The tallest nail

To a hammer everything is a nail and IPPs are the tallest nails. Decades ago, when this scribe was a student of Botany, at the Government College, his ecology professor had noted “they imposed an engineering solution onto a biological/ecological problem”.

He was referring to SCARP, the Salinity Control and Reclamation Project, entailing of sinking of numerous tube-wells in affected lands, designed to combat the twin menace of water-logging and salinity.

Fast forward to yesterday, the same uninformed overreach is Exhibit No 1 in the case of the purported solution to the IPP Question comprising of forced conversion, “Take or Pay” to “Take and Pay” regime, and “requests” to terminate the PPAs. To add insult to injury, someone suggested, undoubtedly to embarrass the political leadership, a public signing ceremony to celebrate GoP’s reneging on the concession agreements signed for/by the President of Pakistan.

To re-appropriate my teacher we are imposing an administrative, brute-force, almost feudal, solution to an issue, which is nothing but a financial/capital markets problem when all along there have been available kosher, market-based solution options. To get to that, however, a better understanding of finance will help.

Reportedly, the American International Development Finance Corporation (DFC), successor to OPIC, instead of giving its consent to reduce the tariff discounts for the five wind power projects (WPPs) financed by them, has proposed/offered a five-year debt tenor extension and reduction in spread by 50 basis points with the request that GoP should consider DFC’s proposal on the following merits:

(i) provide the GoP with an immediate and greater reduction in the tariff (read lower current capacity purchase price) (ii); sets a new benchmark for foreign financing, which can benefit GoP in future lending from international DFIs (including Chinese lending); (iii) improves the country’s balance of payments by spreading debt payments over longer tenor; (iv) preserves investor confidence …,thereby assisting future investments in ARE sector…; and (v) (now this is embarrassing for a pretender student of finance like this scribe) NPV of savings to GoP from the reduction in tariffs is greater than the increased interest exposure over the extended debt term.

The DFC is reading Finance 101 to bureaucrats, accountants and GoP financial trouble shooters, some of them are ‘practical men …slaves of some defunct accountant/munshi” who brandish their 12-digit calculators at the uninitiated and decide on the IPP Question which is at most, not more than an intermediate finance level exercise.

The DFC’s referral to the positive NPV as a gain after covering for increased interest payments over the reschedule period reflects badly on the technical/finance knowledge of at least some of our negotiators.

Something must have transpired which made DFC to introduce this NPV line. It is sad and scary to imagine the fallout from such technical/finance advice available to the decision-makers to handle topical financial issue like the IPP Question.

DFC’s is a good offer, financially. Though this scribe has not seen the numbers, this offer no doubt will help reduce the current cost of power acquisition from these 5 WPPs and a positive NPV. This is the magic of finance. As highlighted by DFC, we can employ this intermediate-level finance and win relief in Present Value terms in other cases further afield. Finance 101.

Actually, we can do even more to further reduce the current cost of power acquisition from such IPPs even after utilizing DFC re-profiling. Only by using market-based financial solutions and not Don Corleonesque “offers that these businessmen could not refuse” can we help Pakistan.

Calling Pakistani businessmen, IPP walas, textile exporters or anybody who dares to go into manufacturing, “chor [thief]” will not help. Sometimes one wonders why do they hate desi businessmen, admittedly not all of them are snow white? An example will highlight this point.

AES Lalpir and AES Pakgen, two US-owned IPPs, 1994 Power Policy, had refused to succumb to “coercive persuasion” back in the Ehtesab’s opening innings. No haircuts. The Americans, in the teeth of Ehtesab, had stood their ground, strictly on principle and rightfully so.

AES then sold these assets, same tariff, to the Nishat-led consortium. Unlike Americans then and the Americans and Chinese now, the two AES IPPs, now majority Paki owned, and a few more, were “persuaded” in 2021 and reportedly are now being ‘re-persuaded’, to accept haircuts and to even terminate PPAs, foregoing their remaining contractual payments.

Being a Paki investor, good luck to you if like IPP, the government is your only customer, carries a risk of sudden death, forcing people to think again before partnering with the government. It is sad to know that for achieving these results they, the hammer, really did not need to impress desi investors to take two haircuts within a span of 3-4 years. There have been and are still available better, market-based solutions to achieve the same ends. But for that one has to have seen about NPV.

These entrepreneurs, who are signing off, are marketing men. They know when to walk away. They cannot have a malakhra with the combined might of the civil-military behemoth, judiciary, an uninformed public and unlettered, real-estate, and opinion makers. They still could, but it is not worth their time. They cut their losses and move on. Damage has, however, been done to the full faith and credit of the GoP.

After few quarters when these public servants and their finance-light fixers have gone off the radar, the entrepreneurs, the manufacturers and exporters will still be investing in BMR and hopefully some greenfield as well, adding value and earning export dollars.

An investor may not need think twice before passing an investment opportunity in a land where desi-owned, sovereign-guaranteed contracts are being ripped, 28 years into their 30-year life? This is not us Pakis’ first rodeo. We had foreign currency deposits forfeited before. This is just a latter-day nationalization/expropriation.

Copyright Business Recorder, 2024