Govt approach to IPPs comes perilously close to coercion

EDITORIAL: Negotiations with Independent Power Producers (IPPs) are well under way in the second phase, following the successful termination of agreements with five IPPs in the first phase. In this round, authorities aim to keep the IPPs operational while transitioning to a ‘take and pay’ model, a challenging task given the lack of a competitive market.

The task force must deliver realistic policies on wheeling charges and a workable formula for operational and maintenance (O&M) expenses. A critical issue in this phase is managing negotiations with foreign investors and lenders, a shift that will likely have a more pronounced impact in future rounds as the government moves beyond the 2002 power policy. Engaging foreign stakeholders may require different skills, as traditional methods of pressure and coercion could backfire in the international arena.

Locally, authorities successfully leveraged their position, with all domestic IPPs acquiescing to revised terms. Many local investors, or “seths,” have other business interests, strong family ties, and vulnerabilities, giving the authorities leverage. Files are full of past indiscretions; and if not there are softer points to exploit. The non-technical side of the task force deserves credit for driving these agreements, but the technical team’s performance, however, has been below average.

However, the same approach may not succeed with foreign investors and lenders. This is evident from the recent letters the IPPs with foreign equity partners have sent to authorities, warning against unilateral negotiations without lenders’ consultation.

Some lenders have also advised IPPs’ sponsors against agreeing without involving them. This situation reveals a stark difference in how local versus foreign IPPs are treated, with foreign investors benefiting from stronger home-country support.

Without addressing foreign lenders’ and investors’ concerns — particularly those involved in newer IPP — the savings from tariff reductions could be less than modest while unintended negative impacts are likely to outweigh any short-term benefits.

For foreign investors, the current environment recalls the contentious 1998 negotiations, after which many sold out their shares and exited Pakistan. The main participants in the 2002 policy IPPs, mainly local players, sat out of the 2015 IPP race, which was largely dominated by Chinese firms and government investments. How the Chinese investors respond to future investment needs remains to be seen.

Domestic investors are the primary financiers in Pakistan’s economy, and they invest beyond just the power sector. Coercive negotiations may create risks in other areas, particularly in infrastructure, where government funding is inadequate.

Public-private partnerships (PPPs) are the way forward, but local investors’ valuation of projects involving government may be adversely impacted, especially in sectors requiring expertise through foreign joint ventures. If local investors hesitate, the government may need to rely on foreign government-to-government investments or quasi-government entities, limiting the economic efficiency and production capabilities needed for sustainable growth.

Copyright Business Recorder, 2024