Negotiations with Independent Power Producers (IPPs), particularly those involving local owners under the 1994 and 2002 power policies, have entered a new phase.
Prominent businessmen who own these IPPs have been approached by certain state actors and, in many cases, pressured to accept terms without question.
Some IPPs face contract terminations, while others are being pushed to accept “take-and-pay” agreements or lower returns on equity.
Most of these IPPs had already renegotiated during the PTI government, but the impact was negligible then and is likely to be even smaller now. The real focus should be on the IPPs established under the 2015 policies, where most of the funding came from Chinese investors. The government attempted to negotiate with the Chinese, but they returned empty-handed. This raises the question: why target the local IPPs again?
It’s important to remember that no one invested in these projects at gunpoint. Most IPPs, including those funded by Chinese investors, were initiated at the request of the government at the time, with mutual agreements on rates of return.
Certainly, there were cases where costs were inflated and efficiencies overstated, resulting in windfalls for some IPP owners. However, these issues point to regulatory failures and potential collusion between IPP owners and government officials. Yet, there seems to be no accountability for the government and regulatory officials involved. Instead, all IPP investors are being broadly painted as culprits.
The rationale behind this new round of negotiations is hard to grasp. Firstly, it will likely have no significant impact on consumer tariffs. Secondly, it risks further damaging investor confidence. This entire approach needs to be reconsidered.
These hardline negotiations with local IPP owners, who also have significant stakes in sectors like banking, textiles, cement, and more, will undoubtedly affect their current and future investment decisions. One of the country’s top businessmen, for example, has lamented, “The biggest loss will be in privatization.” These are the very groups interested in acquiring PIA and potentially investing in electricity distribution companies (DISCOs).
The state must carefully consider how its actions today could impact future privatization efforts and the overall investment climate.
What’s particularly striking is the government’s apparent eagerness to offer incentives to foreign investors—especially those from GCC countries—while squeezing local business groups dry. For instance, the federal government is working on selling a 15% share in Reko Diq at a bargain price to Saudi investors, primarily to meet the IMF’s gross financing need conditions, which is causing delays in IMF board approvals.
Similarly, the concession of a container terminal at KPT and other berths to the Abu Dhabi Port Group bypassed the first right of refusal for the private international group (PICT). This preferential treatment was given to a UAE state-owned entity in anticipation of future loans and investments, which are yet to materialize.
This writer has argued repeatedly that government-to-government (G-to-G) investment is not ideal. The most sustainable investments usually come from private investors, often in partnership with local businesses. Currently, many local investors and businesses are rapidly moving capital out of Pakistan and avoiding fresh investments due to the rising costs of energy and taxes. Meanwhile, the red carpet is being rolled out for G-to-G investors, where geopolitical interests take precedence.
The intentions of state actors may be in the right place, aiming for the country’s betterment, but their actions are achieving the opposite effect. These tactics are making local business groups increasingly pessimistic about the country’s outlook.
“I think we should cooperate with them,” one of the country’s biggest exporters, who is also in the IPP business, recently said after being called for negotiations. He believes the IPP issue should be handled commercially to ensure a win-win solution, emphasizing a professional approach. “I am advising every IPP to cooperate, but the government’s counterparts should not brand the business community as thieves,” he added.
Expecting IPPs to voluntarily give up their contractual rights is not a viable approach. There are more constructive solutions. For example, one IPP owner is considering bringing an aluminium- smelting plant to Pakistan in partnership with a Chinese firm, utilizing his IPP’s infrastructure as its contract expires in a few years. The state should facilitate such initiatives and encourage others to explore similar collaborations.
This aligns with the Special Investment Facilitation Council’s (SIFC) objective of fostering new projects by local private groups in partnership with foreign investors. However, the current negotiation tactics are sending the wrong signals. The state must rethink its strategy because local private capital may be the country’s most valuable asset. Pushing these groups to the brink is not the answer.
Copyright Business Recorder, 2024
Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar
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