The conditions the government met also included giving an application to the power sector regulator for determining multi-year electricity tariffs to make power distribution companies attractive for privatisation and submitting the Energy Efficiency and Conservation Bill to parliament.
The World Bank’s board of directors has approved $500 million worth of budgetary support for energy sector reforms in Pakistan, a brief statement issued by the finance ministry said.
The loan will be utilised for budget financing, unlike project loans that are used for creating assets. In recent years, successive governments have preferred to tap budgetary support to finance the budget, which is creating a debt sustainability issue for the country.
The Washington-based lender approved the loan after a delay of about ten months, as the PML-N government could not implement all conditions in time. The loan was originally scheduled to be approved in April this year.
WB’s credibility as an independent development institution suffered a blow over the last few years and it now wants to prove itself as a reformer of rather than an extension of Pakistan’s finance ministry, sources privy to the discussions said.
WB’s approval will also pave the way for the sanctioning of a $400 million loan by the Asian Development Bank next week and a $50 million grant by Japan.
The loan is expected to be disbursed next week. It will also help increase WB’s contributions in the current fiscal year, which stand at only $54 million or 3% of annual estimates. Pakistan has projected receiving $1.8 billion from the WB during the current fiscal year 2015-16. With the fresh loan, the foreign currency reserves held by State Bank of Pakistan will cross $15 billion.
So far, the government has been facing problems in getting concessionary loans from its traditional development partners and has started relying on expensive sources of funding. From July through September, the government received $1.7 billion in foreign economic assistance and out of that $1.05 billion was on account of expensive commercial borrowings. These include $263.5 million from Noor Bank Dubai and the $500 million Eurobond.
To qualify for the loan, the government fulfilled over half a dozen conditions, the most important of which was setting up the Central Power Purchasing Agency (CPPA) Guarantee Limited. In the first phase, the CPPA will buy electricity from the producers and sell it to the power distribution companies. It will also be responsible for billing, settlement and payments of claims aimed at bringing transparency in the system.
Both the World Bank and Asian Development Bank believe that the financial viability of the power sector cannot be ensured without paying the full cost of power to its producers. Power sector circular debt currently stands at Rs661 billion.
In the second phase, the CPPA-G will buy electricity and sell it to multiple sources including bulk consumers. This phase is under implementation and will be completed by end of 2017, a power ministry official said.
In the last phase, which will be implemented by 2020, a wholesale power market will be set up in the country. According to another condition, the government has submitted tariff petitions to the National Electric Power Regulatory Authority for multi-year power tariff determination. The purpose is to make Faisalabad, Lahore and Islamabad power distribution companies attractive for privatisation. FESCO is planned to be privatised by June 2016.
The government also submitted the Energy Efficiency and Conservation Bill to parliament, which is aimed at setting energy standards for consumer electric goods. According to another condition, the government has started making progress reports of the power sector public on quarterly basis.