LAHORE: Patron-in-Chief United Business Group (UBG), S M Tanveer, has strongly urged the federal government to cancel all agreements with Independent Power Producers (IPPs) forthwith and start procuring electricity from cheaper sources without any capacity charges.
In a statement on Wednesday, Tanveer expressed grave concerns about the widespread closures in various industrial sectors due to exorbitant electricity tariffs, saying that he was looking at job losses across the country as a direct result.
Tanveer highlighted that the pending Rs 2 trillion capacity payments to IPPs have paralyzed the country’s economic activities, urging the government to take decisive action before the prevailing desperation leads to total economic collapse.
He criticized the capacity charges of IPPs as unfair and unjust, noting that IPPs are being paid even when no electricity is generated or supplied. He added that these capacity charges constitute two-thirds of the total cost, with fuel costs comprising the remaining one-third.
He further emphasized that previous investigations revealed that IPPs have been enjoying a return on investment exceeding 73% in dollar terms, an unusually high rate compared to international standards. Pakistan’s energy sector has been ensnared in problematic contractual arrangements with IPPs since the Power Policy of 1994. These contracts, initially designed to alleviate the energy crisis by attracting private investment, have instead led to an escalating circular debt, which reached Rs2.64 trillion in February 2024.
The incentive structures provided to IPPs, including guarantees indexed to the US dollar, mean that any depreciation of the Pakistani rupee increases returns for IPPs, placing a heavier financial burden on the government and public at large. Although the return on equity for IPPs was initially set at 18% and later reduced to 12 percent in the Power Policy of 2002, it remains elevated compared to global norms.
Additionally, cost comparisons with similar projects in other countries suggest that many IPPs were funded through inflated invoicing on capital goods, resulting in no real underlying equity. Consequently, Pakistan is burdened with perpetual returns on ghost equity.
Moreover, significant misreporting and overbilling by IPPs have exacerbated the issue as their tariffs are guaranteed under take-or-pay contracts protected by international law. For instance, the actual oil consumption of several oil-based plants is less than what is billed by the IPPs.
Attempts to audit these discrepancies have often been obstructed by IPPs through legal means such as stay orders. Similarly, operation and maintenance costs are overstated; where the actual expense is Rs 500 million, it is billed at Rs 1.5 billion per annum.
Tanveer feared that the recent surge in electricity rates would trigger civil unrest and discontent among the business community if no timely action is taken by the government. He called for a comprehensive review of IPP agreements, price re-evaluation within legal bounds, and improved oversight to prevent over-invoicing. He also stressed the importance of examining the energy infrastructure for clauses related to misinformation and fraud.
S M Tanveer expressed hope that the federal government would soon devise a solid strategy to deal with the IPPs and ensure affordable electricity prices for the industry at large in the national interest.
Copyright Business Recorder, 2024
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