issue of cross-subsidies, said the sources.

"We have decided not to follow that route and work on a comprehensive proposal to bring down power tariffs for all segments," said Zafar Yab Khan, the spokesperson for the Ministry of Energy. He was requested to comment on the IMF's observations about the proposal to reduce industrial tariffs by Rs2.70 per unit.

It was the second such cut that the government wanted to extend to the industrial sector in the past seven months. But it again ignored the residential consumers who are also cross-subsidising the below 300 units/month consumers' bills.

Earlier, Prime Minister Shehbaz Sharif had announced a reduction in electricity tariffs for the industrial sector by Rs10.69 per unit to boost production and exports, according to an official announcement by the Prime Minister's Office in June last year.

Deputy Prime Minister Ishaq Dar also chaired a meeting on power tariffs for industrial consumers last week, said the sources.

Earlier, the IMF had also not given the go-ahead for a Rs4.80 per unit reduction in electricity prices for consumers by abolishing taxes. This would have provided Rs580 billion annual relief to residential consumers.

To compensate for the Rs580 billion losses, the Power Division had proposed increasing the current Petroleum Levy rate of Rs60 per litre and sacrificing the Public Sector Development Programme (PSDP), according to government sources.

The Power Division had proposed that income tax, sales tax, further tax, extra tax, electricity duty, and the television fee being charged on electricity bills be abolished. Many of these taxes are unjustified, but due to the Federal Board of Revenue (FBR)'s failure to expand the tax base, the bills are used as a tool to collect revenues.

The elimination of six types of taxes would have resulted in a Rs4.77 per unit price reduction, but it would have dented federal and provincial revenues by Rs580 billion per annum, said the sources. Out of the Rs580 billion, there was an estimated hit of Rs352 billion on the provinces. The federal government could have sustained a Rs230 billion hit, according to the sources.

The per-unit electricity cost, including all taxes and surcharges, is about Rs65 to Rs70 per unit, which has already forced consumers to shift to rooftop solar panels.

The plan states that by abolishing income tax and reducing the sales tax to the extent of only input tax adjustment claims of the power producers, the government can reduce the electricity price by Rs4.12 per unit. The annual impact of reducing and abolishing these taxes is Rs502 billion.

Under the 7th National Finance Commission award, 57.5% of federal tax collection goes to the provinces as their shares.

Then there is an extra tax carrying an annual implication of Rs64 billion. The government collects Rs62 billion in electricity duty, and its elimination would have resulted in a 51 paisa per unit reduction. There is also a Rs35 per bill PTV fee. The government collects Rs16 billion annually in PTV fees, and its elimination could have reduced electricity prices by 13 paisa per unit. There could have been a negative impact of Rs182 billion on Punjab due to the reduction in taxes, duties, and fees. Sindh would have taken an annual hit of Rs86 billion, Khyber-Pakhtunkhwa Rs54 billion, and Balochistan Rs28 billion.