$7bn IMF loan benchmark: Govt on tightrope over gas cut to CPPs from Jan

ISLAMABAD: The government is treading a tightrope for being bound by the IMF program, as one of its structural benchmark of disconnecting the captive power plants (CPPs) from gas supply and connecting the industry to grid-electricity from January 2025 has started haunting the top decision makers.

Four federal ministers put their heads together here on Thursday on how to handle the structural benchmark of the IMF program loan of $7 billion. The federal ministers of commerce and trade, petroleum and power attended a meeting chaired by Finance Minister Senator Muhammad Aurangzeb to thrash out the issue of disconnecting the CPPs from gas supply. The meeting was held at the power division, which lasted two hours. Top officials of respective ministries were also part of the meeting. The meeting was held on the directives of the prime minister to work out the way forward for the solution of the captive power plants, one of the top officials, who attended the meeting, told The News.

In the meeting, the official said, the petroleum division and commerce ministry advocated the continuation of gas supply to the captive power plants and asked the finance minister to play a role in convincing the IMF to get this structural benchmark removed from the IMF program. Only the IMF board can remove this condition, the official added.

The inter-ministerial meeting decided to seek an extension of six months from the IMF for implementing the structural benchmark of disconnecting the CPPs from gas by June 2025. During this period, the government would try to persuade the IMF to remove this benchmark. However, the government would increase the gas tariff for the industrial sector (export and non-export) on a par with the RLNG cost from January 1, 2025. The IMF had made connecting the industrial sector to grid electricity as a structural benchmark for the $7 billion program to increase the consumption of the grid electricity on the demand of the power division.

During the visit of the IMF mission during November 11-15, top officials of the petroleum division sensitised the fund officials on the issue and the head of the mission agreed to holding further discussion on this subject.

The commerce minister argued in the meeting that the plan to disconnect supplies of the CPPs would have adverse implications for exporters, as they would further lose confidence of global buyers due to a highly uncertain situation in Pakistan. The exports of industrial manufactured sectors will decline resulting in the loss of foreign exchange, employment, services and revenue to the FBR.

He said there was also a potential risk of production losses as a direct consequence of unstable electricity supply from the national grid subject to variations in respect of voltage, frequency or supply of electricity, resultantly halting the entire production process.

Musadik Malik told the finance minister that if the gas supply to the captive power plants from January 2025 is cut, the government would have to ensure the annual government budgeted subsidy of Rs100 billion to maintain gas tariff for protected gas consumers in the domestic sector at the existing rates. Otherwise, the government would have to increase their tariffs, he said.

The finance minister was told that the captive power plants were giving a cross-subsidy of Rs103 billion per annum and the industrial sector Rs47 per annum. Even if complete gas is diverted to the power sector from the CPPs, the electricity tariff can only be reduced by Rs1.8 per kWh. For minimal relief in power tariff, the gas sector would brave a loss of Rs393 billion in recovery, which will cause a surge in gas circular debt.

If 350MMCD gas from the captive power plants is diverted to the domestic sector, the system would face a huge loss in recovery. The delta of loss would not be recovered from domestic consumers, as their tariff is much lower if compared with the current gas tariff at Rs3,000 per MMBTU of the captive power plants. The captive power plants and industrial sector are, according to official sources, providing a cross-subsidy of Rs150 billion for protected domestic consumers, which is 60 per cent of total consumers.

The finance minister, according to the official, posed the question to the Petroleum minister when the IMF program was being discussed as to why didn’t the Petroleum Division oppose the benchmark of disconnecting gas supply from the captive power plants from January 2025. The petroleum minister said that at that time, the gas prices were not higher and it was thought that the gas would be consumed by other sectors of the economy if the industry is connected with grid electricity, adding the scenario has changed now. He explained the gas prices are at a higher side while the gas consumption has decreased manifold with line pack pressure all-time high at over 5 billion cubic feet in the national gas transportation network, which may burst any time.

The petroleum minister said that if this benchmark was not revoked, he would start giving gas to 2.5 million applicants seeking gas, but the delta loss would increase manifold in the gas sector. The finance minister asked the minister of power and petroleum divisions to come up with flawless data on the issue of the captive power plants to firm up the case before tabling it before the IMF.

Federal Minister for Power Awais Leghari said shifting CPPs to the national grid was necessary as per an agreement with IMF so that efficient national power plants might utilize indigenous gas which might resultantly help the government reduce electricity tariff and increase power consumption. He said the Power Division required Rs25 billion to install grid stations to connect the industrial sector, which were thriving on the CPPs and this process would take ample time, maybe more than one year.