When there is smoke there is fire. Yet again, there is a controversy brewing up regarding 2014 Power Policy on determining tariff structure for coal-based power plants. Twenty years back, in the 1994 power policy (in PPPs government) in which tariffs were upfront faced severe criticism from the experts and opposition for granting very high returns to the IPPs. To counter it, in 2002 (in Musharrafs regime) the power policy was revised to have tariff determination based on cost-plus formula in which every IPP was treated independently.
The IPPs submitted their costs which were approved by Nepra based on thermal efficiencies and other elements for tariff computation. Today, the returns in rupees of a few IPPs are much higher than the deemed guaranteed return in dollar terms - higher returns are partially attributed to currency depreciation and rest is probably due to overstating cost by the IPPs. Who is to be blame for it - naivety or incompetency of regulators or shrewdness of businessmen? Whatever the case, the sole losers are people of Pakistan for buying electricity at exuberant rates.
While this controversy was at its peak, in 2013 (in PML-Ns regime), Nepra reverted to methodology of 1994 policy of offering upfront tariff. The only difference was to move from furnace oil (FO)/gas to coal-based IPPs. Two decades back, FO was the cheapest fuel and low price was the reason for having plants to run on it; but today its the most expensive option.
Same is the tale for banking on coal as it is costing less than half of RO to generate 1KWh today; but what if, the coal prices shoot up in years to come owing to some global regulations surrounding high carbon emissions. Well, this is the risk Pakistans policymakers are bearing, and probably rightly so. But, to mitigate this risk, concurrently, they ought to work on hydel generation and mechanism of importing gas.
Anyways, lets restrict the focus on coal. No private party showed interest to install power plant on tariff structure determined in the 2013 Policy. Hence, the government has revised the rates up and lowered the efficiencies and other specifications to lure foreign as well as domestic players.
The strategy proved effective as a few (though, not many) players are committing to install power plants. But the controversy remains, whether Nepra had done its homework. It appears the tariffs were naively announced in June 2013 without realizing that private investors come for returns, not for charity. Or maybe, there are some hidden elements in revising up the tariffs.
Yes, its the lack of transparency that has created the controversy and could be the prime reason for PTI to file a petition against new tariffs. There has to be a clear-cut policy where everything has to be in black and white. The regulatory authorities are stressed owing to acute energy shortage and reluctance of western players to come for coal financing owing to environmental hazards associated with coal. The need is to think out of the box for creating a transparent policy.
One way is to deploy the excessive liquidity in the public sector upstream energy companies. The combined financial position, based on FY14 annual statements, of the three public sector E&P companies namely, OGDC, PPL and GHPL is strong enough to finance a few power projects. The trio has combined equity, liquid assets and annual profits of Rs641 billion, Rs295 billion and Rs203 billion, respectively. Part of this can be used for making investment in Pakistans power sector.
There can be a road map for it, by setting up a National Power Generation Company (NPGC) with equity capital of Rs200 billion as a joint subsidiary of OGDC, PPL and GHPL. Appoint board and management teams of competent and honest professionals. NPGC can borrow up to 4 times equity i.e., Rs800 billion from local and international sources. This will allow total resource base of Rs1 trillion (equity + debt).
Its hard to find international finances in the absence of strong, domestic equity-backing. That is why government had to negotiate on the Chineses terms for coal-based projects. It is pertinent to note that it is mostly the Chinese contractors who are coming to Pakistan for installing coal plants and there are Chinese banks that are financing it. Strictly speaking, its not all FDI that is coming into the country, rather Chinese debt or equity with 20 percent guaranteed returns in dollar terms, effectively an expensive debt.
The resource-base available domestically would be sufficient for a 7,000-10,000 MW investment in coal and hydropower generation. With strong equity-base and backing of government-owned companies, it would not be a problem to go for international tendering for EPC contracts through a transparent process for setting up power stations with highest technical and environmental standards. This will set the benchmark for investment by private sector and foreign investors.
The tariffs can be determined through market forces by a competitive bidding. Then open the process for investors from around the globe. If the government can easily raise money through OGDCs GDR or sovereign-guaranteed Eurobonds, it can also attract finances with strong backing of these companies.
The modus operandi should be to have a project or two through this process and then the rest will follow the flow i.e. once the situation reverses; the government stops chasing investors, the investors will start chasing the government. All that is perhaps needed is a strong political will to have an alternate workable solution.
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Financial position (As on June 30, 2014)
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Rs (mn) OGDC PPL GHPL Total
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Equity 395,671 181,917 63,189 640,778
Debt - - - -
Cash & Liquid Securities 180,783 90,178 24,143 295,105
Net Profit 123,915 51,417 27,664 202,996
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Source: Annual reports
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