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ISLAMABAD: A group of nine independent power producers (IPPs) having a combined capacity of about 1900 megawatts served on Friday notices, as a step towards invoking the government’s sovereign guarantees, over the authorities’ failure to clear dues of Rs81 billion.
The authorities now have 30 days to pay the dues, otherwise the guarantees would be encashed.
Painting a bleak scenario of conditions obtaining in the power sector, former federal secretary Abdullah Yousaf, who now heads an advisory council for 29 IPPs, said that even if the government paid some Rs31 billion within the mandatory 30-day notice period to avoid the embarrassment of seeing the guarantees being invoked, at least four of the IPPs would stop their operations on Aug 28 and could even terminate their contracts.
He said the government had “already defaulted” on about Rs40 billion in payments to the banking sector on account of interest payments on Rs301 billion it had taken from the Wapda companies two years ago. Under the rules of the central bank, the banks had to make provisions for this “bad loan” but the State Bank gave a relaxation until September 30 and asked the banks not to make such provisioning in view of the government’s liability.
This, however, gave a reason to the banks to bluntly and candidly refuse fresh financing, he said.
Despite the rather frequent and repeated increases in tariff due to the heavy reliance on thermal power and the declining output from gas-based and hydel plants, there is still a gap of Rs2 per unit. This translated into a subsidy of Rs190 billion although the government had allocated only Rs81 billion for the purpose, Mr Yousaf said.
Another Rs179 billion worth of cash shortfalls from previous years had taken the receivables to about Rs300 billion owing to non-payment by public sector consumers and the provinces. As a result, he said, the government had invested more than Rs1 trillion in three years in the power sector, not for asset expansion but for non-productive financing of cash deficits.
The IPPs have served separate notices on the Central Power Purchase Agency and the federal government. On their expiry on Sept 25, the IPPs would issue a final notice to the government that would automatically lead in 10 days to encashment of the government paper by the banks.
Mr Yousaf said a total of Rs280 billion was payable by Wapda’s power companies to the IPPs, including hydropower plants, of which Rs211 billion was payable to 29 thermal IPPs. Of this amount, Rs130 billion was payable to two big plants --- Hubco and Kapco --- but their fuel was being supplied by the state-run Pakistan State Oil and hence not a big problem.
However, 27 smaller IPPs have “overdue receivables” of Rs81 billion payable by the Pepco. Their cash flows have deteriorated so badly that banks have refused to extend financing facility.
As a result, it has become almost impossible for the IPPs to arrange funds to ensure fuel supplies. They have been running their plants on fuel supplied against advance payments.
“This cannot go on. How can they run their business in such a grave situation? They have exhausted their credit limits, as banks are not willing to pay to this sector at all,” Mr Yousaf said.
He said that no one in the government seemed capable of taking charge of the situation and resolving it. “You have to face it, whether anybody likes it or not. You cannot run away.
“If you have in-house problems resolve it. Why are you piling things up? The government does not have a policy and we don’t see things coming through,” he said.
Mr Yousaf said invoking sovereign guarantees had international implications and people were getting anxious to find out the worth of the government papers on which the guarantees were written.
He regretted that the IPPs had not heard anything about the Rs25 billion that the prime minister had reportedly ordered to be released. “We have highlighted the issue at every level --- from finance ministry to various committees and even to the prime minister --- but there is nobody to take charge of the situation.”
Of the nine IPPs that have served notices, four will stop their operations in a couple of days when the Qadirpur gas field is shut for annual turnaround for 20 days starting on Aug 28. He said gas supply to these plants, having a capacity of 900MW, was halved to 76 mmcfd (million cubic feet) in June on completion of their contracts and now they have been told by the SNGPL that they would not get gas after Aug 28.
The four IPPs have been asked to switch over to diesel for running their plants but the cost of generation with diesel is seven times more than gas-based power generation. This will create an additional burden of Rs120 billion a year which will have to be passed on to consumers in the form of tariff increase.
That in turn will increase the IPPs’ credit limits but the banks are not ready to extend it. Also, it is difficult to arrange for diesel and other raw materials.
Mr Yousaf said he had discussed the issue with State Bank officials and senior bureaucrats but to no avail.
The main cause of the problem, Mr Yousaf said, was a change in the power generation mix after which the share of electricity produced by thermal units had increased to 70 per cent from 30 per cent a few years ago.
The former petroleum secretary said the cost of hydropower was about Re1 per unit, compared to Rs4 per unit of gas-based electricity, Rs12 of furnace oil-based generation and Rs16 per unit of diesel-based production.
