EDITORIAL: During a briefing to the Senate Standing Committee on Power, the co-chair of the Energy Task Force stated that the government expects to save up to Rs300 billion annually through negotiations with IPPs (independent power producers), potentially leading to a reduction of Rs2-3 per unit in electricity tariffs.
While the government may achieve these savings after repeated negotiations, it’s essential to question whether these savings are worth the unintended consequences. The coercive tactics employed by the government are eroding investor confidence, to say the least. How can a country hope to attract the investment it urgently needs when authorities resort to threats to revise or back out from sovereign contracts?
It’s undeniable that certain IPPs have drained the economy over the past three decades. The structure of IPP agreements — from 1994 to the present — has often been lopsided, favouring IPP sponsors at the expense of consumers. In some cases, IPPs may have inflated costs for plants and machinery, which are pass-through items, thereby diluting equity and exaggerating returns on investment. There are also instances where IPPs have understated plant efficiency to obtain excess fuel, which was subsequently sold in the market.
Not everything was above board. Some IPPs may have abused the system and should indeed be held accountable. However, they are not solely at fault. Government entities, including the regulator Nepra, must also share the responsibility.
The governments that oversaw the installation of these IPPs, particularly the PPP in 1994 and PML-N in 2015, are equally to blame. Why did they approve so many projects at inflated prices in such a short span of time? They, too, should face accountability. The issue is that the same political parties responsible for these questionable decisions now seek to place full blame on IPP owners.
Furthermore, not every IPP inflated equipment costs or misappropriated fuel. Why are authorities treating all IPPs, regardless of conduct, with the same punitive approach? Even if the decision is to revise all contracts — since a comprehensive forensic audit may be impractical — this should be done within the ambit of the law and without the taint of real or perceived coercion. This isn’t the first time IPP renegotiations have occurred; they also took place in 1998 and 2020. IPPs have come to expect renegotiations and, as a result, factor in higher risk, which translates to higher guaranteed returns. These returns have increased across the policies of 1994, 2002, and 2015.
However, today’s negotiations are unique in their use of coercive measures. Businesses outside the IPP sector now fear similar tactics could be used in the future, discouraging them from expanding. Western investors who led the 1994 investments have shown little interest since, and some foreign delegations have expressed concern over the nature of current IPP negotiations. Locals, who were the primary investors, in the 2002 policy, largely sat out the 2015 projects. Chinese investors—the main backers of the 2015 policy — may hesitate to invest in future government-backed energy projects.
The critical question remains: who will invest in the power and infrastructure sectors when the country needs it most in the future?
Copyright Business Recorder, 2024
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