• 40pc dues will be cleared in one month and 60pc in six months
• Largest chunk of about Rs100bn to go to Kapco, followed by about Rs75bn to Hubco Group and Rs60bn to Mansha Group

ISLAMABAD: Two different committees of the federal cabinet on Monday approved payment of Rs403 billion in two instalments to 46 independent power producers (IPPs) as part of renegotiated agreements.

This now leaves just one power producer — Zurlu Enerji of Turkey — out of 47 IPPs which had signed memorandums of understanding (MoUs) with a negotiation team of the government in August last year to provide some discounts against their original power purchase agreements (PPA).

A cabinet member told Dawn that the Turkish firm’s outstanding dues as of Nov 30, 2020, stood at about Rs1.5bn and its executives were apparently unavailable for logistic reasons. “Hopefully, Zurlu will also be onboard before Feb 12, or else it could be taken up subsequently,” he said.

The approval of the revised terms of agreements and payment mechanism by the Cabinet Committee on Energy (CCoE) and the Economic Coordination Committee (ECC) would be endorsed by the federal cabinet on Tuesday, a senior government official said, adding that this would pave the way for payment of 40 per cent of the first instalment (a little over Rs161bn) within a month, followed by remaining 60pc in six months.

The largest chunk of about Rs100bn out of Rs403bn would go to Kot Addu Power Company, followed by about Rs75bn to Hubco Group, Rs60bn to Mansha Group and then to smaller companies having share of Rs15-16bn and lower.

Mansha Group IPPs also agreed to have local arbitration over the issue of “about Rs53bn excess payments”. Both sides would nominate a retired judge, preferably chief justice, of their choice who would then jointly select a third member of the arbitration commission. The arbitration decision to be achieved within five months would be binding without any other recourse.

Under the deal, one-third of the 40pc outstanding dues will be paid in cash, one-third in Pakistan Investment Bonds (PIBs) and one-third in five-year Islamic Sukuk. PIBs involve rate of return on the basis of prevailing 10-year Treasury Bills plus 70 basis points, while Sukuk entails a return of T-Bills minus 10 basis points. The structure is designed in consultation with the banking sector to allow an equal exposure to conventional and Islamic banks.

A similar structure would be applied for the next tranche of 60pc i.e. one-third in cash and the remaining two-thirds in PIBs and Sukuk on a 50:50 basis. These would be paid within six months after the payment of first tranche. However, in that case both PIBs and Sukuk would be for 10 years.

The issues with eight wind power projects could not be finalized owing to their load curtailment issues with the national grid and distribution companies and dispute over sharing of operation and maintenance costs.

Besides the payment schedule, the meeting was told that 50pc of the capacity payments of IPPs under the 1994 policy, Kapco and Hubco would be converted in rupee instead of dollar, thus reducing the existing fixed operating costs element by 11pc whilst keeping the existing arrangement of indexations.

The local IPPs have also agreed to discontinue the dollar exchange rate and US CPI (inflation) indexation on the project company equity and fix it on National Bank of Pakistan’s TT/OD selling exchange rate prevailing on August 21, 2020 till the current exchange rate (at Rs160 per dollar) reached Rs168.60 per dollar; the existing arrangement under the PPA for the current half year shall apply for future billing.

Hubco and the government side have also agreed on pre-mature termination of the PPA that is valid until 2027 against some compensation. An official said it was a win-win situation for both sides because Hubco was estimated to earn about Rs240bn capacity payments until 2027 even though it may seldom be utilised on economic merit order. The government would provide Rs65bn compensation. The company would convert two out of four units to coal for power supply to Karachi and set up seawater desalination for water supply to Karachi.

According to an official statement, the ECC commended the efforts of the members of negotiations and implementation committees while going through the detailed report presented by the power division secretary for conversion of MoUs into agreements with 46 IPPs and to devise a payment mechanism for clearing outstanding payables as on Nov 30, 2020. This “will eventually save approximately Rs836bn for the government over the average life of the projects”.

Another statement said the CCoE approved the summary with recommendations to send it to the cabinet for further approval.

The CCoE also gave a green signal for setting up of three solar power projects of about 50MW each — HNDS Power, Hellious Power and Meridian Energy— as they had valid permissions, including approved tariff. These plants were reportedly stopped from being implemented due to ‘misreporting’ of CCoE decisions of 2019.

The “three companies were erroneously included in two different categories at the same time. The committee took a serious view of the matter and asked [power division] to rectify the mistake immediately and extend full facilitation to the private investors”.

The CCoE also approved a report of its subcommittee on allocation of pipeline capacity to new LNG terminals with an aim to encourage investment and provide a level-playing field to the LNG terminals.

Published in Dawn, February 9th, 2021