Back in the day, the power-sector regulator — National Electric Power Regulatory Authority(Nepra) — acknowledged the fact that the returns earned by the independent power producers (IPPs) could be higher than the return on equity allowed to them because of various factors: efficiencies, cost-saving measures, more effective and professional project management, and so on.

In September 2011, Nepra had held in the matter of Sapphire Electric Power that it did not consider or adjust the IRR (internal rate of return) earned by IPPs on equity investment at the COD (commercial operations date) stage or at any later stage on the basis of actual costs incurred, timings of receipts and payments, etc.

“The actual IRR earned by IPPs seldom equates to 15 per cent allowed by the Authority in the tariff determination as it is based on predefined parameters whereas the actual result rarely matches the parameters. For the projects already in operation, the actual IRR in many cases is reported to be higher owing to various efficiencies, cost-saving measures and more effective and professional project management by their sponsors.”

This simply signifies that it is not wrong for power producers to improve their profits beyond the notionally allowed return in their tariff determinations by saving on their costs, improving their efficiencies and managing the projects in a better way. Simultaneously, it also means that a power producer who earns less than what it has been allowed contractually — or even makes losses, will not be compensated by the regulator, government or power purchaser for its inefficiencies and poor management. Thus, it repudiates the concept of ‘guaranteed’ profit for the investors.

‘We (Nepra) are the regulator; we’re the policeman of this industry. NAB has no business stepping on our jurisdiction and poking its nose into this matter’

However, the National Accountability Bureau (NAB) investigations against a group of IPPs set up under the 2002 power policy for making what is officially called “excess profits” ignores this basic principle outlined in the above Nepra ruling. The accountability watchdog, as per a senior Nepra official, is based on a letter written by the regulator to 2002 IPPs in 2019, asking them to clarify the reasons for their ‘additional savings’.

“But NAB jumped into the matter before a forensic audit of these projects could begin, scaring the project sponsors who went to court to obtain a stay order. NAB intervened despite the fact that it is the sole prerogative of Nepra to investigate or conduct a forensic audit of any project. The uncalled for NAB intervention has spooked international investors, the World Bank, the International Finance Corporation, etc,” the Nepra official argued, requesting anonymity. “We’re the regulator; we’re the policeman of this industry. Where does NAB come in from? NAB has no business stepping on our jurisdiction and poking its nose into this matter. It has made the issue controversial. Nepra’s action will have legitimacy, which the NAB inquiry lacks.”

Nepra says it has yet not established if any of the IPPs under scrutiny had actually made excess profits, or violated and transgressed their contractual obligations. “This is not possible without a forensic audit. The devil lies in details,” its anonymous official told this correspondent.

Yet a committee formed for power sector audit, circular debt resolution and preparation of future roadmap under former Security & Exchange Commission of Pakistan’s chairman Muhammad Ali in its report claims that various IPPs have made excess profits to the tune of Rs54 billion. How it came up with this figure is unclear because the committee did not engage with IPPs during its deliberations. Nor did it ask them for any financials or clarifications.

Surprisingly, the committee’s accusations are pointed mainly towards six RFO-based IPPs set up under the 2002 Power Policy — Hubco Narowal, Attock Gen, Atlas Power, Liberty Power, Nishat Power, and Nishat Chunian Power — which have similar power purchase agreements, tariff, project cost per megawatt, efficiency, heat rate, operation & maintenance cost and rate of return. Nonetheless, their declared profits are different owing to various factors, including operational efficiencies and operations & maintenance strategy. In the case of Hub Power Company Limited Narowal, the excess profits are not even computed to begin with.

Moreover, the report declared hugely varying figures for the alleged excess profit of IPPs, ranging from zero to Rs13.8bn even though the billing tariff is the same. But it doesn’t elaborate as to why the profits declared by some IPPs are higher than the others, according to an executive of one of these companies. “It wants to punish the better managed IPPs and let off the hook the poorly managed IPPs,” he said.

“Why the Nepra ruling in the case of Sapphire is being ignored and IPPs with higher profits criminalised? If the 2002 IPPs are to be investigated for excess profits then all projects — old and new — should be audited and excess money taken back from them as is demanded by the principle of fairness and equity. It also raises a question: if the government expects the alleged excessive profits to be returned to it, will it also compensate IPPs that incur loss or make less than the allowed IRR?” the chief executive officer (CEO) of another IPP wondered.

“All the invoices are raised by IPPs in accordance with Nepra’s tariff and provision of their power purchase agreements (PPA) approved by the power purchaser after thorough scrutiny and diligence. Nepra can examine whether IPPs have invoiced and received any amounts beyond the scope of their PPAs and tariff,” he contended.

The NAB intervention into the matter signifies that the implementation of the revised PPAs with the 2002 IPPs — under which power producers agreed to slash their tariff and share their savings with the government in exchange for payment of their unpaid bills of Rs403bn — stays stuck in the doldrums. Consequently, the payment of the first tranche comprising 40pc of their unpaid bills the government owes them is stopped since the bureaucrats are reluctant to put their names on the agreements for fear of NAB and consumers are kept from reaping the benefits of the new deals.

“No one wants to risk public humiliation at the hands of the NAB and face corruption cases even though the disputed sum is less than a third of the total 2002 IPP dues towards the government,” the executive quoted above points out.

Interestingly, the revised agreements also provide for a three-member local arbitration comprising retired Supreme Court judges to decide the issue of the disputed excess profit. The tribunal would decide the matter in six months before the payment of the remaining unpaid bills of IPPs is made through the second tranche. The decision will be binding for both sides and settle the matter for once and all. Nevertheless, the tribunal cannot start work unless the revised agreements are signed and the first tranche of unpaid bills is paid.

Sadly, the inability of successive governments to honour agreements with investors has badly undermined Pakistan’s credibility as an investment-friendly destination and increased the country’s risk premium, the high cost of which is borne by consumers. Hence, we see no repeat investors in the power sector since 1994. The sooner this matter is settled the better for investment in the country.

Published in Dawn, The Business and Finance Weekly, May 31st, 2021