Secretary General (Federal) of the Businessmen Panel (BMP), Ahmad Jawad said in light of the recent COVID-19 pandemic which has devastated not only the social fabric of the society but also the economies of the world, Pakistan is no exception.
As per latest data on 8th April 2020, more than 4000 people have been diagnosed with the disease. Even though, Pakistan has not been hard hit as US, China or Italy in terms of cases but the economy of Pakistan has come to a standstill.
The economy of Pakistan was already reeling from the twin deficits; Fiscal & Current. This pandemic is rearing its head towards another deficit; Business Confidence.
The business confidence index had peaked at 52 in December 2019 (Appendix B) which has been one of the highest since the start of the business survey. But the recent pandemic may take its toll on the business which is already reeling with expensive feed stocks such as electricity and gas.
Businessmen Panel (BMP) wants to bring to the attention of Prime Minister that electricity is one of the basic ingredients to run any business.
The cost of electricity to the business may vary depending upon the industry but it is a known fact that electricity has become a heavy burden on the balance sheet of any business.
Though the zero rated industries have started benefiting from 7.5cent/unit electricity but sectors which fall outside this domain are still reeling and pulling every lever possible to make their business stay afloat.
If the current electricity tariffs stay as it is then the business will have no other option but to start passing on the excessive cost of electricity to their customers which would increase the SPI even further which already peaked at 16.9% in January 2020 (Appendix C).
Since the BMP believes that business community and government are partners in the development of the country, we do not only want to highlight the issue of high cost of electricity but would also like to recommend ways on how business along with government can achieve this.
As per previous government regimes, many IPP contracts were signed in haste which either had fixed dollar domination or had a fixed capacity clause. While the seasonality factor of electricity consumption was not properly baked in the contract, this led to contracts which were lopped sided in favor of IPPs.
This not only hampered the cost structure of electricity but also led to increase of circular debt which has been growing at the pace of 10bn/month (Appendix D). Outside of the total government debt, one of the biggest burdens on the government is circular debt which has now reached almost 1.7 trillion PKR (Appendix E).
We would urge the government through Ministry of Energy to review at the current IPPs from the angle of using "force major" clause. In order to use the force major clause, there requires three conditions to fulfill.
The event must be beyond the control: This condition is already met as COVID-19 falls under "pandemic" criteria which are also declared by WHO.
The affected party obligation is hindered: This is also met as the power sector of Pakistan is structured in a way that consumers pay to the CPPA (Central Purchasing Power Authority) through DISCOs (Appendix F).
Since, the consumers such as business are already shut down, they do not require any electricity while the CPPA is still liable to pay to IPPs as per fixed capacity charges clause.
3. The affected party has taken all steps: This is also met, as can be seen that with limited shutdown across Punjab, KPK and Balochistan and complete shutdown in Sindh, the total consumption of electricity has still not gone beyond the projected consumption of 11GwH. (Appendix G).
In essence of above fulfillment criteria of "force majeure" clause, we should go ahead and use this clause to renegotiate lop sided IPP contracts. This will not only ease the burden of high production cost of electricity but will also bring a respite to the circular debt which has become a nuisance in recent times.
The later also becoming a bone of contention in recent review of IMF to release the third tranche of $6bn loan.
The other benefit of suspending the IPPs while using the "force majeure" is also the dwindling foreign reserves. All the efforts done in recent past to increase the forex has been reversed with the onset of corona pandemic. The reserves have fallen down 7% in one week (Appendix H) which may bring down all the efforts done to zero out the current account deficit.
The last benefit of renegotiating the IPP contract is reduction in inflation which has been growing in recent past due to passing on the additional cost of electricity to consumers.
China has so far issued more than 4300 force majeure certificates (Appendix I) which shows that Pakistan can also follow the suit to review at the "force majeure" clause with IPPs and relieve the public and business of high cost of electricity which has been hampering the economic growth of Pakistan.