IPPs: review of PPAs

According to a Business Recorder exclusive, a nine-member high-level interdepartmental committee, established to review the power purchase agreements (PPAs) with independent power producers (IPPs) has, in its preliminary report, acknowledged that some of the clauses extend undue benefit to the IPPs. This comes as no surprise as it has long been known to be the major reason for the high cost of power in the country and as long as the PPAs are not amended, electricity tariffs will far outpace not only the regional average, thereby impacting negatively on the competitiveness of our exporters, but also account for a rising percentage outlay of the total income of an average householder.

A taskforce's report led to the 1994 power policy that offered an extremely attractive 6.5 cents/kwh to prospective investors and allowed them to use any technology (apart from setting up hydel projects) with the option to choose any fuel. Today most IPPs use expensive furnace oil, high speed diesel or gas. Other incentives were also offered including low taxes, duties, fees as well as foreign exchange risk insurance, security packages and a tariff rate which consisted of two main components: (i) capacity payment to be paid by Wapda every month, whether or not it actually purchased electricity from IPPs in a particular month, inclusive of fixed costs (operations and maintenance, insurances, administrative, and debt servicing); and (ii) return on equity. The IPPs were also given the option to seek arbitration in the London Court of International Arbitration (LCIA).

The PPAs were thus structured to be extremely attractive to lure the private sector, particularly foreign private sector, to invest at a time when power shortages had peaked thereby seriously compromising the country's industrial productivity as well as the quality of life of the people; and accounted for around 5 billion dollar investment between 1990 and 1999. The fact, however, is that the IPPs continue to make massive profits even today and there is therefore a dire need for the government to revise the PPAs.

According to an exclusive news item carried by the newspaper last month, the IPPs and the government have reached an agreement, in principle, that includes: (i) a resolution for capacity payments with the IPPs decision to forego the award by LCIA with respect to pre-award interest, post-award interest and costs, but they would receive payment for three components of CPP, i.e., fixed O&M, insurance and cost of working capital during the disputed period and withdrawal of enforcement proceedings in the Lahore High Court; and (ii) interest which for Delayed Payment Rate (DPR) was calculated at Kibor plus 4.5 percent per annum, compounded semi-annually and calculated for the actual number of days for which the relevant amount remains unpaid on the basis of 365 days a year would be reduced to Kibor plus 2 percent for the first 60 days after the due date and thereafter Kibor plus 4.5 percent without compounding; for all other undisputed outstanding invoices the DPR would be worked out on the basis of simple interest instead of compounding, save to the extent that one-time semi-annual compounding shall be permissible on the disputed amount outstanding before execution of the settlement agreement against Energy Purchase Price (EPP), Capacity Purchase Price (CPP) and through invoices.

The agreement also envisages remaining effective for the remainder of the terms of the respective PPAs, as extended from time to time, unless parties fail to adhere to any of the arrangements, in which case the settlement agreement shall no longer remain valid and would terminate automatically. However, the Law Ministry is currently engaged in vetting the agreement and as soon as it receives the all-clear, the agreement would be approved by the Economic Coordination Committee of the Cabinet and then by the Cabinet itself before coming into effect. One would hope that the views of the Law Ministry are received promptly so that the agreement can go into effect as soon as possible.