Energy sector mismanagement and the RPPs

Rental power projects (RPPs) have once again resurfaced as a heatedly debated topic in this country in spite of the matter being sub judice. The original protagonists namely Faisal Saleh Hayat, the current Federal Minister for Housing and Works, and Raja Parvez Ashraf, the former Federal Minister for Water and Power, are adamantly persevering with their original arguments during the hearing in the Supreme Court and thereby making a mockery of the coalition between the PPP and the PML (Q).
This is not the first time that a coalition partner has gone to court against a PPP loyalist. The Hajj scandal where the JUI (F) minister provided evidence against the PPP's Religious Affairs Minister in court led to the summary dismissal of both from the Cabinet. Discipline of the Cabinet was being compromised, so sanctimoniously stated the Prime Minister, as he dismissed the two. However, analysts maintain that the same treatment is unlikely to be meted out to Faisal Saleh Hayat, (the government reportedly put pressure on Hayat's party leader Chaudhry Shujaat Hussain to compel Hayat to withdraw but with little success so far) for an obvious reason: the different strength of the JUI (F) versus the PML (Q) in parliament today, and with the Senate elections in March, the PPP's strategy is to keep coalition partners with greater representation in the country's parliament on board, in spite of all odds, including keeping those who violate the cabinet's discipline as well as those with other significant ideological differences (termed as blackmail by many an old PPP supporter).
The government is underplaying two rather disturbing facts. First and foremost, the two accused namely the former Minister for Religious Affairs and the former Minister for Water and Power are both PPP loyalists. And secondly, the Supreme Court has repeatedly observed that efforts are afoot to stall the investigation process against ministers through entities controlled by President Zardari's loyalists namely Rehman Malik and his Federal Investigation Agency and National Accountability Bureau under the jurisdiction of the Law Ministry, which Babar Awan allegedly continues to guide through his brother, who is an Advisor in the Ministry even though Chandio is the Minister.
The case of the RPPs is unique in our history. It is not unique in terms of (i) the government violating the public procurement rules by changing the goalpost midway during the tender process (instead of restarting the process to ensure transparency); (ii) or balance risk sharing as the agreement allowed the RPPs to be paid for optimum capacity even during times when it was operating at well below capacity as in the case of Karkey, which has produced as low as one-fifth of capacity due to the failure of the government to provide gas but has been paid for producing at optimum capacity, (iii) or obtaining the required approval from Nepra and instead applying for approval after signing the contract thus raising further questions of transparency; or (iv) in terms of not referring to import policy order provisions on used/second-hand power plants in the proposal or the rental agreement. What was unique about the RPPs was the Cabinet's agreement to allow third party audit of the contracts, an approval whose credit, all are agreed, belongs to former Finance Minister Shaukat Tarin.
The audit findings were damning for the government in three major aspects: (i) the report argued that over 2,000 MW of electricity could have been utilised from within the existing system through full-capacity utilisation (of 997 MW closed plants), which would require the elimination of the large intractable to this day inter-circular debt and energy conservation measures (1,300 MW); (ii) rental tariff of 11 of the 14 contracted RPPs ranged between 18 and 22.24 cents per unit, and one each of 15.60 cents, 9.5 cents and 8.5 cents per unit. The last three RPPs were based on gas and the others on furnace oil and hence price could fluctuate with international oil prices. In this instance, the report correctly argued that to expect bidders to arrange for gas whose allocation is controlled and regulated by the government restricts competition. "If gas was available, it should have been transparently included in invitations under the bidding"; and (iii) with a 14 percent down payment and limited bank guarantee, the possibility of the RPP sponsor abandoning the project was considered high. The sponsor of RPPs with five-year contracts would recover his investment in three years and still own the government part of the down payment. The seller could thus abandon the project rather than face penalties and the rental plant would not offer any collateral. Overall, the third party audit maintains that 'rental service agreements are weak in their legal structure, do not balance the risk sharing between the seller and the buyer and have many inconsistencies'.
The matter of the RPPs is in the courts now and it is hoped that exemplary punishment will be meted out to those found guilty. Critics however argue that this is unlikely given that the cabinet, consisting of PPP, ANP, MQM as well as JUI (F) members, collectively endorsed the projects, or at least the eight RPPs subsequent to the third party audit which argued that those contracts that had reached an advanced stage of approval be carried out for legal reasons. The fact that the cabinet at that time did not include Faisal Saleh Hayat who had already begun a successful public awareness campaign against the alleged implicit corruption in the award of RPP contracts is acknowledged as a reason why the case against the government is so strong.
The other side of the energy mismanagement scenario is attributed to factors that reflect lack of political commitment as opposed to deliberate mismanagement that many define as corruption and can be tackled immediately: (i) failure to formulate an integrated energy policy, possible through establishment of one energy ministry, which must focus on not only ensuring that prices be based on the thermal unit output of all fuels (furnace oil, hydel or gas) but also the current energy mix with the high reliance on the expensive furnace oil be revisited; (ii) reducing the transmission and distribution losses which have continued to be the highest in this region; (iii) eliminate inter-circular debt; and (iv) reduce subsidies to the energy sector and compel the non-payers (government and private entities) to pay their bills to ensure full cost recovery rather than relying exclusively on increasing tariffs.
Neither of these recommendations have begun to be implemented other than a periodic increase in tariffs coupled with a rise in number of hours of loadshedding which has led to violent riots in major cities. Politically this option may become increasingly difficult to continue. The high powered committee established by the Prime Minister under the chairmanship of the Finance Minister which had access to detailed power sector reforms proposed by the US and multilateral agencies appeared to be simply a means to gain some more time. But time is a luxury that the government may not have, given the ongoing deliberations in the Supreme Court and the fact that the patience of the bill paying consumers of this country is unlikely to stretch beyond three and a half years. However, given the present government's penchant for ignoring public discontent till it spills into violence on the streets and foot dragging in implementing the court verdicts it is unclear how long the energy sector will continue to be mismanaged.