ISLAMABAD: The federal government has reportedly made its mind to reduce the Return on Equity (RoE) of public sector power projects including hydro and nuclear plants and also to convince Independent Power Producers (IPPs) to follow the course of government’s own power projects, well-informed sources told Business Recorder.
This move, sources said, had been initiated days before the pressure from the business community leaders including former Minister for Commerce Gohar Ijaz, who also reportedly had a debate on this issue with the incumbent Minister for Power, Sardar Awais Leghari.
The business community of the entire country is now up in arms against the rate of return and exorbitant capacity payments being paid to the power plants. Recently, Prime Minister Shehbaz Sharif has constituted an Inter-Ministerial Committee (IMC) headed by the Minister for Power, Leghari, to review the existing Power Purchase Agreement (PPA) template to protect consumers against losses caused by inadequacies on the part of power producers.
Govt to review existing power purchase agreements
“There is a serious consideration in Power Division on ways to convince IPPs to sit with the government to review PPAs,” the sources added.
A team also comprising the power minister and finance minister has left for China to “deliberate conversion of imported coal based power plants to local coal and profiling of Chinese debt,” after high-level interaction between both countries’ top authorities.
Gohar Ejaz says, “Under the IPP agreements Pakistan pays billions to companies that produce no electricity. The government has to decide whether the survival of 240 million Pakistanis is more important than the guaranteed profits for 40 families.”
Taking part in continuous discussion on capacity payment of IPPs on a social media group, Nadeem Babar, former aide to the ex-Prime Minister Imran Khan on Petroleum has said that the solution is to commoditise electricity like other commodities. However, according to him, for that to happen the system has to be opened up and government has to be out of it.
“Unless you do that, electricity will be a monopoly service for which cost will always be higher. Most other nations started like we did, when public sector could not fund, any more power assets, but then migrated to an open system. CTBCM is only one step in probably a 100 more, yet it is a start,” he added.
He was of the view that blaming the investors, and to have forced “voluntary” negotiations only buys time, but does not solve the problem. The sources said a meeting was chaired by the federal finance minister on July 04, 2024, to discuss a proposal of reduction in Return on Equity pertaining to government-owned power plants including hydro and nuclear power plants.
WAPDA, sources said, has opposed the proposal of reduction in RoE of its projects. The WAPDA Hydroelectric produces 33-34 billion units per annum that meet approximately 30 per cent of the country’s demand.
Following salient were highlighted by WAPDA and are now being submitted for consideration: (i) approved WAPDA tariff of approximately Rs3.81/KWh subsidizes the entire energy value chain reducing overall end consumer tariff; and (ii) WAPDA’s tariff essentially meets our operating and maintenance (O&M) expenses, debt servicing and equity investment needs for developing projects. The WAPDA’s financial structure for development projects is based on Weighted Average Cost of Capital (WACC) in a debt-to-equity proportion of 80%: 20% respectively. In case equity portion is reduced; resultant financial gap may have to be bridged by commercial borrowing. At the prevalent borrowing rate of 22 per cent approximately, it will increase WACC in considerable proportion with a net effect of increase in consumer end tariff.
“Any unfavourable change in the basics of WAPDA’s tariff or capital structure (Debt: Equity at 80%:20%) is likely to be viewed negatively both by domestic as also international lenders, multilateral donor agencies and potential investors. It had been assured at negotiation stages that WAPDA’s definite indicated equity will be an essential prong of WAPDA’s financial strategy,” said the chairman WAPDA, in a letter to the finance minister.
He is of the view that reduction in RoE is also likely to affect our existing loan covenant Net Debt/ EBIDTA and may thus require necessary approvals lenders/bond holders. The chairman WAPDA said PSDP grants are invariably tied with government’s fiscal space, wherein, shortfalls are usual. We have to rely on return on equity investment and/ or commercial financing as the only recourse to bridge the financing gap.
The ROE of WAPDA was previously reduced by CCOE in August 2020 from 17 per cent to 10 per cent without indexation. The ROE of other government-owned RLNG IPPs was reduced from 16 per cent to 12 per cent IRR based with dollar indexation.
Accordingly, the CCoE further decided that financial deficit to the WAPDA pursuant to above decision shall be arranged through additional PSDP grants for implementation of WAPDA mega hydel projects. This; however, was never realised. WAPDA has been deprived of approximately Rs26 billion over the last three years due to above RoE reduction, which has added to the financing costs for above projects.
The WAPDA’s capex needs for the aforementioned four projects are approximately Rs4,792 billion for which the equity investment needs are Rs278 billion. If ROE is further decreased from 10 per cent, WAPDA will face a major shortfall in the financing needs rendering these projects commercially unviable. In view of the above, it is requested that WAPDA may be de-linked from the tariff optimisation exercise. Any further cut to a bare minimum tariff of Rs3.81/KWh is likely to impact adversely on timely completion of mega projects of strategic national importance.
The WAPDA is undertaking mega projects which include Diamer Bhasha and Mohmand dams, Dasu Hydropower Project, as well as, Tarbela 5th Extension.
The financing strategy for these important projects hinges on federal government grants (PSDP), WAPDA equity and commercial financing.
Copyright Business Recorder, 2024
Comments
Comments are closed.