A new round of IPP negotiations has commenced. The cat (invisible technical team) is out of the bag. The round began with five power plants—four from the 1994 policy (including one prior to that) and one from the 2002 policy. The technical team, under the leadership of SAPM Muhammad Ali, the chief architect of the 2020 negotiation, was convened in a powerful office in the twin city. Owners of four IPPs met over the weekend, and the fifth one, arguably the biggest businessman in the country, is due to visit today.
The reason these five IPPs are clubbed is that they are effectively dispatching zero power. The technical team recommends terminating these IPPs without any compensation. The authorities started with a harsh option: forget about the receivables and forgo the contractual compensation upon premature termination. And if they have any liabilities, that is their concern, not the government’s.
One point is right. These IPPs, which are rarely used and near the end of their contracts, should be terminated. However, the termination should not be unilateral, implying that the IPPs should not face forced termination without any payment. It’s not optimal to pay the entire amount. There should be a middle ground. The negotiation should be amicable and not hostile. The signaling is wrong, and this could have unintended consequences.
“This kind of negotiation will take us back to 1974 when Bhutto did the nationalization,” frustratedly said one of the IPP owners, who has a vast array of businesses in Pakistan. “The primary concern pertains to the year 2015, which the government appears to be neglecting,” he stated. “They can negotiate by showing respect; we have footprints in many businesses, and it’s in all of our interest to negotiate for the betterment of the country,” he wisely summed it up.
However, the IPP owners felt a bit harassed. One theory suggests that the powerful circles and their technical team treat various IPPs differently, and this behavior variation is not solely based on the merits of the IPPs but also on the perceived reputation of the respective owners. The government should conduct a forensic audit and punish those who have overpriced IPPs and stolen fuel over time.
However, ultimately, the decision hinges on the contracts and the necessity of these power plants. Not all IPPs under negotiation are of the same size and have varying structures. The biggest IPP (amongst the five) is arguably the top power sector company, which is one of the first to establish an IPP in Pakistan and has invested in CPEC projects too.
That company has used future cashflows of the IPP under negotiation to provide guarantees to the lenders of newer IPPs. If the company fails to receive any cash from that IPP, it could have a negative impact on its other projects. It’s like a house of cards, which, if it falls, can drag the whole power sector.
The technical must be cognizant of these nuances. Reports indicate that the technical team believes they should face criminal proceedings. That statement could only be a coercive measure, as legally, it has no standing. There was no government charge for these cashflows, and any company can leverage them for future projects.
Some participants have the impression that certain members of the technical team want to please powerful people. And in the process, they are ignoring the bigger picture. The point is that the Sahiwal plant, which uses imported coal alone, has a higher capacity payment than all the IPPs in 1994 combined.
The owners of these IPPs are big investors. They are developing new projects and have the potential to attract foreign partners for future investments. Avoid pushing them too far, as this could potentially polarize the private sector as a whole. The economy cannot achieve sustainable growth without private investment. The primary goal of IPP negotiations is to lower the energy tariff in order to stimulate growth. If you want the golden eggs, don’t kill the hen.
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