IPPs in the dock?

PM Imran Khan vowed in the midst of recent sugar, wheat and other commodities shortage and hoarding crisis that he would not spare the cartels and hoarders and take them to task.

The start is admirable. He made public the enquiry report about sugar and wheat scandal, overriding its adverse political consequences emerging from within the ranks of his own party and his allies in the government, notably the PML-Q.

To limit direct access to sensitive information some changes in the portfolios of ministers were made pending a detailed report expected on 25 April 2020 when some meaningful and long-term actions and remedial measures will hopefully be rolled out.

The next scandal which has surfaced is in relation to the conduct of Independent Power Producers (IPPs). The profits systematically being made by IPPs, over a period extending from 1994 to date are said to be mind-boggling and far beyond any other legitimate business in Pakistan. This scandal is far complicated one with its local and global implications and tentacles.

The levels of IPPs' profit margins have always been intriguing and raised red flag in many circles including the investigation by the Senate committee on energy during the last tenure of PML-N, but all of it was made to die down without reaching any conclusion. The cat is now finally out of the bag.

The nine-member committee headed by ex-chairman of Securities and Exchange Commission of Pakistan (SECP) Mohammad Ali, which was earlier constituted by Prime Minister Imran Khan on August 7, 2019, has unfolded "startling disclosures" in its report recently submitted to PM Imran Khan.

Under the 1994 power policy, 16 out of 17 IPPs, which invested a combined capital of Rs 50.80 billion, have so far earned profit in excess of Rs 415 billion, having taken out dividends in excess of Rs 310 billion.

As per claims, most of these IPPs had an investment with payback period of 2-4 years, and the profits generated were as high as 18.26 times the investment and dividends taken out as high as 22 times the investment. Six companies earned an average annual Return on Equity (RoE) between 60 to 79 percent and four companies earned RoE of around 40 percent. These profits are probably unheard of in any other sector, especially with such low level of risks and guaranteed payments by the government.

With the "disclosure" of the IPPs profit levels, the report also made some recommendations, foremost being that the government should shift the base tariff for IPPs from US dollars to Pak rupees and finish the 'take or pay' contracts.

The report also underscored the need for establishing a commission for forensic evaluation and legal audit of all IPPs. The report also suggested to the government to consider the retirement of GENCOs, as well as IPPs that were established as per the 1994 and 2002 power polices.

About the circular debt in power sector, it recommended a one-time absorption of circular debt stock to the public debt, ensuring it is linked with quantifiable and accountability mechanism whereby future savings due to reduced cost of generation and other measures outlined in this report are used to pay back this one-time payment.

The recommendations made in the enquiry report means a dramatic change in the very basis of the agreement signed between the government and the IPPs. As such this level of enquiry is not likely to yield any meaningful results.

Also, the solution offered in the report to wipe out circular debt is primarily based on the unrealistic assumption that the IPPs will ultimately yield to the government demands. This too is not likely to happen. PML-N, in its first tenure, attempted to extract concessions out of IPPs through arm-twisting and even imprisonment but its strategy did not work because it was based on mere threats with no legal or technical back-up. The IPPs called the bluff and the government finally had to flow with the tide.

Reportedly, as a consequence to the published enquiry, the PTI government intends to invite the IPPs and extract concessions from them. It is rather premature and unwise for the government to sit on a negotiating table with IPPs and show its cards on the basis of existing preliminary report which nothing but a fact-finding report or a wish-list. On this basis, at best, the government may extract some minor concessions from the IPPs.

IPPs got their power purchase agreements structured by a team of foreign lawyers specialising in such agreements.

All IPPs power purchase agreements have an arbitration clause with place of arbitration identified as overseas, mostly London. IPPs, once again, appear confident that legally they are not on a weak wicket and can win the case.

The power purchase agreements have much in favour of IPPs. The government guarantees a minimum IRR of 17 percent but there is no upper limit. IPPs simply availed the incentives as offered to them across the board by the government. Business is business.

The only way to effectively confront IPPs is through establishing criminality in the financial and technical conduct of IPPs, which is not possible because of a variety of reasons.

For once, the government has to conduct a full forensic and detailed financial and technical audit of not only the IPPs, but the whole supply chain starting from procurement of each power plant's fuel to its supply to IPPs. It will also be required to examine the conduct of IPPs related to variable parameters, the conduct of the regulators, notably, Nepra and Ogra and the conduct of Gencos from power generation to its supply to consumers. All of them are seamlessly interconnected as one fraternity.

The audit needs to be conducted by independent experts from home or abroad. Some startling and meaningful results are expected to emerge out of it which may provide the government a legitimate basis to proceed further for meaningful negotiations with the IPPs. Anything short of this will not yield the desired results.

(The writer is former President of Overseas Investors Chambers of Commerce and Industry)