Benchmark: ADB to earmark $2 billion loan for energy sector

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Pakistan will be required to take hard decisions aimed at increasing power tariffs, reducing line losses and shifting the energy mix. PHOTO: STOCK IMAGE

ISLAMABAD: Despite raising concerns about the lack of transparency in payments made to IPPs to decrease the circular debt, the Asian Development Bank is planning to offer $2.1 billion in loans for the country’s ailing energy sector.

 

The investment, planned under the new Country Partnership Strategy (CPS) 2015-19 estimated at $5.1 billion, is expected to be effective from early next year, with 41% of the financing focusing in the energy sector alone, according to finance ministry officials.

With the country facing debilitating energy infrastructure, the new investment will be allocated for transmission, distribution, grid connectivity, hydropower generation and import of gas, according to the draft CPS.

However, Pakistan will be required to take hard decisions aimed at increasing power tariffs, reducing line losses and shifting the energy mix. These conditions to funding are being described as in line with the government’s 2013 National Power Policy.

The multilateral lender hopes that the over $2 billion investment in the power sector in the next three years will allow the government to withdraw electricity subsidies. It is also discussing the condition of reducing line losses and bringing them in line with the benchmark approved by National Electric Power Regulatory Authority (Nepra), according to the draft CPS.

The strategy and the government’s power policy are also aimed at achieving zero load-shedding by 2018, a goal that seems overambitious.

Lack of transparency

While the ADB paints a rosy picture of the country’s power sector five years down the line, it has also highlighted the grave situation faced by the energy sector. The draft document of the CPS states that the private participation in the energy sector has been curtailed because of “chronic concerns about payment to power suppliers, unclear investment policies and lack of transparent payment practices”.

It is the first time that an international lender has highlighted the issue of lack of transparent payment practices in a policy document.

“There were concerns raised on the payments to the IPPs (Independent Power Producers) not being based on merit,” according to the draft CPS. The draft document did not elaborate who raised these concerns.

The issue of favouritism in power payments shot into the limelight in June last year when the government cleared Rs480 billion circular debt. There were allegations that the government made out of turn and excessive payments to a Lahore-based industrialist due to his close proximity with the ruling party.

In its draft document, the ADB said that the Central Power Purchasing Agency (CPPA) was to provide a transparent payment settlement system. It added lack of transparency in the operation and payment mechanisms has made it difficult to hold public sector companies accountable for their performance.

The ADB observed that careful policy actions and full implementation of difficult decisions are needed for changing the country’s ailing energy sector.

“Since the system lacks funds to pay for the power generated, power suppliers are uncertain about the priority and timing of payment”, according to the draft CPS. The ADB cautioned that the implementation of the under discussion strategy is vulnerable to the risks, which could also lead to the IMF programme go off the track.

The ADB plans to keep the energy as its key priority area in the new CPS. Currently, the ADB has an active portfolio of 19 projects involving $4.5 billion financing. Energy and infrastructure remained the key priority areas of the ADB in 2009-13.

Source: The Express Tribune