Rethinking energy sector reforms

Recently, eight multilateral development finance institutions, including the Asian Development Bank and International Finance Corporation, wrote to key economic and energy ministers, warning that unilateral renegotiations of renewable energy Independent Power Producer (IPP) contracts would be detrimental to the sector’s long-term stability and discourage much-needed private investment.

This is a troubling sign for an economy desperate for foreign investment and loans to restore growth.

The issue is not with renegotiating IPP agreements per se. This is not the first time it has happened, and investors factored in such risks when signing Power Purchase Agreements (PPAs). Historically, each successive power policy has seen investors demand higher returns and stronger guarantees.

However, the tone of the letter—and informal conversations with IPP owners and lenders—suggests that the manner in which negotiations are being conducted is causing more harm than good.

The government must step back and reassess its strategy. Reforming the energy sector and rationalizing tariffs are critical. Underutilized IPPs pose a long-term payment risk to lenders and shareholders, while sustainable demand can only rise if tariffs are lowered. Addressing inefficiencies in power generation, transmission, and distribution is essential to making this happen.

The Energy Task Force was established to reform the sector, but its methods need serious re-evaluation. The renegotiation of older IPPs (from the 1994 and 2002 policies) has yielded little in terms of tariff reduction, but it has undeniably shaken investor confidence.

Domestic business owners outside the IPP sector have also voiced concerns, and at a time when financial capital is already moving out of the country; this is a risk Pakistan cannot afford.

Now, Pakistan’s foreign lending partners are raising alarm bells. The task force is attempting to alter the PPAs of wind and solar IPPs where these institutions have lent significant capital.

The development finance institutions (DFIs) note that they have collectively invested US$2.7 billion in Pakistan’s power sector over the past 25 years—an investment pipeline that could dry up if confidence continues to erode.

If this approach continues, the next in line will be Chinese IPPs, where investment exceeds US$27 billion, making China the single largest bilateral investor and lender to Pakistan.

The government must proactively engage with Chinese lenders to ensure project and sector viability. Mismanagement here could jeopardise broader economic ties—at a time when Pakistan is hoping to launch CPEC Phase-2 by attracting industrial relocation. That process is already stalling due to multiple Chinese concerns, including security threats to their personnel. The government must avoid adding more to their list.

At the same time, investment from the Middle East and the West—including the DFIs—is critical. However, there have been no firm commitments from these sources, and the ongoing IPP renegotiations may cast doubts on already committed investors, particularly in the recently-bidded K-Electric renewable projects.

The message from the DFIs is clear: heavy-handed renegotiations are damaging investment sentiment. The belief that coercive tactics will not affect capital inflows has already been proven wrong. Pakistan is already starved of dollars, and every domestic or foreign investor requires them to build capacity. The avenues for securing these funds are shrinking as the need grows. The country cannot afford to alienate its last remaining investment partners. The task force must recalibrate before it’s too late.

Copyright Business Recorder, 2025