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 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 resisted the audit for over 20 years.
Government sources told The Express Tribune that the Petroleum Division tried to persuade the IMF not to raise the levy rate to 20% from August this year, as punitive rates were reducing demand for both local and imported gas. The levy is the difference between the scheduled notified industrial tariffs, intended to force 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 opposes the levy, which his predecessor agreed to. The minister informed the IMF that the captive power plant (CPP) levy was causing significant losses for Sui companies, as imported gas was diverted to low-end consumers.
Sources said the IMF disagreed 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.
Due to past policy missteps, consumers are unwilling to pay high electricity prices and are shifting to other sources, primarily rooftop solar. The IMF was informed that, during the first half of this fiscal year, the Sui companies incurred Rs104 billion in losses, and collections from the CPP levy were also below 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, pushing the end price close to Rs6,000 to make gas supply punitive and discourage industry from shifting 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 only 30% efficiency. However, some plants are reported to have about 55% efficiency, with no independent verification of this claim.
Sources said the government proposed that the captive plants conduct the audit to demonstrate efficiency in gas utilisation.
In the past, captive power plants 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 sufficient time to complete the audit, but they did not utilise it. The government also requested that the IMF change the formula for calculating levy rates. It proposed that the levy be calculated as the weighted average of peak and off-peak industrial tariffs, rather than linking it to peak tariffs.
The IMF stated that it would examine the feasibility of calculating the levy rate using average tariffs, but did not provide a final decision.
The IMF has also not taken a position on the government’s proposed Rs1.5 trillion gas-sector circular debt reduction plan. The plan is built on using the dividends of oil and gas exploration companies, imposing a Rs Rs5 per litre levy on petrol and diesel, and using the savings from LNG diversions.
The shift of captive plants from gas to the power grid has increased costs for industry, particularly for export-oriented units.
The government is legally required to calculate the levy rate by considering the difference between the power tariff for 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 stems from the FBR and the government’s belated decision to subsidise petrol and diesel prices partially.
The government, on the one hand, will provide about Rs23 billion in subsidies for petrol and diesel, but, on the other hand, will charge a Rs106 per litre levy on petrol.
