The history of IPP operations in Pakistan is saddled with controversy, including contract interpretation and enforcement, ehtesab, case law, creation of NEPRA, public hearings, and so forth. Finally, in 2002, investors came to believe that the worst was behind them. At what cost? A lost decade of power sector investment shortages, large amounts of load shedding, and the sorry saga of Nandipur. The private investors, knowing full well the risks associated with the projects and the power purchaser, wanted risk mitigation, e.g., protection against PKR devaluation. Nominal PKR profits may seem high as the return on equity, ROE, wherever applicable, has been indexed to USD. If the PKR goes down against USD, ROE in PKR goes up to compensate. We must understand though that the real ROE remains unchanged.
What are IPPs? IPPs are single product companies, that is, they sell electricity under 20-30-year sale contracts to a single buyer, i.e. WAPDA. Since May 1998, an important issue facing Pakistan policymakers has been whether independent power producers (IPPs) produce expensive electricity. It is contended that IPPs’ expensive power has rendered the state utility, Water and Power Development Authority (WAPDA), bankrupt. It is also alleged that IPPs indulged in corruption and colluded with WAPDA officials to get their signatures on contracts which allowed procurement of expensive power by WAPDA and which it can ill afford now. If we sift through the rhetoric surrounding IPPs, we can focus on the central issue of whether IPPs produce expensive power. If it can be established that IPPs produce cheaper power than WAPDA, then the second part of the argument that WAPDA became financially weak because of IPPs’ expensive power is null and void.
Any long-term investor, in a regulated market, with a single customer, would not wish to be saddled with the soft currency of a conflict-ridden economy, facing sanctions, domestic strife, and terrorism. Investors and their bankers demand mitigation against risks and eventualities through tools such as indexation and protections e.g., against change in taxes, etc. If tomorrow the PKR moves up to 200 USD, why should the investor suffer? Nominal PKR returns would rise again to protect the real return. The Government of Pakistan should fix its fiscal house, stem losses in the power sector, sell discos, improve recoveries and stop blaming the IPPs. Investors should not suffer the cost of power theft, bad loans and predictable, fiscal profligacy of the government.
The role of the IPPs cannot be downplayed as their long-term stake in the economy has been pivotal in realizing the country’s economic potential.
Given the current domestic scenario and the series of statements and hearings, it would not be incorrect to say that IPPs are indeed being subject to a lot of scrutiny, again, if not outright political victimization. Power shortages in Pakistan have been reduced substantially in comparison to the 1990s. The shortages now take a smaller toll on the country’s productive capacity and infrastructure, and that is in large part to do with IPPs. The role of IPPs can certainly not be downplayed as their long-term stake in the economy has been pivotal in realizing the country’s economic potential and has greatly improved its standing. If the country still suffers, it will not be on account of lack or shortage of power.
The fault, therefore, is not in the IPPs. The fault is in the sinking rupee, in losses at distribution companies (Discos), and the piling payables of the Government of Pakistan and other government-owned entities. We must focus on where the problem is and where the counterparty is keeping its end of the agreement. The IPPs have given their all for the development of Pakistan at a time when no one was willing to invest in the country. They have empowered an uncertain economy, which had not witnessed such a massive Foreign Direct Investment ever in the past. On the other hand, the government has not paid the IPPs for years, and IPPs are at the brink of default being owed an amount of approximately Rs600 billion; yet, they still continue to remain available to provide uninterrupted supply of electricity for the country.
It is important to remember that in times of economic crisis, such as in a post-COVID-19 world, such maligning attempts can cause immense damage to the investment climate and economic prospects of the country. The IPPs claim to be 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. The government should accept this offer and engage IPPAC and the IPPs in talks, as well as using them to provide uninterrupted power supply.
Over the last two decades, electricity shortfall and instances of load shedding in the country bear witness to the fact that we need these IPPs. Without getting into the discussion about corruption within the IPPs, one solution would be for the government to acquire them under the relevant clauses of the Implementation Agreement, after giving fair compensation and making money for itself. If that is not an option, then the government must give the IPPs their due, and ensure that they play a positive role in our economy.