EDITORIAL: The federal cabinet formally approved a deal with Independent Power Producers (IPPs) projected to save 836 billion rupees over 20 years, as per the recommendation of the Cabinet Committee on Energy (CCoE) headed by the Federal Minister for Planning, Development, Reforms and Special Initiatives Asad Umar. This was revealed by Shibli Faraz, Federal Minister for Information and Broadcasting, during the traditional post-Cabinet meeting press conference. Providing details Faraz stated that the savings from the deal would imply lower tariffs though he wisely refrained from giving a time-frame when tariffs would begin to decline, adding that he would arrange a press conference with the government negotiators so that they could respond to all queries.
These revelations have been in the public domain for the past several months with the Memoranda of Understanding (MoU), with no contractual obligation, signed several months ago pending the government’s pledge to clear the IPP dues at one go, a pledge that it was unable to meet due to paucity of funds delaying the signing of the contracts. That agreement has now been reached and the government has pledged to clear 403 billion rupees dues of the IPPs in two instalments with the first instalment consisting of around 180 billion rupees payable as follows: one-third paid immediately in cash, one-third in five-year Sukuk bonds and one-third in Pakistan Investment Bonds (PIBs). The second and final instalment will be payable as follows: one-third in cash, one third in 10-year Sukuk and one-third in ten-year PIBs.
The successful completion of the negotiations goes to the credit of the present government as previous governments remained focused on signing off contracts on the assumption that without the incentives the country would not have been able to attract the required investment. These contracts were becoming increasingly burdensome on the hapless consumers on several counts, including: (i) capacity payments have risen from 650 billion rupees last year to a whopping 850 billion rupees this year due to incremental power coming into the system with more generation expected to continue to be added to the system; this would be replaced with take and pay, without exclusivity; (ii) 12 percent rate of return on equity (RoE) during construction for foreign and 17 percent in rupees for local investors calculated at 148 rupees per US dollar has been agreed with no future US indexation; (iii) savings in fuel for oil powered projects would be shared on a sliding scale starting from 70:30 in favour of the power purchaser for the first 0.5 percent efficiency improvement above currently determined Nepra benchmark efficiency followed by 50:50 for the next 0.5 percent and 40:60 for any efficiency above that; (iv) future savings in O and M would be shared 50:50 after accounting for any reserve created; (v) to match actual with claimed efficiency the purchaser shall appoint a reputable international independent consultant to perform a one-time detailed heat rate tests for all IPPs; and (vi) till the competitive power market is fully operation as per the terms defined in the license of each IPP, the CPPA(G) will work towards providing access to bilateral market at the earliest.
While the government has been very successful in negotiating bordering on coercion with the IPPs yet it has not yet been able to improve the sector efficiency as reflected by the historic escalation in the circular debt – from 1.2 trillion rupees inherited by the government two and a half years ago to the current 2.3 trillion rupees today. The distribution and transmission losses have not been contained and the only transmission line laid in recent years is the Lahore-Matiari line which began to be laid during the tenure of the previous government as a component of the Pakistan China Economic Corridor. To add to the sector’s inefficiency the gas load management plan, premised on failure to import RLNG in time given that the country suffers a severe gas shortage during the winter months, accounts for the failure of the industrial sector to meet its export order timelines.
And by far the most worrisome measure taken by the incumbent government, identical to the practice of previous administrations, has been passing on of sectoral inefficiencies to the hapless consumers through a steady rise in tariffs. With the International Monetary Fund second staff review under the 6 billion dollar Extended Fund Facility expected to reach a staff level agreement within weeks if not days the concern of the public is on the tariff increase agreed by the government - a tariff that the Fund insists be based on full cost recovery given that the projected 836 billion savings due to the renegotiations with the IPPs are to be over a 20 year period. Last but not least, there exists IMF’s cheerful acquiescence to the government-IPPs deal.
Copyright Business Recorder, 2021