Pakistan’s real economy is failing primarily on account of its energy sector. This author has been raising the alarm for the last two decades. Now even a former caretaker federal minister (Gohar Ejaz) has come out openly on this issue.
Everybody in Pakistan is convinced that the electricity tariffs are simply unaffordable with industries becoming uncompetitive and household budgets collapsing.
In this series of articles, this author will highlight the financial and intellectual corruption and incompetence of executives and policymakers on the basis of real time data, financial statements, regulator’s reports and studies by reliable institutions. Recently, there have been many articles on this subject; however, the actual financial disharmony, which is the core issue, has not been fully identified and explained.
This author has examined the subject from multiple angles, including financial viability, affordability, comparative analyses in the region, transfer pricing and the mechanism adopted by power regulator NEPRA for tariff determination.
The upfront conclusion is that the country and its people have been short-changed and taken for a ride. The role of our foreign friends across the Himalayas is also not very encouraging.
Flawed Power Purchase Agreements:
The primary question is whether or not a Power Purchase Agreement (PPA) for Independent Power Projects (IPP) entails risk and reward for the investor or whether it is a foreign currency bond issued by the Government of Pakistan with a return of around 16% in US dollars.
The Lahore University of Management Sciences (LUMPS) and Central Power Purchase Authority-Guaranteed (CPPA-G) in their study have analyzed the PPAs as to risks undertaken by the investor and come up with the following table:
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Kind of Risk Nature Person Responsible
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Interest rate Possibility of variation Government of Pakistan
risk in market rate of (Purchaser of electricity)
interest payment through indexation
on debts Debt repayment
Debt repayment Insufficiency of Government of Pakistan
cash to repay debt (Purchaser of electricity)
or interest through committed CPP
payments
Exchange rate Possibility of local Government of Pakistan
risk rupee depreciation (Purchaser of electricity)
through indexation
Inflation risk Impact of local Government of Pakistan
inflation upon (Purchaser of electricity)
sellers cost through indexation
Change in law Impact of change Government of Pakistan
upon the seller (Purchaser of electricity)
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The sole purchaser of the power generated is a government-owned and managed institution namely, National Transmission & Distribution Company Limited (NTDC).
The aforesaid schedule reveals that under the present system, notwithstanding the accounting treatment, an IPP is a ‘financial instrument’ like a bond issued by the Government of Pakistan.
This bond was manageable when there was no substantial exchange rate fluctuation and paucity of indigenous fuel and increase in its prices. Now on account of severe exchange rate fluctuations the whole scheme is out of control and threatens the national economy.
This is an extraordinary situation. Even otherwise, 100% indexation to dollar parity and that too without a cap was intrinsically a flawed policy decision with disastrous consequences for the country.
In contrast, however, the Indian system is substantially different. There are capacity charges in India too but there is a ‘cap’ on indexation. The Model Agreement in India states as under:
Fixed Charge:
The Utility shall pay to the Concessionaire a Fixed Charge, determined through competitive bidding, for availability of the Power Station. The Fixed Charge determined for each accounting year shall be revised annually to reflect 30 percent of the variation in a composite index comprising WPI and CPI. Since repayment of debt would be substantially neutral to inflation, the said indexation of 30 per cent is considered adequate.
A higher level of indexation is not favoured, as that would impose an unjustified burden on the consumers. Such higher indexation would also add to uncertainties in the projections relating to returns on investment.
Further, an annual reduction of 2 per cent in Fixed Charge is being stipulated so that the benefit of a depreciated asset is passed on to the consumers.
In Pakistan, on account of 100% uncapped indexation, the tariff has been increased effectively to the extent of 300% on average. This is the reason for the ongoing crisis.
This conclusion does not presuppose that the whole exchange rate risk be borne by the IPPs, however the purpose is only to identify the reason for the colossal capacity charges in Pakistan. This is a fate accompli for Pakistan. However, as explained the problem is larger than that.
Intellectual corruption - a woefully flawed Pakistan Economic Survey
Even in 2024 when everything was clearly written on the wall, the primary document of Pakistan economy, namely; the Economic Survey 2023-2024, has not come out with the truth. It states as under:
Energy is inarguably one of the most important inputs for economic growth that can sustain industrial and commercial activities. The sector has progressed since 2013 in terms of power generation and reducing power outages.
The initiation of CPEC power projects has addressed historical gaps in electricity production and improved the reliability of the supply chain. However, the reliance on imported and costly fossil fuels for electricity generation underscores the need for a shift in the fuel mix.
The aforesaid statement is manipulated and politically motivated. It does not mention that since 2013 generation capacity has been increased without taking into account the following facts:
i. Expansion in capacity exceeds the requirement which has been described as ‘progressed’.
ii. There is no mention of huge capacity charge on unutilized capacity, which makes the energy unaffordable for consumers;
iii. There is still load-shedding in certain areas during high demand period due to lack of required transmission system capacity;
Thus the purpose of identifying these shortcomings in the Pakistan Economic Survey is to reflect the intellectual bankruptcy in the corridors of power in Islamabad. They are there for serving the political masters, not the nation. If this continues the state cannot exist, to say the least.
(To be continued)
Copyright Business Recorder, 2024
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