As a matter of fact; development of the power sector is highly contingent upon the growth of the country. It was prudent to install power projects, in anticipation of economic growth. Almost all the other sectors and state owned enterprises (SOEs) are in bad shape and are relying on government support and subsidies. One of the most sorted out questions by local and international investors till 2015 was – if electricity would be available for their upcoming projects. Who knew at that time that entire system would get stuck because of some non-issues.
There is a segment in Pakistan’s economy which always wants concessions; be it the interest rates or export rebate, subsidies or any plus minus status, the exports and profits of that sector never increase significantly therefore, putting all the blame to higher cost of electricity is just an excuse. There is a limit to increase the electricity price of end consumers whereas there are limited ways to reduce the tariff of existing IPPs. Policy makers should spend more time on the revival of industry by other means and measures than spending more time on finding ways to reduce the returns of IPPs.
A large part of the report of the Commission (“Report”) consists of evaluation on Return of Equity (“ROE”) and Return on Debt (“ROD”) components of IPPs. Unfortunately; it seems that the calculations and resultant conclusions are based on wrong interpretation of the provisions.
Ministry of Power with the help of a foreign legal counsel prepared the Standardized Power Purchase Agreement (“PPA”) and IA back in 2006-07, which was reviewed, discussed and approved by the then Economic Coordination Committee (“ECC”). The purpose of getting approval from ECC was to provide a framework to PPIB, AEDB and CPPA. CPPA cannot dilute the rights and also cannot increase the obligations of Government of Pakistan (“GoP”) therefore, it has to negotiate under the framework of Standardized PPA duly approved by the ECC. PPA says that ROE will be indexed quarterly (Apr, Jun, Sep and Dec) on the basis of average of last three month’s US Dollar rate and invoicing will be done on monthly basis with 30 days credit to CPPA. Being from the power sector; I never felt comfortable with the concept of allowing dollar indexation on rupee equity but it was decided by the mighty ECC therefore, only local investors took advantage of this concession. It wouldn’t be wrong to say that the Commission has effectively questioned the collective wisdom of the Federal Cabinet and ECC. It is exceedingly important to determine which body or forum would be supreme in taking final decisions in the country. There are a number of former government officials who are either incompetent or purposely creating confusions and are spearheading campaign against IPPs and other stakeholders without realizing how much this witch hunt will damage the investment climate of the country. Everyone is supportive of transparency and system improvement, but there is always a way to do this.
The Report has firmly concluded that NEPRA allowed IRR of 15 percent (say) to an IPP on an annualized basis assuming payments to be made at the end of the year. But IPPs issued and CPPA cleared invoices on a monthly basis thus IRR of IPPs has increased (exorbitant numbers have been given in the report).
I believe that annualized IRR is only calculated to determine the ROE component of the tariff and in no way aims at making payments to an IPP once in an operating year. The current practice of monthly invoicing is highly beneficial for CPPA and least beneficial for an IPP. Sum of 12 invoices of a year to be indexed on quarterly basis gives lower value than invoicing to be done once in a year. I am not considering abolition of Dollar indexation on existing IPPs as it is just a wishful thinking and this assumption can potentially mislead the decision makers. Therefore, if quarterly indexation is replaced with annual indexation mechanism to be done at the end of an operating year, then it can be based either on i) year-end dollar rate or ii) average of US Dollar rate of the year. Historically, US Dollar rate has most of the times increased month after month even if it has a marginal increase. In both the cases; total of ROE component would be higher than what an IPP has already invoiced to CPPA (i.e. indexed quarterly). I have done the math and anyone can also do the sensitivity analyses in MS Excel. The same is true for ROD component. Therefore, instead of taking money back from IPPs, CPPA will have to pay heavily under ROE and ROD instead. CPPA hardly clears an invoice in time and mostly pays in installments therefore, current mechanism provides CPPA enough time to collect the funds for payment to an IPP at its convenience.
The Commission has compared dollarized IRR of 15 percent with the PKR IRR, a complete mismatch. Similrly, equity payback is calculated on the basis of profits, which is highly misleading and gives wrong picture. For Commission’s knowledge; revenue also includes principal repayment of debt. How can this component be considered in ‘equity’ payback.
Heat Rate audit should be done, and thermal IPPs should not have any issue with this. There are ways and means to assess the actual heat rate at the time of COD. NEPRA reviews and approves adjustment in fuel tariff every month on the basis of actual record of fuel purchase and consumption by an IPP. CPPA cannot process fuel invoice of a thermal power plant without NEPRA’s approval. CPPA pays on the basis of ‘consumption of fuel’ and not on the basis of ‘procurement of fuel’ therefore, theft of fuel is a loss of an IPP not the loss of CPPA. Report has not given any instance or method how theft of fuel is being done. There might be some isolated instances on fuel procurement but Report should be very specific instead of labeling the sector.
On one side, Report recommends a restructuring of debt while on the other suggests to convert the agreements to Take-or-Pay arrangements (without must-run option). No lender even NBP will agree to restructure the debt on take-or-pay basis, none of the IPPs in the history of Pakistan is on take-or-pay basis. All the IPPs are financed by local and international banks; and those who have developed the projects know that lenders do a detailed due diligence of a project which also includes review of all agreements and procedures adopted to procure the equipment. Generalized accusing of malpractices in procuring the equipment can have far reaching consequences on the financial sector as well unless Commission has some specific evidence already in hand. Likewise, almost 80 percent of power plants were constructed by state owned Chinese EPC Contractors. The Commission should have proposed some methodology on how to approach Chinese EPC Contractors to understand the process of procurement of plant and equipment. Analyses for the sake of analyses without any basis and making a 300 pages report (instead of simple and to the point 30 pages report) have effectively tinted the whole exercise of improvement.
Overall, Report has put CPPA, NEPRA and ECC on the spot and is less negative on IPPs. Both CPPA and NEPRA have one of the best and dedicated power sector professionals and it is absolutely not appropriate to put the team in such an awkward situation. I strongly believe that CPPA and NEPRA have done their job effectively, efficiently and within the parameters of the given framework. It would be better if both CPPA and NEPRA clarify their official position on this Report. Government is already complaining that public sector departments are reluctant in taking any decision and with these baseless accusations; Commission has made the work of government even more difficult.
Conceptually, circular debt cannot be of this level unless the chain is broken from somewhere. There is no doubt that cost of electricity is high in Pakistan as compared to other countries in the region. There are a number of technical and regulatory reasons for this but one factor exists which is not even discussed at any forum but it is actually the root cause of circular debt. Has anyone ever thought why most of the IPPs on imported fuel (oil, RLNG, coal) are in Punjab province, be it under 1994 or 2002 or 2015 power policies? There was a time when load shedding of electricity and gas was used as a tool to fail the political opponents. No one can have this short memory. Political forces should sit and find a solution for this. The supply of electricity must be made on the basis of requirements and recovery from an area instead of on the basis of political base.
CTBCM under CPPA is not the solution at all and it will further create problems. Ministry and its line departments should not get into any sale or purchase of power arrangements. Instead, the only way forward is Wheeling Arrangement, allowing IPPs or investors to sell their power to anyone, anywhere in the country, which will also help reducing the tariff country wide. Both NTDC and DISCOs should be split district wise and let the market determine the electricity price. Without allowing wheeling and keeping CPPA as sole and exclusive off-taker will not help changing the Take-or-Pay to Take-and-Pay arrangement. As long as CPPA remains exclusive off-taker, it will have to pay fixed capacity payments for system availability of IPP. Unbundling of the power sector has actually created more problems than making the system independent. The real problem is that some in the system are not ready to abdicate their throne.
On another note, Can anyone make a list of international arbitration, Pakistan has lost so far. It doesn’t mean that Pakistan doesn’t have good lawyers; the reason is government employees know that they have a weak case yet they don’t take decisions thus force an investor to approach international court for arbitration. No one asks them when they lose the arbitration.
It doesn’t mean that there are no issues with the IPPs, but there should be a systematic way of handling the issues. It is practically impossible that entire power sector is just bull dozed on the wishes and misconceptions of some. We have seen impractical solutions and approaches many times in our lives in past, which only deteriorated and complicated the situation instead of bringing any positive change in the country. In last, one must thank federal cabinet, ECC and CCoE for initiating a massive exercise of reforms but no thanks to the Commission for detracting the whole exercise and discrediting the system. Please note, you can’t have a cake and eat it therefore, thanks but no thanks.