Power sector issues

Energy is one of the most important inputs for economic growth and development of a country. Unfortunately, Pakistan, like many other developing countries, has generally faced a shortage of this input despite some serious efforts by various governments to increase its supply to the desired level.
The present government, sensing the urgency of the issue, is working on many fronts to bridge the supply-demand gap in the power sector. While it is seriously exploring the option of increasing hydel power by building big dams at proper locations, strategic plans are also being pursued to induce IPPs to make higher investment in various projects to meet the shortfall.
However, the required rate of private investment in this sector could be attracted only if there is complete harmony and understanding between the government and IPPs about the rate of return on equity, tariff and taxation structure and other related matters. Looking at the latest reports, it appears that there are a number of lingering issues which need to be clarified and resolved before the IPPs are in a position to design and implement their plans with a high degree of confidence.
In this regard, the Private Power Infrastructure Board (PPIB) appears to be seriously concerned about some of the regulatory problems which are acting as the main deterrent for the smooth functioning of the IPPs. It has conveyed to the government that IPPs' reservations on tariff have become a real bottleneck in the implementation of up-coming private power projects and this may lead to the worst power shortages ever faced by the country.
According to the PPIB, revised tariff determinations still have lacunas and are inconsistent with the power policy announced in 2002. The reimbursement of withholding tax on dividends (presently 7.5 percent) to the IPPs, for instance, is likely to be treated as "other income" by tax officials to be taxable at corporate tax rate of 30-35 percent.
The mechanism would result in double taxation and excessive payments by National Transmission and Dispatch Company (NTDC) consumers in addition to creating volatility in the tariff and leading to litigation between companies and tax department due to complicated mechanism. The PPIB is also of the view that the break-up of variable operation and maintenance cost into local and foreign components should be allowed according to actual expenses and indexed according to the 2002 Policy.
The increase in prices in foreign countries from where the inputs would be imported by IPPs over a period of next 20-30 years is also likely to have a major financial impact on the operating costs of projects. Although, power policy of 2002 does not specifically allow indexation of foreign expenses against foreign inflation, it is still a vital issue for the IPPs.
Besides, the PPIB has backed 123 MW Star Power Generation and 200 MW Orient Power Project at Balloki, which raised serious reservations over the final tariff determinations given by National Electric Power Regulatory Authority (NEPRA). Both sponsors have asked for return on equity during construction period which in effect means they are asking for return on equity on Internal Rate of Return (IRR) basis which is an internationally accepted norm.
Due to the current impasse between the IPPs and NEPRA, PPIB is reluctant to issue Letters of Support (LoS), delaying the financial close and construction of the projects.
All of this does not augur well for government's policy of promoting investment in the power sector to increase the supply of energy to the level consistent with the present and future requirements of the economy. In our view, the PPIB is right in asking the government to resolve the regulatory and other issues immediately to avert the power crises in the coming years and protect the expected investment of $8 billion in the power sector.
The lingering controversy would not only scare away the potential investors who had submitted Statements of Qualifications (SoQs) for three ICB and seven hydel projects but would also have a negative impact on all under-process projects of over 8800 MW.
The issue becomes all the more important because various governments in Pakistan, including the present one, have so far failed to even start projects like Kalabagh and Basha dam due to the lack of political consensus. It is also worthy of note that the projects like these have a long gestation period and the country has no alternative but to depend on IPPs for its power requirements in the intervening period.
The more worrying aspect is that relevant authorities of the government do not appear to be very concerned about the increasing power shortages in the country and the need for responding properly to the issues raised by the IPPs. The views of the PPIB are also not given much importance. It needs to be realised that IPPs have a large scope of investment almost anywhere in the world and their investment decisions are guided by comparative profitability and the degree of its certainty at various locations.
Obviously, they would invest where return on equity is higher and the regulatory and other issues, if any, are easier to resolve. We are afraid that if the regulatory and tax authorities of the country continue to drag their fact unnecessarily in the affairs of IPPs and do not make Pakistan hospitable for investment for them, it would be very difficult to maintain the current momentum of growth because adequate and uninterrupted supply of power is the basic requirement of a modern economy.