Government-IPPs deal

The notice served on the government by the nine Independent Power Producers (IPPs) for invoking sovereign payment guarantees has finally forced the authorities to enter into a fresh agreement with these IPPs for the settlement of their receivables and avert the possibility of closures.
According to the revised terms and conditions, the government has agreed to pay Rs 8.5 billion by September 29, 2011 and restore Normal Daily Payments (NDPs) of about Rs 200 million, while IPPs have withdrawn sovereign guarantee notices against the government as a part of the new deal.
In addition, the government has committed to paying the remaining amount of Rs 26 billion by October 14, 2011. It was understood that, except for the aforementioned stipulations, other terms under the Power Purchase Agreements with the nine IPPs would remain intact. An official statement issued by the Ministry of Water and Power said that detailed deliberations were held with Pepco, PPIB and representatives of IPPs under the chairmanship of Minister of Water and Power to find a way out to amicably resolve the issue so that plants of the nine IPPs remain operational and GoP sovereign guarantees are not called to enforce the payment issue. Sources in the Ministry of Finance have revealed that Pepco will borrow from banks to make payment to IPPs but, according to sources in banks, they will be very reluctant to lend the necessary amount because their exposure in the power sector has already reached 30 percent of investment.
Both the government and the concerned IPPs obviously must have struck the above deal after complete assessment of their positions and a lot of introspection but the new agreement seems to have been reached because both the parties appear to be locked into a situation where there are no plausible alternatives. IPPs had taken the ultimate step of invoking government guarantees to overcome the financial crunch, which was becoming unbearable for them. Under these IPPs' notices, the government had been given 30 days until September 25 to pay about Rs 31 billion and another Rs 14 billion by next month to avoid encashment of its sovereign guarantees. In a normal situation, the government should have realised the gravity of the crisis before or on receiving the notices and taken the necessary steps to clear the dues in time with the added precaution that such a critical situation was avoided in future. However, as is the norm in Pakistan, the government reacted to the notices by arm-twisting the IPPs and stopped on September 6, 2011 even the usual daily payment of Rs 200 million to them in anger against their decision to issue sovereign guarantee notices to the GoP. This put the affected IPPs in a serious trouble as their credit limits with the banks had exhausted and they were no more able to service their debts and keep their plants operational. The government could also not afford to keep the matter pending for a longer period due to the reason that the calling of sovereign guarantees would have further dented its credibility and loss of energy due to the closure of the concerned IPPs would have harmed the economy and raised the possibility of public agitation on streets. Therefore, expediency demanded some sort of compromise to avoid an open conflict.
However, looking somewhat closely, a fresh arrangement is not a satisfactory resolution of the issue on a lasting basis but can only provide temporary relief to the stakeholders by postponing the simmering issue for another few months. The reason for such a belief is simple. Both the present and past governments have miserably failed to address the problem earnestly and have almost adopted deceptive ways to bypass the issue in one way or the other during their tenures. In fact, nobody appears to be serious in tackling the problem on a long-term basis and risk the ire of the parties likely to be affected by the necessary measures to salvage the situation.
The circular debt, for instance, is on the increase and the power sector is still faced with a financing gap of about Rs 250 billion per annum but attempts to increase electricity tariff, eliminate inefficiency, check theft and pilferage of electricity or reduce the number of employees are severely resisted and the government assumes the role of a silent spectator whenever the chief of some organisation tries to take the necessary steps to improve the financial position by resorting to the necessary punitive measures. In our view, the problem would become even uglier after the government's decision to part ways with the IMF.
There are clear signs that due to lack of fiscal space in the budget to finance the financial gap in the energy sector, the government will now find it much easier to borrow from the banks or print more currency notes to pay these IPPs and it will refrain from sensible measures to make the energy sector self-sufficient. Such an easy route would be highly risky for monetary stability and unleash inflationary pressures which would damage the prospects of the economy further and make the lives of ordinary people more miserable. Unfortunately, however, much stronger medicines would then be needed later on to control the situation and restore macroeconomic stability. We, therefore, believe that the government needs to avoid political expediency and look more seriously and honestly into the situation to make the IPPs financially viable so that they remain fully operational and do not feel the need to resort to the ultimate step of invoking government guarantees to recover their receivables in the future.