IMF rejects relief on CPPs gas levy

The International Monetary Fund (IMF) has rejected Pakistan's requests to freeze the 15% additional gas levy on industry's in-house power plants and to exempt efficient plants from the imposition of the levy.

The government had offered the IMF that only those industries should be exempted from the levy that will undergo the gas-use efficiency audit. These industries had been resisting the audit for the past over 20 years.

Government sources told The Express Tribune that the Petroleum Division tried hard to convince the IMF not to increase the levy rate to 20% from August this year, as the punitive rates were causing a reduction in the demand for local and imported gas. The levy is the difference over the scheduled notified industrial tariffs aimed at forcing industries to stop using gas to generate in-house electricity and shift to the highly expensive and unaffordable national power grid.

Petroleum Minister Ali Pervaiz Malik made multiple attempts to convince the IMF during the past two weeks as part of the third review talks. Malik is against the imposition of the levy, which had been agreed to by his predecessor. The minister apprised the IMF that the captive power plants (CPPs) levy was causing huge losses to the Sui companies, as the imported gas was diverted to low-end consumers.

Sources said the IMF did not agree with the government's stance. The global lender was of the view that the Sui companies' losses were because of long-term Liquefied Natural Gas (LNG) contracts. Another reason for the revenue losses was that the power sector was not picking the agreed quantity of imported gas due to low electricity demand.

Because of the wrong policies of the past, consumers are not willing to buy highly expensive electricity and are shifting to other sources, mainly electricity produced through rooftop solar panels. The IMF was informed that during the first half of this fiscal year, the Sui companies sustained Rs104 billion in losses and the collection on account of the CPP levy was also lower than estimates.

But these arguments could not convince the IMF to keep the levy rate at its current level. The government is legally bound to increase the grid levy, taking the end-price close to Rs6,000 to make gas supply punitive for the industry to shift to the national power grid. Prices may further skyrocket due to supply shortages caused by the US's illegal war against Iran.

Sources said the IMF observed that the captive power plants levy should be seen as a punitive tool to discourage the use of gas in these inefficient in-house plants.

There had been criticism in the past for providing expensive gas to less efficient captive power plants with mere 30% efficiency. However, some plants are said to have about 55% efficiency, but there was no independent verification of this claim.

Sources said the government offered that the captive plants would undertake the audit to prove efficiency in gas utilisation.

In the past, the captive power plants had obtained stay orders from courts against decisions of the Economic Coordination Committee of the Cabinet and the Cabinet Committee on Energy requiring them to undergo a third-party audit.

Sources said the IMF also noted that these factories had enough time to undergo the audit, which they did not utilise. The government also requested the IMF to change the formula for the calculation of the levy rates. It proposed that the levy should be calculated through the weighted average of peak and off-peak industrial tariffs instead of linking it with peak tariffs.

The IMF assured that it would examine the possibility of calculating the levy rate with average tariffs, but it did not give its final word.

The IMF has also not given its position on the government's Rs1.5 trillion proposed gas sector circular debt reduction plan. The plan is built on using the dividends of oil and gas exploration companies, imposing a Rs5 per litre petrol and diesel levy, and using the savings from LNG diversions.

The shifting of captive plants from gas to the power grid has increased the cost for industry, particularly for export-oriented units.

The government is bound by law to calculate the levy rate by taking into account the difference between the power tariff of the industrial B3 category notified by Nepra and the self-power generation cost of CPPs at the gas tariff notified by Ogra. It is not the first time that the government has tried to resist the levy after committing to the IMF. In March last year, the government agreed to increase the rate as per the law only after the IMF withheld the staff-level agreement.

The staff-level agreement is again delayed, but this time the disagreement is due to the FBR and the government's afterthought to partially subsidise petrol and diesel prices.

The government, on the one hand, will give about Rs23 billion in subsidy on petrol and diesel but, on the other hand, is charging Rs106 per litre levy on petrol.