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ISLAMABAD: Independent Power Producers (IPPs) and government's team are said to have completed four rounds of talks but "crucial things" are yet to be tabled and agreed between the parties, well-informed sources told Business Recorder.

The newly-constituted committee representing the government is headed by Chairman Federal Land Commission Babar Yaqoob Fateh Muhammad and comprises an officer of Power Division not below a Joint Secretary, Muhammad Ali, former Chairman, Securities and Exchange Commission of Pakistan and Barrister Qasim Wadood. However, now a senior officer of an intelligence agency, who played a vital role in settlement of dispute with Turkish power firm M/s Karkey, has also been included in the committee.

On July, 28, 2020, the federal cabinet formally decided to dissolve Inquiry Committee constituted under Special Assistant to the Prime Minister on Power Division and Coordination of Marketing & Development of Mineral Resources.

"There is advancement in talks between the parties but nothing is final so far. We either cannot say that the committee has failed," the sources said, adding that no one has tabled the figure of Rs700 billion.

The committee headed by Muhammad Ali, former Chairman SECP had recommended recovery of Rs 100 billion from IPPs after its findings that Pakistan's entire budget is "swallowed" by the IPPs, as per one of the participants.

"The committee is neither fully successful nor unsuccessful," said another source who is closely monitoring the outcome of each round.

The new committee is engaged with various IPPs to negotiate the amounts, rationale and mechanism of "excess" payments of the past under specific heads, systemic oversights highlighted in the report, reduction of interest rate payments on debt and other components, extension of debt tenor etc, and agree on changes required to ensure avoidance of these payments in the future.

The committee is negotiating on a claw back mechanism for sharing efficiency and other gains and savings in the future between power purchaser and IPPs. These may be subject to verification of various costs, implementation of cost accounting order, heat rate verification of various costs, implementation of cost accounting order, audit, etc. as the Negotiation Committee may deem appropriate.

"We think consensus will be evolved on the agreement by the end of current month," the sources continued.

However, it is still unclear, how much time, the government takes to finalise agreements with different IPPs as this would also require amendments in Power Purchase Agreements (PPAs).

IPPs argue that the main issue is related to new plants and Discos. The committee's negotiation should focus on capacity payments of new IPPs and action by Discos can reduce power tariff by Rs 3-4 per unit while the old plants are near the end of their agreement period and cannot contribute substantially to a tariff reduction.

With fifty percent reduction in Libor plus and increase in tenor of project from 10 years to 25 years, a relief of Rs 1.50 or Rs 2 can be made. The government can save up to 400 million dollars. The plants established under power policies of 1994 and 2002 can only contribute 10 paisa per unit relief to the government, they added.

The committee is urging IPPs to shift from take or pay to take and pay contract terms and indexation from USD to PKR.

The committee is also asking the IPPs to change their rate of return on investment and Internal Rate of Return (IRR) from USD to PKR basis without any USD indexation; and shifting from take or pay contract terms to take and pay contract terms.

"The committee is urging IPPs to share excess amounts, if any, on heat rate and O&M," the sources continued.

In circular debt of Rs 2.23 trillion, the share of over dues of IPPs is around Rs 300-350 billion.

Some insiders are of the view that the government wants to complete the task prior to August 18, 2020 so that it can publicly announce that it has successfully reduced tariffs and recovered amounts from the IPPs.

However, IPPs are of the view that the ultimate decisions are to be taken by their respective shareholders, which are sitting in different countries.

"Serious discussion is underway between the committee and IPPs on a proposal that foreign shareholders should be given profits in dollars but return on investment to local shareholders be given in rupees," the sources continued.

At the same time, foreign shareholders are being asked to slash their profits in dollar terms.

The committee will document the understanding reached with IPPs towards achieving the objectives of these ToRs and recommend IPPs be considered either for retirement or for detailed forensic audit.

IPPs are resisting any retrospective application of proposed agreement but showing willingness on prospective for an amicable solution. However, government's team is of the view that the retrospective effectiveness of agreement must be on those IPPs which made profits over and above the agreements. The profits of all IPPs have already been reconciled and now the committee is giving final touches to the numbers to be tabled before the IPPs in the fifth round.

"The understanding is developed on going forward and the parties have shown a willingness. Both parties have to compromise from their initial positions to reach a consensus," the sources maintained

The government also wants to retire power plants established under Power Generation Policy 1994.

However, power sector experts contend that the government should focus on RLNG, prices of which are on the decline. The recent spot purchase tender of RLNG was done on 6.97 per cent of Brent whereas Pakistan is purchasing RLNG from Qatar at 13.37 of Brent. The cheap RLNG can be substituted with furnace oil to produce cheap electricity. In future RLNG will be available at $ 2 or $ 3 per MMBTU which will be a cheap fuel.

The government should expedite private sector RLNG terminals so that gas is deregulated in the country and people and industry may get cheap fuel and subsequently cheap electricity.

Meanwhile, power sector sources say that the country is going to pay a huge price for mismanagement by the government and its subordinate departments and related ministries as cost of production of electricity is going up by leaps and bounds.

All this is in the backdrop of tough negotiations that sensitive agencies are reportedly doing with sponsors of IPPs to bring down the cost of electricity production in the country.

Petroleum Division had reportedly forced the refineries to change their crude mix so as to limit the production of furnace oil. This was done on the base of planning to limit production of RFO based IPPs. On one hand such a radical plan was put in place and on the other hand as a trade mark decision making matrix of this government, import of LNG was also curtailed.

"This is an ideal recipe for creating a crises. As a result LNG based production reduced by 22% only in June 2020. That is from 3.6 million MW in June 2019 to just 2.8 million MW in June 2020," the sources maintained.

To cover this shortfall NPCC was forced to order production from furnace oil. Figures for the month of July have not been made public yet but industry sources share information that even plants having option to generate electricity by Diesel have been forced into production. Diesel is the most expensive source of producing electricity.

"It is total chaos as government departments and Ministries have no coordination and as a result one crisis after the other is emerging," said one of the stakeholders.

The LNG import for August is also limited. The crises will only worsen in the coming days as IPPs are only being paid partially as the circular debt spirals out of control. The new estimate is around 2.3 trillion rupees. IPPS have reached their limit and the working capital is not available to purchase more fuel.

"Almost all IPPs have no stock of furnace oil. So with only limited furnace oil being produced locally, imports being limited and cash flow restricted a perfect crises is in the making" the stakeholder continued.

Copyright Business Recorder, 2020