IPPs' issue: Flawed govt approach?

The government is reportedly divided in two camps on level of engagement with the Independent Power Producers (IPPs) to bring down capacity payment and subsequently reduce tariff.

The political figures in the federal cabinet, who are unaware of power sector's dynamics, contractual obligations and other technicalities want the government to pressurize the IPPs to waive off or at least bring down capacity payments. On the other hand, officials dealing with the projects differ with these political figurers.

However, background interviews with the officials and industry stakeholders reveal that any relaxation in the existing contracts can only be possible on amicable basis.

For instance, National Electric Power Regulatory Authority (Nepra) which approved (right or wrong) tariffs for the power projects as per the approved policies of the government, has proposed that the government enter into renegotiation with IPPs regarding markup on delayed payments (1 per cent reduction = Rs 1 billion for every Rs 100 billion payable to IPPs - around Rs 600 billion on December 31, 2009).

On April 2, 2020, Cabinet Committee on Energy (CCoE) constituted a committee under the chairmanship of Minister for Power, Omar Ayub, comprising Special Assistant to Prime Minister on Coordination of Marketing and Development of Mineral Resources, Secretary Finance, Secretary Power Division and Secretary Law and Justice to deliberate on various viable and mutually acceptable options to make the power sector sustainable.

The potential areas of discussion would include heat rate test, foreign currency indexation for local investors, rescheduling / increasing the debt term, O&M costs, return on equity etc.

Private Power and Infrastructure Board (PPIB) has summoned the Chief Executive Officers (CEOs) of 30 IPPs on April 16, 2020 (tomorrow) in two groups to discuss tariff related issues and submit government's proposal to them.

The CEOs of following 14 IPPs have been invited at 11:30 am; (i) CEO-Kapco; (ii) COE Hubco, Khi; (iii) CEO, Pakgen; (iv) CEO Lalpir; (v) CEO, Altern Energy; (vi) CEO Fauji Kabirwala Power; (vii) CEO Habibullah Coastal Power Company; (viii) CEO, Kohinoor Energy; (ix) CEO, TNG Liberty Power; (x) CEO, Rousch (Pakistan) Power;(xi) CEO, Saba Power; (xii) CEO Southern Electric Power Company; (xiii) CEO, Uch Power Limited and (xiv) CEO, Davis Energen Power, Lahore.

The CEOs who have been invited at 2 pm are as follows ;(i) CEO, Attock Gen; (ii) CEO Atlas Power; (iii) CEO Engro Energy; (iv) CEO Saif Power; (v) CEO, Halmore; (vi) Hub Power (Narowal); (vii) CEO Liberty Power Tech, Khi; (viii) CEO Nishat Power; (ix) CEO, Nishat Chunian; (x) CEO Orient Power; (xi) CEO Foundation Power; (xii) CEO Sahpire; (xiii) CEO Uch-II Power; (xiv) CEO Laraib Energy; (xv) Patrind Hydropower; (xvi) CEO Gulpur Hydropower Project; (xvii) CEO Siddiqsons Energy Khi and (xviii) CEO, Lucky Electric Power, Khi.

The IPPs say that they have always remained available to engage in a meaningful dialogue with the government to discuss and find an amicable solution to the most pressing needs of the country.

Insiders claim that the government can use the report of Muhammad Ali led committee as leverage to pressurize the IPPs to reap maximum financial benefit at the time when the country is facing big economic challenges and unprecedented financial pressure due to Covid-19.

The top brass of Power Division has already assured the federal cabinet that action will be taken against delinquents in the light of recommendations of the committee. The report is now out but its details have not been made public so far. However, whatever is being reported in the press are the same issues that have remained under discussion at different forums.

"When we will sit together all issues will come under deliberations between the government's team and IPPs representatives," said one of the officials on condition of anonymity.

The official who understands the worth of international agreements maintains that whatever contracts (right or wrong) were signed in the past are valid/ legal and should be honoured as IPPs are Pakistan's partners for up to 25 years and 30 years.

"We need to negotiate with the IPPs in good faith as long-term partners as they are also aware of the country's economic situation especially after spread of Covid-19," he added.

In case of any undue action on part of the government, IPPs have conveyed in clear terms that the matter will again be in the international court which will also hit the investment prospects of Pakistan.

"Things are not as wrong as is being reported in the media," the official maintained.

IPPs argue that they have given their sweat and blood for the development of Pakistan at a time when no one was willing to invest in the country. The IPPs have empowered an uncertain economy, which had not witnessed such a sizeable quantum of Foreign Direct Investment ever in the past.

The government has not paid the IPPs for years, and IPPs are on the brink of default, owed an amount of approximately Rs 600 billion and still continue to remain available to provide uninterrupted supply of electricity for the country, always keeping the greater national interest in the forefront.

Previously, nine IPPs had already given a lot of relaxations to the government in the form of a settlement agreement, keeping in mind the national interest. Yet it was the government that has been unable to obtain formal approval(s) to implement the same; hence that opportunity has been lost.

The settlement agreement was consented to by such IPPs that had won the Arbitral Award by the London Court of International Arbitration (LCIA) in 2017 for the recovery of unpaid capacity payments, which had been deducted in contravention of legally valid and binding Power Purchase Agreements (PPAs).

IPPs maintain that similar witch-hunting exercises in the past have caused immense damage to the investment climate and economic prospects of the country, and "if we do not learn from the past mistakes, it will again lead to the same negative results".