IPPs: one of the most difficult conundrums

For decades the public at large has been agitating in futility against electricity tariff hikes and power cuts. This summer, bitten by IMF’s withdrawal of multiple concessions to the industry, the elite industrialist and business chambers of the country too have unleashed their wrath against independent power producers (IPPs).

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) announced that it would file a case in the Supreme Court against the “unbearable” capacity charges being paid to IPPs. Piqued by the fact that despite repeated and unrelenting expressions of its concerns and apprehensions, loud and clear, regarding IPPs’ capacity charges, FPCCI leadership says the business community is still not being taken on board for the consultative process to resolve the issue as soon as possible despite being the primary stakeholder of the issue.

On the contrary, however, the Overseas Investors Chambers of Commerce and Industry (OICCI), which represents over 200 multinationals in Trade and Industry in Pakistan, does not support court interventions. M. Abdul Aleem, CEO of OICCI stated: “We always follow logical discussion on complicated and sensitive issues. Court action is not part of our strategy unless there is a blatant violation of our rights or commitment, policy or contract”.

Pakistan Business Council CEO Ehsan Malik advocates regionally competitive industrial power tariffs to promote employment, boost exports, and make manufacturing for the domestic market more affordable.

Korangi Association of Trade and Industry (Kati) President at a press conference this week stated that: “the IPPs are receiving more money than the nation’s defence budget. The interests of the 240 million people of Pakistan should take precedence over the interests of the 40 families running these IPPs.”

The Kati chief demanded the government annul contracts with unnecessary private companies and a forensic audit of the IPPs’ financials. He asked: “Do we prioritise the interests of 40 IPP-running families, or do we care more for the 240m citizens?” He further stated: “While the total production capacity of electricity installed is 45,000 megawatts, only 22,000MW is being utilised. The cost of a unit of electricity for industrial consumers, without tax, is Rs35, which rises to Rs60 after tax. Out of the Rs35 approximately Rs18 per unit is paid in capacity charges for electricity not even used, pushing the economy towards destruction”.

Former caretaker commerce minister, Gohar Ejaz, recently outlined comprehensive plans to reform Pakistan’s power sector, emphasizing the need for transparency, accountability, and efficiency to benefit all stakeholders. The statements by trade bodies came after Gohar Ejaz disclosed data on payments to Independent Power Producers (IPPs), revealing significant financial burdens on consumers.

Ejaz shared on Sunday that over the past year, IPPs received payments amounting to Rs1.95 trillion. He criticized corrupt contracts and mismanagement that resulted in electricity being sold at Rs60 per unit, calling for public action against these deals.

He also called for the government to conduct forensic audits of all IPP plants by independent auditors to assess setup costs, equity value, net dependable capacity at the time of commercial operation, subsequent annual NDCs, fuel efficiency, fuel procurements, profits, and return on equity.

Frustrated by the high capacity payments to IPPs, trade and industry leaders have asked the government to revisit the power purchase agreements and demanded a reduced electricity tariff of 9 cents per unit for industry’s survival.

Most of the demands of the trade and industry, seemingly driven by emotion and frustration, are unrealistic and un-doable. The agreements made by the government with IPPs are secured under sovereign guarantees and in most cases the place of arbitration is in the UK and other similar secure overseas destinations.

Time and again, it has been tried to review their power purchase agreements but to no avail. On the contrary, fully knowing the consequences, more and more IPPs have been added to the national grid on same terms to further burden the power sector with capacity payments.

FPCCI’s request for intervention by Supreme Court will not yield any meaningful result. The apex court’s intervention in the case of Reko Diq is an example to learn from where the government had to cut a sorry figure, and paid dearly to move out of the legal checkmate. Kati’s contract annulment demand is also not doable.

Ejaz’s call for forensic audits of all IPP plants to assess setup costs, equity value, net dependable capacity at the time of commercial operation is something of the past and is a closed chapter, duly legitimised as part of the power purchase agreement.

What is doable and must be done is the current operational forensic audit of all IPPs, inclusive of subsequent annual NDCs, fuel efficiency, fuel procurements, profits, and return on equity. There is much fat in it and a lot of it can be exposed. An operational audit of IPPs is the only way forward to legitimately dig into the current and past fault lines in the operational conduct of IPPs, leading to meaningful results.

Capacity payment to IPPs is only one part of the mess in the power sector contributing to electricity tariffs. The whole power supply chain has turned rotten - commencing from fuel procurements, its storage and transportation, the conduct of IPPs, the misgovernance in power distribution companies and the conduct of the consumers in terms of electricity theft, pilferage and receivables. A forensic audit of the entire power supply chain and implementation of its findings is something doable and realistic to provide relief in electricity tariffs to the hard hit industry of the country.

The saga of IPPs in Pakistan is that of greed and exploitation by vested interests with least focus to provide reliable and affordable electricity to consumers. The fraternity of industrialists also cannot be absolved of their greed on climbing on the bandwagon to make windfall profits. Little did they realize that aimless mushrooming of IPPs will one day strangle the industry. Many large industrial groups diverted funds from industry towards establishment of IPPs.

One example which exposes the reckless trend of setting up of IPPs is made transparent in the Pakistan Economic Survey of 2021–22. The installed electricity generation capacity reached 41,557MW in 2022. The maximum total demand coming from residential and industrial estates stands at nearly 31,000MW, whereas, the transmission and distribution capacity is approximately 22,000MW.

This leads to a deficit of about 9,000 MW when the demand peaks. This additional 9,000 MW required cannot be transmitted even though the peak demand of the country is well below its installed capacity of 41,557 MW. One needs to question why 9000MW was added to the grid when there was no evacuation capacity on the grid. There are many more such examples of reckless waste that have no plausible explanations.

In case the leadership of industry means business in providing affordable electricity to its fraternity it must then stop seeking or demanding concessions and shooting in the dark; in fact, it will be required to meaningfully contribute and prevail upon the government for an independent forensic audit of the entire supply chain of the power sector followed by the sincere implementation of its findings while overriding all vested interests and considerations.

Copyright Business Recorder, 2024