ISLAMABAD    -   The Federation of Pakistan Chambers of Commerce and Industry (FPCCI)’s Business­men Panel (BMP) has stressed the need for revisiting terms of power purchase agree­ments with a view to restore the viability of country’s en­ergy sector, as billions of ru­pees could be saved by mak­ing payments to IPPs in local currency instead of dollars.

The FPCCI former president and BMP Chairman Mian An­jum Nisar also supported the government stance of the au­dit of dozens of Independent Power Producers agreements established during the last 30 years, after a Senate penal chief termed the contracts of IPPs as dacoity, seeking project-wise details including heat rates and regional comparison of price of the same technology. He said that Pakistan has been facing a high inflation for the past cou­ple of years partly due to mas­sive depreciation of the rupee against the US dollar and partly due to a surge in global com­modity prices like energy cost. The country largely meets its energy demand through expen­sive imports. He stressing the need for putting the economy on a sustainable growth trajec­tory by providing incentives to the industry, lamented that the economy is facing multiple challenges of falling exports, high inflation, low growth and declining foreign reserves, with fiscal accounts under immense pressure on account of heavy interest payments. The Busi­nessmen Panel (BMP) chairman said that the drop shows the government would find it dif­ficult to achieve the industrial growth and export target, lead­ing to more pressure on foreign exchange reserves of country.

The FPCCI former president said that in view of decreasing cost of production and lessen energy tariffs, the govern­ment should bring some major changes in the agreements with IPPs, who are earning high prof­its due to certain terms and con­ditions of their agreements. He further disclosed that the high cost of power tariff was due to a host of factors, including snowballing capacity payments, net hydel profit, transmission constraints, minimum plant fac­tor provision for RLNG based plants, gas price anomalies and financing cost of circular debt. The FPCCI former president said that Pakistan pursued an aggressive policy to add power capacity, but years of slow economic growth, power theft, and under-investment in transmission and distribution networks have meant that bill recovery has not been at par.

He said that most IPPs had an investment payback period of 2-4 years, profits generated were as high as 18.37 times the investment and dividends 23 times the investment and under the 1994 Power Policy, 16 out of 17 IPPs invested a combined capital of Rs52 bil­lion and earned profits in ex­cess of Rs417 billion. The gov­ernments’ failure to contain the circular debt had cost the country over Rs5,082 billion in the past 15 years, with an an­nual loss of Rs370 billion.

Mian Anjum Nisar added that restoring energy sector viabil­ity requires strong cost-side reforms, including continua­tion of efforts to improve trans­mission infrastructure, better integration and expansion of renewable energy capacity, improving DISCO performance via either privatisation or long-term management concessions, moving captive power demand to the grid, revisiting, the terms of power purchase agreements and continuing to convert pub­licly-guaranteed PHPL debt into cheaper public debt.

He outlined the reforms’ agenda that has either been un­dertaken by Pakistan or where Islamabad needs to put more efforts. In the case of the energy sector, terms of power purchase agreements have not come heavily under the scanner as the focus has first been on taking recovery and tariffs to a sustain­able level. Higher energy prices triggered mass protests across Pakistan last year and have also stifled energy demand with policymakers scratching their heads on how to move forward for the sector’s viability. With runaway inflation triggering record high interest rates, de­mand for energy has reduced further, leaving the govern­ment in a ‘catch-22’ situation. In a report, it is also admitted that the only sustainable solu­tion for the sector is decisive action to address cost-side and infrastructure issues. He quot­ed the IMF report which is an important document as many see it as a guideline in the light of Pakistan’s pursuit for a lon­ger, larger programme with the IMF. In the letter of intent, part of the IMF staff report, Pakistan also agreed that it will focus on mobilising significant additional revenue especially in under-taxed sectors.

In its recommendations, he suggested to the government that basic tariff of IPPs should be changed in Pakistani cur­rency instead of dollars and if this change is not made, an amount of Rs5,463 billion will have to be paid. Similarly, the profits to the IPPs owners should be given in Pakistani rupees instead of dollars. 

The country could save Rs5,400 billion only with change of currency in the agreement, instead of “Take or Pay” contract. The government is suggested to revoke the practice of capacity payment based on Take or Pay with the owners of IPPs. The report also claimed that the IPPs’ own­ers showed extra cost to get extra tariff at the time of the contract, with NEPRA failing to check the veracity of cost. The cost of the power plant pre­pared by the companies was also accepted by the authori­ties, it further reveals.