EDITORIAL: The government’s decision to terminate power purchase agreements (PPAs) with five of Pakistan’s oldest independent power producers (IPPs) marks a pivotal shift in the country’s energy sector.
The development will see the wrapping up of the take-or-pay model that the IPPs were operating on, generating future savings of Rs411 billion, which will reduce the average electricity tariff by 71 paisa per unit.
As has been pointed out endlessly, the lopsided nature of the contracts had ensured that for years the government had been forced to pay IPPs billions in capacity payments even as many of their power plants remained idle, contributing to exorbitant electricity prices and wider economic turmoil.
Considering the extreme fragility of the economy, one can reasonably support the government’s decision; failing to do so, one could argue, would have made safeguarding the country’s economic survival a highly daunting prospect.
However, this turn of events does leave a bad taste in the mouth as it involved the rescinding of sovereign contracts, which could have grave implications for the investment climate.
This is evident in the sharp decline of publicly listed IPPs’ share prices, which have fallen by 13-26 percent over just three weeks, while their net earnings and dividend payouts are also bound to decrease.
Even so, the disarray in the energy sector, the sharp fall in electricity consumption and the consequent economic slowdown of perilous proportions forced the government’s hand, which makes it essential to acknowledge the broader history of this sorry saga to understand this development in its proper context.
The take-or-pay model that IPPs have been operating on is not unique to Pakistan, as power generation plants in several countries in the wider region with sole buyer of electricity function similarly. Therefore, when contracts with IPPs were signed in the 1990s and in later years, Pakistan had to offer competitive, lucrative terms to ensure investment in the sector amidst regional competition, especially since the country was wracked by security concerns, corruption and a volatile neighbourhood.
The problem here was that policymakers went too far in signing contracts on these terms that, over time, no longer aligned with our interests and became a millstone around the neck.
Pakistan ended up with a very large number of power plants, and while the initial goal was to plan for future growth, the anticipated economic expansion failed to materialise.
This resulted in excess capacity, with idle power plants draining billions from the economy, disproportionately affecting underprivileged groups and the business environment.
To top it all off, decisions made by the 2013-18 PML-N government exacerbated this disarray. In a bid to counter the massive load-shedding the country was experiencing, it made significant additions to the power capacity, rendering the entire system unmanageable.
Power plants, many of them running on expensive imported coal and (RLNG) Liquefied Natural Gas were set up under the CPEC (China Pakistan Economic Corridor) umbrella, while long-term RLNG contracts were signed with Qatar again on Take-or-Pay basis, proving to be another expensive way to fuel power plants.
The subsequent PTI government’s moves to review the dollar indexation clause in PPAs, resulting in a cap being placed to control electricity prices amidst rupee depreciation was clearly an insufficient solution, and thus we find ourselves in our present state where the government is compelled to terminate long-standing contracts, a desperate measure indeed for a desperate time.
There are plenty of lessons to be learnt from this unfortunate history, a vital one being that negotiating investment and energy deals requires an exceptional degree of care, due diligence, competence, in-depth knowledge and foresight, qualities that are clearly in short supply among Pakistani policymakers.
Political considerations and basic ineptitude have too often trumped sound economic judgment, leading us to our current sorry state. It goes without saying that prioritising a strategic, long-term approach to economic decision-making has to become imperative if we want to avoid future economic turmoil that jeopardises the nation’s very survival.
Copyright Business Recorder, 2024
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