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EDITORIAL: The government is attempting to address conflicting challenges of negotiating with Independent Power Producers or IPPs (1994/2002 policies) and simultaneous privatization of RLNG plants. One of these will hit a snag. And it is happening with the RLNG plants. Reportedly, two parties that had earlier shown interest have now refused to offer any bid. The lenders are also reluctant. The fear is that the negotiated terms with IPPs might be applied to these RLNG plants as well somewhere down the road if not soon. The government needs to get its act together and focus on one element at a time. If the priority is to complete privatization, negotiations with the IPPs need to be put on hold or else put the sale of the two RLNG plants on hold and sort out issues with the IPPs as it does not make sense to leave the proverbial 'Pandora's box' open, especially looking at the build-up rate of circular debt. Privatization can wait until new rules of the game are laid out. There is a need to set a template for debt restructuring and negotiate revised terms for return on equity including dollar indexation. Since almost all IPP contracts are similar in nature, once a workable solution is arrived at, the privatization process can start.

The big question for the government is where to start the process. It is imperative to look at the impact of renegotiations on the broader scheme. The government should seek stepwise resolution of the multifaceted energy circular debt issue. First is to rework the lopsided contracts of private IPPs and other power generating projects owned by government and those falling under the China Pakistan Economic Corridor (CPEC). Next, it should reconfigure the Discos by improving their management. This can be done by outright sell-off or reaching wholesale selling contracts for Discos with private sector. Third, it should develop an efficient and vibrant energy market by deploying technological solutions. Currently, the government is fixated on the first layer alone. Lack of coordination in its efforts has also made matters worse. The key problem is growing capacity payments, which are increasing with new projects coming online and is directly proportional to currency depreciation, since all existing and upcoming project payments are dollar linked. Capacity charges for newer projects are higher.

All projects have high debt to equity ratio, and the debt payments are frontloaded. For example, if a project's Power Purchase Agreement (PPA) is for 25 years, the return on equity is distributed over 25 years while the debt must be repaid in 10-12 years. Debt component of (almost all) IPP projects under 1994 and 2002 policies is already repaid. New projects conceived and developed in the last PML-N government's tenure are also coming online. Few are already operating while the rest will be operational by 2025. These projects are either owned by the government or fall under CPEC. The key is to restructure debt of all projects to achieve any meaningful gain. For instance, as per industry estimates, capacity payments for government- owned projects are close to Rs528 billion, CPEC projects at Rs191 billion, and IPPs of 1994/2002 at Rs134 billion. These figures shall grow to Rs860 billion and Rs361 billion by 2025 for government and CPEC projects, respectively. In case of 1994/02 IPPs, these shall reduce to Rs109 billion. These numbers are assumed at last year's average PKR/USD parity, and will grow further with currency depreciation.

The proof of the pudding is in the eating. Major gains will accrue on lowering per unit tariff from restructuring debt of government projects and those under CPEC. However, since international lenders are involved in many projects, it will not be an easy task to restructure these debts. In case of two RLNG projects (Haveli Bahadur Shah and Balloki) that are slated for privatization, the main debtors are government-owned and -managed domestic banks - National Bank of Pakistan and Bank of Punjab. It is relatively less complicated to restructure debt with these two banks and make changes in ROE (return on equity) by removing dollar indexation, and shift to take and pay from existing take or pay contracts.

Since all project contracts are of similar nature, the government can make a template of these two RLNG plants and apply it to other government owned projects. The PM may request his Chinese counterpart for assistance in this respect. Meanwhile, the government should approach the Qatari government to renegotiate long-term take or pay contract for RLNG. This will take its sweet time. There is no point of keeping RLNG projects on the privatization list for so long. The government should forego the budgeted privatization proceeds of Rs100 billion this year and focus on long-term gains instead.

Copyright Business Recorder, 2020