Hafsa Ammar is a student of the Department of Peace and Conflict Studies at the National Defence University, Islamabad. Her areas of expertise are hybrid warfare, narrative building, and nuclear deterrence in South Asia.
Introduction
Independent Power Producers (IPPs) are a saving grace for developing and underdeveloped states because they have more flexibility and funds when it comes to establishing power-generating industries and projects. They add to the market competition, leading to decreased rates for the masses.
Independent power provider models have successfully attracted international and private investment for the power and energy sector; an area that has been state-owned and domineered for a long time. Although they are independent contractors, they do sign various power purchase agreements (PPA) with the sitting governments of the state. The PPA specifies a variety of factors ranging from costs to duration of IPP functioning. There are, however, several risks involved when independent power producers sign agreements with fragile states like Pakistan.
Risks
- Currency – Weak domestic currency vs USD
- Payment Plan – Lack of consistency in payments due to unstable economy
- Political Aspect – Political instability or change in authority could lead to contract reevaluation or cancellation
A question that always arises when private ownership of an IPP is discussed is why do nation-states that pride themselves on sovereignty and independent working allow foreign actors to function in their state at such a massive scale? This question is answered eloquently in the 1994 Pakistan Power Policy Reform Report. It stated a fact that stands true to this day – the ambitious programs and power demands of Pakistan cannot be fulfilled by the public sector due to the lack of fiscal freedom and resource allocation.
As mentioned above, IPPs are a great aid to a weak nation’s energy sector due to the deep treasuries behind them. They represent Foreign Direct Investment (FDI) that not only generates revenue but also creates employment/development opportunities for the locals. They also reduce electricity costs due to the market competition they generate but this is where Pakistan is currently stumbling. The vicious circular debt that Pakistan is caught in also connects to the IPP and power supply sector.
IPPs in Pakistan
There are many independent power producers in Pakistan, some of which are:
- Datang Pakistan Karachi Power Generation (Private) Limited
- ICI Pakistan Limited
- K-Energy Limited (Pvt)
- Kalachi Portgen (Pvt) Limited
- Sindh Nooriabad Power Company (Pvt) Limited
There are several risks involved in signing PPAs with independent power providers for the state as well. As seen currently, electricity prices are rising as Pakistan sinks further into debt – currently at 124.3 billion dollars (external debt; June 2023) and Rs.2.646 trillion (circular debt; July 2023).
Circular Debt
The induction of independent power producers in a state such as Pakistan which has a weak currency and fragile economy has led to many challenges, namely the accumulation of circular debt. It is an amalgamation of unpaid dues and bills between the consumers with the government, and the government with the power producers and distributors. The state’s reliance on take-or-pay contracts, which require the government to pay for a minimum amount of electricity from IPPs, whether or not it is needed, has contributed to circular debt.
‘Take-or-Pay’ is a feature found in Pakistani power purchase agreements, It essentially means that the state or consumer party will purchase a specific quantity of electricity from the producer over a defined period, but regardless of whether the electricity is needed or used, the government will firmly commit to payment. This model guarantees IPPs a steady income which negates the payment delay risk that they often face in underdeveloped states.
Revenue collection from consumers is only 60%, whereas the government is contractually bound to pay the IPPs a fixed amount according to the signed agreements. To pay back and fulfill the purchase agreement, the state cannot reduce the cost of electricity or put into force any sort of subsidy.
Protests in Pakistan
Recently in Pakistan, civil protests have been rising at an untameable pace due to rising inflation in the energy sector – unimaginable hikes in fuel prices teamed up with the devaluation of the Pakistani Rupee (Rs 307.49) against the dollar. The International Monetary Fund (IMF) put various conditionalities on its bailouts, one of which for Pakistan has been to reduce and/or eliminate subsidies in the power sector. The Finance Minister of the caretaker government, Shamshad Akhtar, stated that the national treasury does not have any ‘fiscal space’ to help lessen the load on the public.
To fulfill purchase agreement payments with IPPs, Pakistan has been going into debt, a never-ending loop in the power sector. In June 2021, the government paid around forty percent of their owed amount to the IPPs i.e. Rs89 billion. It was decided to pay out the amount in two sets to lessen the load that the energy sector contributes towards circular debt, but then, several IPPs were under investigation by the National Accountability Bureau (NAB) as well which is why dues could not be paid to all.
Now, the Senate has leveled accusations against independent power providers for playing such a massive role in recent inflation. Senator Saifullah Abro, a PTI member hailing from Sindh, took action when he went on record to say that unless the issue was resolved with the IPP payments, the energy crisis would remain prominent.
The faultlines that resulted in such civil unrest, lay within the capacity payment to be made to the producers, an amount of 1.3 trillion rupees. The extreme increase is due to the devaluation of the rupee combined with the rising prices of imported coal and RLNG (Re-gasified Liquified Natural Gas).
Recent Developments
In July 2023, the state authorities took a bold step in an attempt to alleviate the pressures of the impending debt crisis and moved to clear Rs. 1.42 billion for the IPPs. The CPPA (Central Power Purchasing Agency), which handles the PPAs, said that this step would lead to a better fiscal environment for the energy sector’s future.
- Engro Powergen Thar Limited – Rs. 4.31 billion,
- National Power Parks Management Company Private Limited Rs. 22 billion,
- China Power Hub Generation Company (Private) Limited – Rs. 9.21 billion
- Karachi Nuclear Power Plant-Unit-2 – Rs. 8.75 billion,
- Port Qasim Electric Power Company Ltd. (PQEPC) – Rs. 8.32 billion.
Experts are hoping that this will help ease the pressure on the state but the problem remains. The people are spilling out onto the streets demanding a reduction in the very bills that are supposed to go into paying out the IPP contracts. How the state intends to mitigate this burgeoning domestic conflict is yet to be seen.
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