The two-year-long controversy over unaffordable and expensive electricity generation contracts has almost come to an end with the signing of revised agreements with 46 private investors and dozens of public-sector entities.

The government says it has been able to achieve savings of about Rs770 billion over the average remaining 20-year contractual life of about 8,000 megawatts of independent power producers (IPPs). Likewise, a saving of Rs2.053 trillion is being reported on account of the reduction in the rate of return on equity for about 8,000MW of public-sector plants, assuming an average 10-year remaining life of Gencos and Wapda each and 30-year life of LNG-based and nuclear power plants.

The government refrains from publicly commenting on a bigger chunk of almost 16,000MW of power plants under the China-Pakistan Economic Corridor (CPEC). About 6,500MW of these plants are in the pipeline. Nevertheless, Pakistan had taken up a request with the Chinese leadership almost a year ago to extend the debt servicing period for the first chunk of about 10,400MW plants to 20 years from existing 10 years and reduce the interest rate from Libor plus 4.5 per cent to Libor plus 2pc.

The authorities are equally reluctant to discuss the eight wind power plants — a majority of which are financed by the World Bank and were finalised under direct instructions from the prime minister’s office under Imran Khan amid interesting abstention from the top brass of the Power Division. The sponsors of these projects have not revised their agreements despite the government’s desire.

In view of over Rs5tr ‘unjustified’ payments to IPPs claimed in the original investigation, the savings of Rs770bn appear small

In the next phase, the authorities in Islamabad expect staggering the commercial operation dates (CODs) of CPEC projects (about 6,500MW) in the pipeline. At the same time, the government has now started negotiations with the banks to prolong their debt repayment tenures with IPPs to 20 years from the existing 10 years along with a reduction in interest rates to secure further financial comfort. In fact, the matter has already been taken up with National Bank of Pakistan and Habib Bank Ltd.

Energy Minister Omar Ayub Khan and Special Assistant to the Prime Minister Tabish Gauhar explained last week that savings from the revised agreements with IPPs were originally estimated at Rs836bn on the basis of an average 5pc devaluation for 20 years and exchange rate of about Rs168 in August last year when MOUs were signed. But the estimate was revised down to Rs770bn at the time of the signing of agreements at an exchange rate of Rs160.

However, this will have almost negligible impact on the circular debt. Seen in the context of over Rs5tr unjustified payments to IPPs claimed in the original investigation report of Mohammad Ali Committee, even the savings appear small. Authorities, however, justify it on the grounds that it was hard to bring IPPs from an adversarial stance to the negotiating table. They had outright rejected the investigation report and wanted to defend their contracts at a time when some of them had already had arbitration awards in their hands.

The government had to choose between a negotiated settlement and a forensic audit of all contracts, operations, regulatory approvals and payments. “The government went for the negotiated settlement but reserves the right to have a forensic audit at any time,” a meeting of the cabinet committee on energy was informed last week. “The government has not cut its hands at all. We have protected our every right (in the revised agreements with the IPPs). There is no protection to any criminal act,” said Energy Minister Khan.

How these renegotiations will impact future investments, particularly in the power sector, is the real question. After similar attempts in the past, investors and financiers came back at a significantly higher premium than before and the country suffered the repeated cycles of investment dry-outs and supply blackouts.

A total of 47 IPPs originally signed MOUs in the second week of August last year and 46 took them to the final agreements by the expiry date of Feb 12 with the approval of the federal cabinet. The cabinet was informed that minor adjustments had been made between MOUs and final agreements.

For projects under the 1994 Power Policy, the exchange rate agreed in the MOUs was Rs168.60 on Aug 12, 2020, which did not take into account the devaluation of the dollar at the time of agreement, thus creating an anomaly. Agreements were signed on the condition that the exchange rate prevailing on the date of signing of the Master Agreements would be used as the floor (about Rs160) for the exchange rates, and Rs168.60 would be used as the ceiling.

The risk of devaluation would lie with the power purchaser and the government says this risk had been adequately covered through the 11pc reduction in capacity purchase price and variable O&M of this group. The savings to be obtained through this arrangement will be fully eroded only if the dollar devalued below approximately Rs130.

For the 2002 Power Policy, the exchange rate agreed in the MOUs was Rs148 coupled with an increase of the return on equity (ROE) and the return on equity during construction (RoEDC) to 17pc from 15pc to prevent a further increase in tariff on account of rupee devaluation. However, the dollar depreciated against the rupee over the following six months. In order to address this anomaly, the agreements provide that the dollar indexation on this component will continue as per the respective tariffs at Rs160 till the date the dollar reaches Rs168. Thereafter, RoE & RoEDC would be fixed at 17pc per annum on the dollar exchange rate of Rs148 for local investors with no further indexation.

An Arbitration Submission Agreement option was provided to cater for all IPPs under the 2002 Power Policy instead of referring the matter to Nepra for amicable resolution of the issue. Two former Supreme Court judges, nominated by each side, and the third by these two, will be appointed arbitrators to resolve the dispute on the excess payment of Rs58bn. This arbitration will be binding and final as far as the dispute of excess profitability is concerned.

As per the payment mechanism, the payment of Rs403bn to 46 IPPs would be made in two instalments of 40pc and 60pc. The first tranche of 40pc payables is to be made over the next few days in the shape of one-third in cash, one-third in five-year Sukuk and one-third in 10-year PIBs at the floating rate of treasury bill-plus 70 basis points. The remaining 60pc will also be payable within six months of the first instalment in almost the same manner.

Published in Dawn, The Business and Finance Weekly, February 15th, 2021