The sordid saga of IPPs

[FOOLS_NIGHTMARE]

Recently, there have been reports that the fear of the National Accountability Bureau (NAB) may force the government to back out of its deals with power companies set up under the 2002 power policy.

The purpose is to renegotiate their ‘renegotiated’ power purchase agreements (PPAs) to deduct the alleged excess payments made to the 12 independent power producers (IPPs) from their longstanding unpaid bills.

That is a bad idea as the government will be setting yet another bad precedent for the investors instead of dealing with the real issue: the unwanted NAB intervention in matters that adversely impact policymaking, bureaucracy’s ability to make decisions and investor confidence.

In a quid pro quo arrangement, the IPPs set up in the country between 1990 and 2013 had agreed to give significant concessions to the government that are billed to save it over Rs800 billion in future payments to the power companies. In exchange, the government had agreed to pay them back their long overdue, unpaid bills of nearly Rs405bn in two instalments after the signing of revised contracts.

The decision to reopen revised power purchase agreements amounts to making the government renege on its commitments, jeopardising its credibility

The revised power purchase agreements also provided for a three-member local arbitration comprising retired Supreme Court judges to decide the issue of the alleged excess payments made to them on account of fuel and maintenance savings, currency depreciation, miscalculation of internal rate of return (IRR), mismatch in debt payments, inventory shortages, etc. The tribunal would decide the matter in six months before the payment of the second tranche of unpaid bills to them. The decision will be binding for both sides and settle the issue once for all.

The issue of excess payments had surfaced after a committee on the power sector led by former Securities and Exchange Commission of Pakistan chairman Mohammad Ali accused 12 IPPs set up under the 2002 policy of having made an excess profit of around Rs92.9bn. Hub Power Company (Hubco)-Narowal was spared owing to the ‘non-availability of data’.

It also alleged the 1994 IPPs of making exorbitant profits, saying that the average return on equity (RoE) of the 1994 IPPs is 10 per cent higher, 13pc if Hubco is included, than that of the 2002 IPPs. The payments to the 1994 IPPs are already made as required under their revised contracts in spite of the allegations of excess profits whereas payments to the 2002 IPPs are withheld because of the NAB investigations against some of them.

“This decision to make payments to the 1994 power companies and dump the renegotiated contracts (out of fear from NAB) to restart negotiations for new deals with the 2002 IPPs is discriminatory and a huge mistake,” Sheikh Muhammad Iqbal, a power sector professional, says. The revised deals in essence were a re-negotiation version of the original 25-year power purchase agreements (PPAs). Now the government is not ready to execute the revised agreements, which were approved by all the relevant government authorities and agencies.

“The re-negotiated agreements have needlessly been sent to NAB even though it was not even a party to the deals finalised between the government and the IPPs. The transactions are now stuck in limbo as NAB refuses to give its go-ahead in form and substance agreeable to the power ministry,” an industry source says. The NAB investigations against a group of IPPs for making excess profits are based on a letter written by the regulator to 2002 IPPs in 2019, asking them to clarify the reasons for their ‘additional savings’.

Nonetheless, senior National Electric Power Regulatory Authority (Nepra) officials admit that it is yet not established if any of the IPPs under scrutiny had actually made excess profits, or violated and transgressed their contractual obligations.

The decision to reopen revised PPAs amounts to making the government renege on its commitments, jeopardising its credibility based on a report, which is not made public for a debate let alone challenged by the experts. “Armed with the report and with NAB looming all over, the government has corralled some IPPs while others are not being investigated at all despite similar charges against them,” Mr Iqbal contends.

Ironically, out of the six residual fuel oil (RFO) based IPPs of the 2002 policy, one company is specifically being targeted and investigated by NAB for reasons unknown. This is in spite of the fact that all these RFO-based IPPs have similar power purchase agreements, including tariff, heat rate, efficiency, and rate of return.

Subsequent to these power policies, the government has signed several agreements under the China-Pakistan Economic Corridor initiative, allowing even higher returns to the investors. “Will these be re-negotiated now or after 10 years? Will the persecution cycle be repeated for the Chinese investors? Or is it only the hapless local investors that are to be targeted?” a senior executive of a power company asks?

Another critical issue is whether the government should refer the matter of the excess profits to Nepra, the power-sector regulator. Experts argue that Nepra being a signatory to the controversial report on the power sector can hardly be considered an unbiased and impartial judge of this matter. “The recently negotiated settlement agreements already layout an arbitration process. Why is it that the agreements are not being upheld even with regard to the arbitration process?” the power company executive wonders, requesting anonymity.

Mr Iqbal says there is a clear danger that if the government fails to honour the revised agreements and make payments, these IPPs will default on their bank loans and may call in sovereign guarantees. They can also initiate yet another foreign arbitration to recover their unpaid bills, which will tarnish the image of Pakistan, he adds. The government needs to close this sordid saga. “It isn’t a pleasant scenario; it is time to implement the settlement and not to reopen the deals already closed, and move on,” Iqbal concludes.

The sordid saga of IPPs

The govt will be setting yet another bad precedent for investors instead of dealing with the real issue.

www.dawn.com

 

[Bouncer]

TLDR;

1. Governments of their time in 1994 and 2002 signed shitty agreements with Independent Power Producers (IPPs) to lure them to invest in power sector. They were offered very lucrative deals that assured them of zero risk at the cost of consumers & tax payers. Basically the best business model any investor can hope for--just like the sugar mills in Pakistan. Even if you can't tell your *** from head you can still make a handsome profit and recover your original investment.
2. Now some babus and investors got greedy and wanted even more. This "even more" part is the problem here.
3. Enter the circular debt crisis--power theft/line losses/old infrastructure causes lower recovery from consumers to IPPs, IPPs in turn can't pay the company they purchase fuel from i.e. PSO, PSO in turn can't pay the companies it imports from. So from time to time Gov of Pak takes out a huge bundle of cash and pays IPPs to clear this backlog so the lights don't turn off. Basically IPPs never loose money in this operation but their payments can be delayed.
4. So the PTI Gov this time decides enough is enough and we need to solve this issue once & for all--they pay out huge amounts of money (hundreds of billions) to IPPs as one time payment and to clear the remaining amount they negotiate a deal with them to the effect that hey we are going to clear this much out of the total right now instead of you waiting for years but in turn we have to re-negotiate the shitty deals. And after this it will be chapter closed. And they happily lived ever after.
5. Not so fast says NAB. Someone told them of the "even more" part (point-2). Now the Gov and IPPs are all afraid that NAB is going to hound them for these re-negotiated agreements. So no one wants to move forward and we are back to where we started i.e. tax payers and honest consumers will keep paying 100s of billions because of these shitty agreements that Benazir, Musharaf, Raja Rental signed.
6. Finally, if by any chance you are still seeing a ray of hope that someday maybe Gov will sign these re-negotiated agreements with these 1994 & 2002 IPPs and these dark clouds of corruption and expensive electricity will go away, well no not really. Congratulations because Nawaz Sharif signed even shittier agreements with the Chinese so this shit will go on for the next 30, 40 more years. And the worst part is that while the shitty agreements with 1994 & 2002 IPPs are at least public knowledge, the agreements with Nawaz signed with the Chinese are important to "national security" so you can't read them. Bye.

This TLDR turned out longer than I expected.