Country needs a better mix of RPPs and IPPs

The Asian Development Bank (ADB), as the third party auditor on the controversial Rental Power Projects (RPPs) proposed by the Ministry of Water and Power as a means to meet the energy shortfall in the short term has, reportedly, endorsed the general public perception and the stated position of finance minister Shaukat Tarin that the projects were ill-advised, would further burden consumers through a 31 to 45 percent hike in electricity tariff and are too expensive to boot.
Additionally, the report adds that the RPP contracts had several weaknesses: (i) if the contractor disappears after signing the agreement, the government would still be required to pay for capacity charges; (ii) the sponsors have committed to 32 to 35 percent capacity utilisation, while the government has committed to paying for 90 percent capacity utilisation; (iii) contracts lack clauses in the event of non-performance by the sponsors; and (iv) the necessary infrastructure that would transport the additional fuel required was not in place.
Not mentioned in the newspaper reports, with respect to the ADB report on the RPP contracts, was the serious public concern over the government's failure to conform to the rules of the Public Procurement Regulatory Authority (PPRA) by changing the terms of reference well after the tender was first floated - a procedure bound to fuel allegations of nepotism at best and corruption at worst.
Instead of acknowledging this serious faux pas and reinitiating the entire tender process, the people of this country will no doubt recall that the Minister for Water and Power, Raja Parvez Ashraf, had vociferously defended, albeit unsuccessfully, the indefensible on the media.
The ADB report also reportedly reveals that if the government abandons the idea of setting up RPPs and instead focuses on Independent Power Producers (IPPs) then loadshedding can be tackled within two years: with 8 RPPs installed, as suggested by the ADB, the government can meet the energy shortfall in one year and a half and with 14 RPPs, as originally proposed by the Ministry of Water and Power, loadshedding would end probably within six months.
The difference, of course, would be in the amount that the consumers pay as tariff. In its defence, the Ministry of Water and Power may well argue that if the 14 RPPs were allowed to be established, loadshedding would have ended in six months - a fact that would have put the economy back on track - an economy suffering from a massive decline in productivity due to the energy shortfall, with a consequent negative impact on unemployment levels as well as government tax revenue.
Higher price of electricity is preferable to no electricity or such would be their argument. There is certainly an element of truth in this argument, however it ignores two basic facts. First, that had the government embarked on the IPP route, as suggested by the ADB, when it came to power only six more months would have remained for the country to become self-sufficient in energy and at a much lower tariff.
And, second, a major reason for the ongoing loadshedding is not generation capacity or how quickly it can be enhanced but upgradation of the dilapidated transmission and distribution network and, more importantly, of inter-circular debt that the present government has simply been unable to deal with. And while one can fault the Ministry of Water and Power for being focused on the RPPs, above all other preferable options, yet the cabinet collectively must be held responsible for the continuing inter-circular debt.
So how has the government dealt with the fallout of the ADB report? The Ministry of Finance has clarified that they are still awaiting the full report. And Pepco Managing Director has acknowledged to Business Recorder that a consultative meeting was held on January 6 with ADB, where data was sought, rather than a revelatory meeting, where findings are shared.
Assuming that the ADB did share some findings with Pepco almost two weeks ago, a charge denied by the MD, but confirmed by other sources, the government's strategy is clear: to suppress the report for as long as possible though the common sense of this strategy is not evident as the report is expected to be released by Friday this week.
The Pepco MD clarified that the sponsors had committed to 36, as opposed to 32 to 35 percent capacity utilisation, but did not contradict the government's commitment to paying for 90 percent capacity utilisation.
He further added that had the 2250MW, originally proposed by the Ministry of Water and Power, been established by end-December 2009, the expected tariff rise would have been 6 percent, as opposed to 31 to 45 percent and indirectly attributed the massive tariff rise to the insistence of the Ministry of Finance to third party audit, which delayed matters. This claim would have to be evaluated by the third party auditor.
How should the government deal with the ADB report? In most democratic countries such a damning conclusion by a third party auditor would have led to a ministerial resignation, yet that culture just does not seem to be prevalent amongst our politicians.
However, now that the cat is out of the bag, it is hoped that the Cabinet begins a salvage operation as soon as possible. Three RPPs, with a combined generation capacity of 412MW, are at an advanced stage of implementation, according to the MD Pepco, which would strongly suggest that they cannot be scrapped, especially given the contracts the government has signed with their sponsors.
The only option at this stage is to minimise the negative fallout of the leaked report - a fallout that challenges not only the capacity of the entire Cabinet to take informed decisions, which did approve the 14 RPPs though at the suggestion of Shaukat Tarin, subject to third party audit and only after a hue and cry was raised in the media, but also to arrest the damage to its already tarnished image.
One hopes that the Cabinet holds an emergent meeting, as soon as possible, accepts responsibility and begins to take corrective measures that must include a better mix of RPPs and IPPs and the need to speedily eliminate the inter-circular debt, a commitment made by the Ministry of Finance in its first Letter of Intent (LoI) submitted to the IMF in November 2008.