BMP for revisiting power purchase contracts with a view to reducing energy cost

LAHORE: The Federation of Pakistan Chambers of Commerce and Industry’s Businessmen Panel (BMP) has stressed the need for revisiting terms of power purchase agreements with a view to restoring the viability of country’s energy sector, as billions of rupees could be saved by making payments to IPPs in local currency instead of dollars.

The FPCCI former president and BMP Chairman Mian Anjum Nisar also supported the government stance of the audit of dozens of Independent Power Producers agreements established during the last 30 years, after a Senate penal chief termed the contracts of IPPs as dacoity, seeking project-wise details including heat rates and regional comparison of price of the same technology.

He said that Pakistan has been facing a high inflation for the past couple of years partly due to massive depreciation of the rupee against the US dollar and partly due to a surge in global commodity prices like energy cost. The country largely meets its energy demand through expensive imports.

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He stressing the need for putting the economy on a sustainable growth trajectory by providing incentives to the industry, lamented that the economy is facing multiple challenges of falling exports, high inflation, low growth and declining foreign reserves, with fiscal accounts under immense pressure on account of heavy interest payments. Businessmen Panel (BMP) chairman said that the drop shows the government would find it difficult to achieve the industrial growth and export target, leading to more pressure on foreign exchange reserves of country.

The FPCCI former president said that in view of decreasing cost of production and lessen energy tariffs, the government should bring some major changes in the agreements with IPPs, who are earning high profits due to certain terms and conditions of their agreements.

He further disclosed that the high cost of power tariff was due to a host of factors, including snowballing capacity payments, net hydel profit, transmission constraints, minimum plant factor provision for RLNG based plants, gas price anomalies and financing cost of circular debt.

The FPCCI former president said that Pakistan pursued an aggressive policy to add power capacity, but years of slow economic growth, power theft, and under-investment in transmission and distribution networks have meant that bill recovery has not been at par.

He said that most IPPs had an investment payback period of 2-4 years, profits generated were as high as 18.37 times the investment and dividends 23 times the investment and under the 1994 Power Policy, 16 out of 17 IPPs invested a combined capital of Rs 52 billion and earned profits in excess of Rs 417 billion. The governments’ failure to contain the circular debt had cost the country over Rs 5,082 billion in the past 15 years, with an annual loss of Rs 370 billion.

Mian Anjum Nisar added that restoring energy sector viability requires strong cost-side reforms, including continuation of efforts to improve transmission infrastructure, better integration and expansion of renewable energy capacity, improving DISCO performance via either privatisation or long-term management concessions, moving captive power demand to the grid, revisiting, the terms of power purchase agreements and continuing to convert publicly-guaranteed PHPL debt into cheaper public debt.

He outlined the reforms’ agenda that has either been undertaken by Pakistan or where Islamabad needs to put more efforts.

In the case of the energy sector, terms of power purchase agreements have not come heavily under the scanner as the focus has first been on taking recovery and tariffs to a sustainable level.

Higher energy prices triggered mass protests across Pakistan last year and have also stifled energy demand with policymakers scratching their heads on how to move forward for the sector’s viability.

With runaway inflation triggering record high interest rates, demand for energy has reduced further, leaving the government in a ‘catch-22’ situation.

In a report, it is also admitted that the only sustainable solution for the sector is decisive action to address cost-side and infrastructure issues. He quoted the IMF report which is an important document as many see it as a guideline in the light of Pakistan’s pursuit for a longer, larger program with the IMF.

In the letter of intent, part of the IMF staff report, Pakistan also agreed that it will focus on mobilising significant additional revenue especially in under-taxed sectors.

In its recommendations, he suggested to the government that basic tariff of IPPs should be changed in Pakistani currency instead of dollars and if this change is not made, an amount of Rs 5,463 billion will have to be paid. Similarly, the profits to the IPPs owners should be given in Pakistani rupees instead of dollars.

The country could save Rs 5,400 billion only with change of currency in the agreement, instead of Take or Pay contract. The government is suggested to revoke the practice of capacity payment based on “Take or Pay” with the owners of IPPs.

Copyright Business Recorder, 2024