A serious debate is going on in the Ministry of Finance

June 09  - 15, 2003 

The federal government is under tremendous pressure from the donor agencies to revise upward the gas and electricity tariff as has been committed by the Military Government as a part of reform agenda. The political set up is however, feel concerned about the backlash from the public.

According to the sources a serious debate is going on in the Ministry of Finance on how to minimize the impact of such off-budget measures that effect adversely the poor as well as the industry. These sources claimed that price adjustments for the energy sector were due ahead of the budget, but delayed due to political considerations. The government was required to take a firm position on the subject by mid-June 2003 to remain on track with the International Monetary Fund (IMF). The government had agreed with the Fund to follow a market-based pricing mechanism for the petroleum, gas and power sector. In the case of gas and electricity prices, the formula was not being implemented consistently, despite the establishment of the regulatory bodies.

The government has committed massive increase in power tariff in the Financial Improvement Plan (FIP) for WAPDA, submitted to the International Monetary Fund (IMF). The FIP, evisages following actions to be taken till 2004 to improve the financial position of WAPDA:

Full and timely implementation of the fuel adjustment clause and, in case of any delay, adjustment will be accounted for in the next adjustment to make up for the expected revenue shortfall.

The "automatic" fuel adjustment clause mechanism would be revised so that any reduction on account of lower fuel prices would take place only if the structural tariff is consistent with the revenue targets agreed under the FIP.

The growth of WAPDA's administrative expenses would be in line with performance improvement plan (15 per cent year-on-year) increase in administrative expenses in fiscal year 2002 over the last year essentially to accommodate revised pay scales introduced during the year and no more than 10 per cent per year during 2003 and 2004.

WAPDA would achieve the target of reduction of technical and non-technical losses by 1.5 per cent each year to reach a level 21.6 per cent by end 2004.

The volume of average receivable from all consumers would not be more than two months or 16 per cent of average billion for 2003 and 2004.

Ghazi Brotha Hydropower Project (GBHP) would be in line during 2004, starting commissioning of the first generation units from July 2003.

According to the FIP, WAPDA's projected financing gap is Rs.27.4 billion in 2002 billion, Rs.28.2 billion in 2003 and Rs.16.9 billion in 2004. The plan is based on the following assumptions:

The stock of arrears from the public sector at the end of 2002 will decline by Rs.6.5 billion with respect to the beginning of 2002.

The stock of arrears from the public sector will decline by Rs.7 billion in 2003.

Oil prices, which have a strong bearing on Independent Power Producers (IPPs) energy purchase costs, will be at the level of December 2001.

WAPDA is reported to have expressed its doubts about the implementation of FIP. The authority maintains that it could wipe out its losses without increasing the tariff provided the government reduces by 50 per cent its Petroleum Development Levy (PDL) on the purchase of furnace oil consumed by the authority for generation of electricity. It blames the high rate of taxation in the form of PDL an input cost of electricity generation for the high tariff.

The government collects almost Rs.100 billion revenues just by taxing the POL products. This includes Rs.45.6 billion PDL, 15 per cent GST and other excise and customs charges as announced by the Central Board of Revenue. In addition, there is 3.5 per cent commission charge for the oil marketing companies 4 per cent charge for the dealers commission and inland freight charges. This makes the petroleum a major revenue spinner for the state.

On every one liter of motor gasoline 87 RON, there is Rs.9.5 rupee PDL, for HOBC the rate is Rs.11.2 per liter, for kerosene Rs.3.35 per liter, for high speed diesel Rs.3.5 per liter, for light diesel oil Rs.1.2 per liter and for JP-4 the rate is Rs.3 per liter. On top of all other levies, the federal government charges 15 per cent sales tax, which helped achieve over 29 per cent growth in the GST revenues during the first three quarters of the year.

According to the Household Integrated Economic Survey (HIES) expenditures on fuel had become the third largest head on domestic consumption, after food items and housing. It cost almost 8 per cent of average monthly income, with even higher share in the low-income groups.