Who truly own the IPPs?

The Pakistan power system is ever in the news – unfortunately, always in the negative sense. The power tariffs are backbreaking while the service to the power consumers has plummeted to the lowest rung.

The whole county has turned into power sector analysts – with all and sundry coming-up with bizarre solutions. The solutions fall between renewable energy as the ultimate solution and privatising Discos, as seemingly these entities are unable to recover the required revenues.

However, the whole debate forgets that more than 80% of the cost making up the present power tariffs relates to power generation and that the IPPs, both in the private and governmental domains, are predominantly responsible for the present surge in costs.

A little foray reveals that indeed it is so and basically it is the private IPPs and the governmental undertakings, based on the same architecture as that of the private sector IPPs that are responsible for the back-breaking tariffs.

The falling PKR viz. a viz. the USD may have contributed, but surely remains the poor second. What exactly is the architecture of IPPs? We see that firstly a sponsor comes and who is ready to invest the equity portion, which could be in the range of 20 to 30% of the total cost of the project.

Once the project, inclusive of technology and fuel along with its location, is firmed up, then arrangements for funding through commercial loan for the rest up to 80% cost of the project is made.

All of the loans are on the availability of a GoP-backed sovereign guaranteed Power Purchase Agreement (on the take or pay basis). Based on the various power policies of the Govt. of Pakistan, the return on equity could be from 15 to 18%, and which will be paid to the sponsor for the whole currency of the Power Purchase Agreement (PPA).

The cost of the IPP production includes the fixed return on equity as the per the relevant policy, the O&M cost (inclusive of fixed and variable portions), the cost of fuel needed to run the power plants, the yearly burden of insurance and lastly the cost of running finance facility needed to operate the plant and to maintain fuel stocks in accordance with the requirement of the PPAs.

The loan part (both principal and interest and all other costs mentioned above) are designed to be paid-for by the power customers through the consumer-end tariff as determined by power regulator NEPRA, which includes cost of generation of the specific IPP which thereafter adds on to the whole basket. In other words, the sponsor is not obligated to even spend one cent on the eventual production by the IPP.

This is so because all costs are basically pass-through items to be paid by the power customers via the Central Power Purchasing Agency (CPPA).

This further translates into another fact that the sponsor cannot ever dip into any of these pass-through items, as these are only being processed through the IPP as a trust and nothing else. It is because of this situation that none of the sponsors has ever been labelled as an owner. The definitions of both sponsor and owner as depicted in various encyclopaedias as below:

“Sponsor or sponsorship may refer to a person or organization with some role (especially one of responsibility) regarding another person or organization: Sponsor (commercial), supporter of an event, activity, or person. Sponsor (legislative), a person who introduces a bill.”

“Sponsor is the one who assumes responsibility for some other person or thing”

“A person who owns something: one who has the legal or rightful title to something: one to whom property belongs.”

Once the difference between a sponsor and an owner is understood, it can be easily comprehended that a sponsor is distinct from an owner, and both these cannot ever be used in place of each other and nor these can be used in any document to mean the same thing. It is because of this fact that all of the documents having any nexus with the IPPs – initial application or proposal submitted to the PPIB, the implementation agreements, LOIs, the applications to Regulator NEPRA, the LOS by the PPIB (so-called one window facilitator for IPPs), the tariff determinations made by NEPRA and the eventual PPAs (Power Purchase Agreements) do not talk about any IPP owners and rightly restricts itself to the word “SPONSORS”.

Additionally, all of these documents, on the basis of which any IPP operates, do not ever use the word “OWNER” and nor even any illusion to this word is ever made except in the PPAs where the corporate body / entity is considered as an owner.

The corporate body is basically the trustee of the interests of the sponsor (pitching in just with an equity portion) and the end-users who basically are footing all of the expense including but not limited to the management expenses – a part of the O&M expenditure, which would also contain the financial burden of the sponsor if he is a part of the management of the IPP.

In order to further understand the connotation of the word sponsors, it is important to foray into the operation of the IPPs and the meaning of pass-through items in the financial and legal language.

Pass-Through Items. Certain costs or charges identified as Pass-Through Items under this Agreement which shall be payable by the Purchaser to the Seller on the basis of actual necessary cost reasonably incurred as agreed between the Parties.

Pass-through costs are third-party costs incurred by a taxpayer on behalf of a related party. These transactions are carried out with no intention to generate profit since no value-added functions were performed by the taxpayer. [Here, taxpayer can be considered as the sponsor of an IPP].

The above definitions are most telling, specially the fact that all pass-through items are just being passed through the IPPs sponsors for process only and such items / costs can never be made a part of any profiteering by the sponsors.

Unfortunately, and surely criminally, most sponsors have dipped into this trust held by them while all entities required to assure that nothing of the sort happens have acquiesced or have been complicit in letting the sponsors make criminal gains. This all is evident in the balance sheets to a great extent – while much seems to be hidden from any prying eye.

Once the fact that the sponsors do not own the IPPs and that they are only allowed the fixed return on their equity amounts, the question arises as to who owns the IPPs and what should be the fate of these entities once the PPAs end or get terminated.

The answer lies in the fact as to who has paid for setting-up the IPP in question and then as to who has paid (in full) for the operations. It is seen that, but for equity part, basically 20% and on which too the sponsors have been making windfall gains and that too in USD terms, all of the cost has been paid by the purchaser viz. the GoP through the consumer-end power tariffs. Besides, all costs for operations too are paid by the purchaser – hence, in no case can the sponsor claim ownership of the IPP in question.

This in fact was duly incorporated by the original HUBCO PPA, which duly envisaged transfer of the IPP to the GoP / President of Pakistan on a notional cost of Re. 1/- only once the PPA ended (after 25 years). This clause, unfortunately, was criminally changed through the infamous third amendment to this PPA in 1996 –even before HUBCO started production.

The sad part is that this criminal facility that the sponsors owned the IPPs and that they merited to keep the plants as their own after the currency of the PPAs ended, was also given to other IPPs set up under the 1994 Power Policy – sadly to be accepted as kosher for so-called investments under the subsequent power policies too. In other words, the very principle of the IPPs policy was changed to the detriment of the country.

This situation has further exacerbated by the sad fact that the sponsors of the IPPs have been acting as the owners and the four entities viz. PPIB, NEPRA, CPPA(G) and Power Division processing new IPPs or being responsible for subsequent operations, have wrongly been considering the sponsors as such, which by any stretch of imagination they are not. It is because of this situation that the few IPPs which have completed the tenures of the relevant PPAs have simply kept on to the plants with them and have even got their generation licences renewed on the ‘take and pay’ basis. The best should have been the takeover of the IPPs/Plants by the government on behalf of the power consumers of Pakistan.

The least could have been the takeover with 20% ownership (equalling the equity amounts) being left as shareholding of the original sponsors.

This is evident on the basis of the fact that except for the equity part of 20% cost of the IPP/Power Plant, which too is suspect as in all cases heavy over-invoicing is evident, all other operational costs including fixed and variable O&M charges (including the burden of insurance and interest payments on finance to maintain fuel stocks etc.) have been paid in toto by the power consumers of Pakistan through the relevant GoP entities.

It is a foregone conclusion that the real owners of these IPPs, including the ones whose PPAs have ended, are owned by the power consumers of Pakistan and the sponsors of the same have no right at all to the same.

In fact, they need to be held responsible for defrauding the people of Pakistan as has been truly depicted in the HUBCO’s Audit Report of 1997 and then in the Muhammad Ali Commission Report of 2020. It will be opportune to keep this fact in view while terminating the current PPAs, which is being contemplated by the GoP at present.

Copyright Business Recorder, 2024