The government is also considering allowing independent power producers (IPPs) to sell their electricity directly to ‘bulk consumers’ depending on practicality and ‘legal and financial comfort levels.’ – File Photo

ISLAMABAD: With sovereign guarantees losing their worth, the government is considering to develop power projects in the public sector for direly needed capacity expansion and sell them to the private sector for operations in view of the dwindling investor confidence.

Over the past two decades the government has discouraged public sector organisations from setting up power projects following the induction of IPPs, although their construction cost was almost double that of public sector projects.

The fresh thinking has come about on recommendations of IGI Securities, a Karachi-based brokerage firm, hired by the Planning Commission to look into causes of power sector problems and suggest remedial measures. A study carried out by the firm and recently submitted to the government identified eight major risks, their causes and effects and suggested measures to overcome them.

The issue of inter-corporate circular debt tops the list of key risks arising out of lower tariff, inadequate subsidy, huge line losses and high generation costs. This has affected repayment capacity on almost all fronts and put a `question mark` on sovereign guarantees.

The brokerage firm suggested a balanced approach of tariff and government subsidies. “Recovery of dues from problem areas needs to be prioritised, expedited and strictly enforced,” it said, adding that differential tariff be offered to consumers willing to pay more for better or uninterrupted supply.

It called for allowing IPPs to directly sell electricity to bulk consumers to reduce and eliminate the role of the CPPA and distribution companies.

The IGI Securities said “sovereign guarantees are not strong enough anymore” because of macroeconomic weaknesses and subsequent vulnerabilities. Financial capacity of the energy sector has been `severely constrained` and is affecting its ability to service payments in a timely manner as financiers become wary about the cost of financing.

“Therefore, the sovereign guarantees should potentially be replaced by a multilateral or donor guarantee,” it added.

The government is already working with the Asian Development Bank to get its third party guarantees to reduce Pakistan`s country-specific risks.

The brokerage firm said the National Electric Power Regulatory Authority (Nepra) and the Private Power and Infrastructure Board (PPIB) had encroached upon each other`s powers resulting in longer lead times and increasing costs and frustration to investors and developers. “Roles of the PPIB and Nepra need to be redefined and any potential conflict areas addressed by the government. Lines of authority should be made clear and strictly followed. The quality and quantum of human resources of these organisations need to be rationalised.”

The study said that most power projects had failed to reach the development stage because of regulatory and political wrangling and urged the government to set up a power project and later sell it off.

It said fuel shortage increased the overall working capital cost of IPPs which in turn led to higher borrowing from the banking sector. Therefore, it added, the government should aggressively pursue LNG imports, coal mining and oil and gas exploration on a war-footing, and also revisit gas allocations.

The firm warned that the long-term over-reliance on imported fuels could seriously undermine the current account balance.

About repayment risks from the government, it said the government`s inability to collect payments from problem areas and huge line losses were resulting in “risk averseness by investors and consequent lack of investment”.

“Late payments, which in some cases extend beyond 20 months, are jeopardising the cash flow cycle of investors, leading to financing requirements which in turn increase the cost for the developer,” it said.