FeaturedNationalVOLUME 16 ISSUE # 02

IPPs and power sector reforms

The Independent Power Producers (IPPs) have for long been a thorn in the side of Pakistan’s power sector. A recent inquiry committee report on the independent power producers is an eye-opener. The losses of over Rs4 trillion are a bigger scandal than any financial scam in Pakistan’s history.

It is good that the government has finally succeeded in resolving the vexed issue of the IPPs. The government and the IPPs have reached an understanding on a reduction in the rate of return on equity and late payment surcharge (LPS), and sharing of savings on account of plant efficiencies. A memorandum of understanding (MoU), containing 13 points, has been signed between the two parties. The IPPs, which were set up under the 2002 Power Policy, have now agreed to alter their existing contractual agreements.

After approval by the National Electric Power Regulatory Authority (NEPRA), the federal cabinet and IPPs’ Board of Directors, the documents and procedures of the understandings would be completed within a short time. They will be submitted to the NEPRA and the Central Power Purchasing Agency (CPPA) to be followed by legal documentation to reflect the amendments needed to the relevant agreements.

It may be added here that the MoU is valid for six months and it will stand terminated on the signing of the detailed agreement. According to the MoU, the two parties have, in the larger national interest, voluntarily agreed to provide concessions considering the fact that a significant period has been passed since its Commercial Operation Date (CoD). It was agreed that all projects will convert their contracts to a take-and-pay basis and until then, the existing take-or-pay will continue.

The return on equity (RoE), including Return on Equity During Construction (RoEDC) for local investors, will be changed to 17pc per annum in rupee terms without dollar indexation, while for foreign investors registered with the State Bank of Pakistan, RoE will be 12pc per annum on NEPRA-approved equity at CoD. Similarly, any saving in fuel for oil-fired projects would be shared on a sliding scale starting from 70:30 in favour of the power purchaser for the first 0.5pc efficiency improvement while any future savings in O&M of oil-fired projects will be shared 50:50 after accounting for any reserve for major overhauling which would be by the power purchaser or the NEPRA as mutually agreed and the power purchaser will not share in any efficiency losses.

Likewise, for gas projects, fuel and O&M will be taken as one consolidated line and any net savings will be shared 60:40 by the government and the IPPs for gas projects after accounting for any reserves for a major overhaul. However, power purchasers will not share fuel, O&M and major overhaul losses. Moreover, the NEPRA would take a decision if a company has made any excess profits and it (NEPRA) will hear and decide the matter and also provide a mechanism for recoveries, where applicable. Also, the power purchaser and the government will devise a formula for repayment of the outstanding receivables with an agreement on the payment of receivables within the agreed time period.

An important part of the IPPs report is key reforms, which include issues, like the future role of the government in the power sector, restructuring of the power ministry to make it more expertise-driven and putting greater emphasis on transmission rather than generation. The inquiry committee also critically reviewed all previous power policies and balance sheets of most of the IPPs.

Although all power policies have been involved in controversies since their announcements, particularly the earliest one of 1994, the policies did make considerable progress in alleviating the energy crisis. The installed capacity, which was 11,000megawatts in 1994, has now tripled to 33,836MW. It is also important to note that most of the policies were implemented when the country was going through acute electricity shortages, and the government had limited room to manoeuvre and not much scope of negotiating better terms.

However, the committee has pinpointed as to how a majority of the IPPs manipulated various rules and falsified data in their favour. Similarly, some of the previous governments also share blame for their unwillingness to initiate reforms, mainly for petty reasons. It will be the credit of the PTI government if it can complete the reforms before its term ends in 2023.

Besides the IPPs, the government should also consider undertaking structural reforms in the power sector to put it on a stable footing on a long-term basis. There is rampant corruption and inefficiency, resulting in massive leakage and wastage of scarce resources. Theft is a widespread evil among both general and commercial consumers. Line losses are a big scandal, which also need to be tackled by upgrading transmission lines and automating meter reading. It is an ailing sector and calls for a comprehensive strategy to set things right.