The issue of rental power has become alive with the election of the new Prime Minister, Raja Pervez Ashraf. Raja Pervez Ashraf, although erroneously, is considered the main architect, godfather and beneficiary, of now defamed Rental Power scheme. The scheme began in the days of General Musharraf. Supreme Court had earlier declared the whole scheme illegal and void ab initio and ordered the authorities to take action against those involved.
Consequently contracts have been cancelled, Bank accounts of the companies frozen, and their CEOs including government functionaries of Pepco, Wapda, Gencos and even Nepra have been put on the NAB requested exit control list. Included in this limitation are former and existing ministers and secretaries as well. Raja was reportedly under the same exit control list as well. Fortunately or unfortunately, depending which side of the divide you are, arrest warrants were not issued against him ala former Health Minister Makhdoom Shahabuddin, the PM candidate, who had to be dropped because arrest warrants had been issued against him in the anti-narcotic case.
Raja has been quizzed in the case and may be subject to continuing investigation. The incentives and motivations to investigate him are now even more and may cause much political complication. Supreme Court may have an additional reason to be angry and hostile, in addition to the already existing Swiss letter case.
As the issue is expected to acquire new dimensions, it may be useful to the readers to have a perspective on it, which is the purpose of this article. It would be useful in this analysis to extract lessons from the failures of the scheme which, it is expected our policy makers would learn. Our aim is to present an objective, non-partisan and fair analysis. We will also give our opinion on the consequences of the Supreme Court judgement and offer some suggestions in this respect.
Although bulk of the Rental Power scheme was implemented in the ministerial days of Raja Pervez Ashraf, the scheme was actually conceived in the days of General Musharraf, whose cronies are among one of the earliest beneficiaries of the scheme. Originally, 14 RPPs were considered for inducting 2000 MW of generating capacity.
Later, on the advice of ADB, the programme was curtailed and only those RPPs which were contracted at the time of submission of ADB recommendations were continued with a residual capacity of 1000 MW in 8 RPPs. The scheme was widely criticised, although mostly for wrong reasons, although there were right reasons also to oppose it which we will focus on a bit later in these passages.
The main objections against RPPS were; a) RPPs are expensive; b) GoP could have spent the same amount of money in bringing the unutilised generating capacity on stream, the capacity that is unutilised due to some CAPEX requirements or on account of the Circular debt; c) There were transparency issues hinting at possible corruption; d) 14% advance payment was excessive and unnecessary.
Corruption is a common and standard practice in Pakistan and not peculiar to RPPs only. The whole energy sector including IPPS, oil and gas, etc, are run on a non-competitive and cost-plus basis where a lot of discretion is involved and thus great scope for undue benefits to those who are involved.
While government functionaries do not have high salary options and may resort to graft, private company executives are equal participants though earning impossible salaries of several million rupees a month in many cases. This is a separate issue that we would deal with in future and discuss its legitimacy and fairness or lack of it. Thus RPPs may not be rejected on this charge alone.
That rental power is expensive and unaffordable is quite contentious and relative. It may be expensive in absolute terms but may be costing lesser than the alternative. If the alternative is going without power and having riots on the streets of the type that we have witnessed in Punjab recently, perhaps rental power may be considered cheaper. It has been estimated that, everything being the same, the economy would have grown at 2% higher rate, had there not been the excruciating loadshedding of gas and electricity. Certainly IPPs are a cheaper solution, although PML (N) and Wapda lobby opposed IPPs (Hub Power) project, levelling almost the same charges against it as are being levelled against RPPs.
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RPP vs IPP costs and rate of return of RPPs (60% Plant Factor)
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RPP Name Fuel Tot RPP Tot IPP Difference* ROR
Cost) * Cost * (% p.a.)
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Techno Rental Power RFO 18.64 17.31 1.03 (7%) 17%
Project, Faisalabad
Pakistan Power Low 8.02 7.06 0.96 (13%) 3%
Resources, Guddu BTU gas
Chiao Rental RFO 18.70 17.31 1.39 (8%) -
Power Project, Sialkot
Pakistan Power RFO 18.96 17.31 1.65 (9%) 20%
Resources, Multan
Young Gen Power, RFO 15.96 17.31 (1.72) (9%) -2%
Faisalabad
Karkey Karadeiz, RFO 22.36 17.31 5.04 (29%) 61%
Karachi
Waller Power RFO 21.01 17.31 3.70 (21%) 33%
international, Karachi
Gulf Rental Power, RFO 17.82 17.31 0.51 26%
Gujranwala
Sialkot Rental Power, RFO 19.16 17.31 1.85 37%
Eminabad * (Cents kWh)
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SOURCE: ADB REPORT, TABLE 3 & 7 MERGED The question is what choices are there. If you have a decade to wait for, you can have cheaper hydro and if opponents do not oppose hydro projects as they did in case of Kalabagh dam. If you have gas and five years to wait, a gas-based IPP would give you electricity at a rate of Rs 4-5 per unit. But if you do not have cheaper gas, (and not the one the expensive one that would come almost as expensive as oil in the form of LNG or even Iran pipeline), and have to rely on RFO (oil) as is the case of RPPs which mostly run on RFO, then there is not much of a difference between the unit cost of RPPs and IPPs. If one examines the latest Nepra approved fuel charges of IPP, we find that it has varied around Rs 12-16 per unit. The culprit is high oil prices not RPPs.
The differential in fixed cost of RPPs at 4 cents per unit as opposed to 2 cents of IPPs, figures only limitedly in the context of such exorbitant RFO prices. Rentals are expensive. Anybody who has rented a car knows it too well .You should rent it only when you need it badly and for the shortest possible period. But if you do not have upfront money for outright purchase, and you cannot wait for the purchase or lease finance (which again is expensive), you will have to rent. But rent at a competitive rate and pay at the end of the day and do not extend unnecessary advances. And it is here that RPP scheme has erred in a big way.
First of all, competitive bids are invited at a uniform reference price and awards are made on the discounts offered by the bidders. This had not been done and all kinds of price differentials were allowed, equating efficient and inefficient. A stark example is of the Turkish power plant on the ship which was given a tariff of 22 cents as against an average tariff of 16-18 cents given to others. Post- bid changes were made in contract conditions which fundamentally altered commercial conditions. It has been argued by the ADB report that with sweeteners added later, better offers could have been obtained. The defendants would argue that they were in a hurry. Actually, the issue was too complicated for conventional bureaucracy, which specialises in electric wire than project management. An expert transaction consultant should have been hired to save the later complications.
The second flaw, intentional or otherwise, was of higher plant factor of 80%. Rental power is for peak demand purpose. It is not for base load. At a load factor of 20-25%, cheaper offers could have been obtained. It was well nigh impossible that the RPPs would have been called on line for 80% of the time. RFO based IPPs are not called for such a heavy utilisation, even now during such a deep crisis and shortfall. There was a time when Hubco had a load factor of less than 25%. This resulted in unnecessary costs and unduly high advances. A 14 % advance on 25% availability (load factor) would have resulted in one-third cash outlay as opposed to the present case in practice. Cash has problems. And we saw that many recipients of the advance simply sat on the money and utilised it elsewhere. Until the court order forced them, they were complacent about it.
Whether rental power was necessary or other options of improving the existing generation facilities, conservation measures such as distributing energy savers or simply paying off the circular debt, are executive judgements. Choices are not very clear. It is a normal tendency in energy planners to expand generation and they look at conservation measures with scepticism, as social issues are involved. There were questions on improvement of existing facilities as well, although I would have put my weight behind it, had I been involved. Finally, circular debt could have been paid off. But circular debt is not one time issue. It is generated every month due to the differential in cost of generation and consumer tariff. A permanent solution involves one or all of the following; increase in government subsidy (actually paid for and rather than promised), increase in tariff, reduction in T&D losses, theft and non-payment and developing cheaper local energy sources. Only fixed cost (which is 20%, about 24 billion rupees per year for 1000 MW) could have been saved, as the RFO of RPPs would have gone to the IPPs or Gencos. The recurring circular debt liability is of 200 billion Rupees annually.
Moderation in launching schemes has always been in short supply in our beloved country and undue haste and excess has been a hallmark. It pervades in bureaucracy and as well as political governments. Half-baked schemes are implemented in undue haste which actually are delayed later due to various complications that emerge due to this management style. Take the case of Yellow Cab scheme of 1980s and Tandoor scheme and the latest is Wind Power. Yellow cab was a good scheme but implemented with such excessive rate and impossible terms that it was misused and bankrupted the lending banks. Mercedes Benz were allowed in the scheme which never hit the road. Similar is the story of Tandoors and subsidised Roti of Punjab government. There are interesting memories of Roti Corporation and a garments corporation of the ZAB days in pursuit of the PPP agenda of Roti, Kapra aur Makkan. Thousands of rice mills and even ginning factories were nationalised, although the orders hastily withdrawn. Examples abound. And now such excessive tariff is being awarded to wind power that it may turn out to be another liability like rental power if not an outright scam. While wind power has become much cheaper than earlier times, in Pakistan it is being bought at such rates that it would ultimately bankrupt the power sector, accentuating the circular debt which already has acquired unmanageable dimensions. And the very latest is awarding a salary of Rs 4 million per month to a good-looking young man but an inexperienced executive to head power bureaucracy, antagonising all and sundry in the system and hoping that the incumbent will bring in some panacea. A party having socialist ideals has implemented one of the worst examples of Capitalism. Lack of moderation, thy name is GoP. Ironically, most of this is done with good intentions and enthusiasm.
Concluding, there was nothing wrong, in principle, in RPPs. What went wrong was in implementation. GoP and the Raja had a good and simple choice of implementing RPPs. It is the vested interest, reportedly some Karachi and Lahore based businessmen who perverted RPP scheme through bringing in proposals for undue concessions. Their old game is not to invest a dime of equity and earn money through bank borrowing. The simple way was to contract for fixed cost rentals and not complicating it by including fuel costs which could have been paid as it occurred as is the case in IPPs. In that case some advance rental of three months would not have been prohibitively expensive. Other irregularities have been documented by the ADB report such as collecting guarantees of lesser amount were accepted than were due. And there were some more technical and esoteric issues of the balance of risk being heavily tilted against buyer (Pepco and Gencos).
One would argue, however, if the draconian and blanket cancellation of all schemes was the only option. Could renegotiations or cancellation on a case to case basis be a better option? A tribunal should be formed which should look into the cases and expeditiously deal with the consequences of the Supreme Court decision so that frozen assets, especially of the foreign investors are released, after deduction of the liabilities. Pakistan needs foreign investment. There are already many bad examples in this respect. One of which, Reko Diq, has been detailed in my article in these pages recently.
Secondly, haunting the executives in a wholesale manner should have been avoided. These poor functionaries, save some charlatan, are always saving their jobs and lobbying for promotions, which at senior level is always done by politicians. Mistakes or bad judgements can be made. This is the cost and risk of initiative and innovation. If executives are haunted in the manner it is being done now under Supreme Court orders, our problems would multiply. Everybody would play safe which is doing nothing and pushing the files and rejecting or thwarting initiatives. I have seen that honest executives have suffered unduly under accountability campaigns. Firstly, their means are limited to absorb the shocks and expenses that are required to deal with such situations. Those who have the money and resources, either run away or escape punishment by bribing the investigators themselves. I have known a very honest senior executive of Pakistan Steel who has suffered in similar circumstances and lost his sanity (actually gone mad) and eventually died. I fear for similar casualties in rental power. My prayer is that may Almighty Allah protect the innocent.
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