The government’s decision to dishonour agreements with a dozen power plants may seriously dent its reputation, lead to loss of hard-earned gains of billions of rupees annually besides exposing it to paying over Rs22 billion to power plants to settle international arbitration awards.
Six months ago, the government had won significant concessions from the Independent Power Producers (IPPs) by applying political force and using intelligence agencies’ stick. But it is now at the verge of losing these gains due to political expediency, a weak bureaucracy and undue interventions by the National Accountability Bureau (NAB), said sources in the government.
One of the biggest concessions that the government had secured was that the IPPs agreed to forego the awards that they had won from the London Court of International Arbitration (LCIA) against the government, which was also at stake.
Around nine IPPs had won arbitration awards on capacity dispute and as of July 31, 2021, the award amount stands at Rs14.5 billion at current exchange rate in addition to Rs7 billion post-award interest rates, according to calculations by the IPPs.
As a result of this backpedalling, Prime Minister Imran Khan’s desire to reduce the electricity tariffs by passing on the benefits of negotiated settlements with 46 IPPs would also remain partially unfulfilled after his government could not honour the agreements signed in February this year.
Last month, the government decided to reopen deals with 12 IPPs set up under the 2002 power policy due to its failure to honour Arbitration Submission Agreement, which is part of the February 2021 master agreement and alleged pressure by the NAB.
The Cabinet Committee on Energy (CCoE) had approved that “the agreements with IPPs set up under the power policy 2002 finalised by the implementation committee be reviewed in the light of NAB advice”.
Based on concessions given by the IPPs, “The revised tariff shall be effective on the date when last instalment under the payment mechanism has been paid to the company,” according to the agreement.
The government was supposed to make first instalment of 40% before June and second within six months of the first instalment, which the government has now defaulted that in consequence to the delayed effectiveness of the agreement.
“Subject to the terms of this agreement, after notification of the revised tariff determination in line with the tariff adjustment application and payment of the first instalment under the payment mechanism, and till revised tariff effective date, the parties agree that the company shall, commence giving discount in future invoices consistent with the notified tariff,” according to the agreement.
The IPPs had agreed that that if their plants operated on an efficiency level of higher than 45% they will share their gains with the government, reads clause 4 of the agreement. Similarly, clause 5 of the agreement shows that the IPP will also share any saving against the operational and maintenance cost, which would have resulted into low tariffs.
Both these clauses 4 and 5 had to be made operational from July 2021 and were required to share their accounts of fiscal year 2021-22 with the government to honour the agreement. This has now been delayed due to the government’s backpedalling on the agreements. When contacted a government spokesman said that “the agreements become effective once the payments are made, accordingly it cannot be inferred that any loss is being caused instead the savings will start to accrue once the agreements are effective”. But it seems that the government, that is now afraid of NAB, may one day face another inquiry of causing potential losses due to a delay in giving effect to the agreements with the IPPs.
To another question the government spokesman said that “the amount of savings depends on many factors including the exchange rate, fuel rate, energy generated, actual cost incurred by IPPs, audited financial statements of IPPs etc hence the precise amount cannot be computed until the actual savings accrue pursuant to the revised agreements.
Various forums, including Cabinet Committee on Energy (CCoE), Economic Coordination Committee (ECC) and the federal cabinet approved the payment mechanism finalised by the implementation committee and agreements with IPPs in February. However, NAB intervened into the matter as an earlier commission led by former Securities and Exchange Commission of Pakistan (SECP) chairman Muhammad Ali had alleged excess gains by the 2002 policy IPPs.
NAB and the government were making Rs53 billion claims against the 2002 policy IPPs and under clause 9 of the agreement both the parties had agreed to arbitration agreement, which the government has now backtracked on. The government spokesman said, “There is no question of honouring the Arbitration Submission Agreement instantly as the Arbitration Submission Agreement is part of master agreement and it will be effective once the payments are made to the IPPs. He said that the federal cabinet has set up a committee to finalise the process of making payments and making the agreements effective.
However, as a matter of fact, the government has now reopened the agreements six months after signing, putting a question mark over its credibility. Under clause 2.7, the IPPs had also agreed to give away their right to award money, decided by the international court of arbitration.
The government spokesman said that the enforcement proceedings of LCIA awards were pending and have not yet achieved its finality, an effort was made to resolve these issues through settlement agreements with the IPPs, accordingly it is expected that the matter will be resolved amicably and the government will not be subject to the penalties.
One company had foregone Rs1.81 billion on account of LCIA award against the government of Pakistan. The enforcement of the award is pending before the Lahore High Court.
But the sources said that the way the government retracted from its commitments despite assurances given by the security establishment, the IPPs may think over to international arbitration that may complicate the matter further.
“But we want to give another chance to the government to live up to its commitments before taking the extreme step,” said the chief executive officer of an IPP while seeking anonymity.
The 2002 IPPs that have been made subject of the extra scrutiny are penalised for their efficiency gains, as the government’s focus turns away from reducing the generation cost to targeting the balance sheets of the companies were efficient and inefficient companies are treated equally.
The government’s decision to treat companies differently may also cause troubles for the companies in future. In future the Pakistani sponsors of the IPPs will get Pak rupee linked equity returns of 17% whereas the foreign sponsors will get 12% dollar-linked returns. However, the GDF Suez, which owns 100% equity stakes in Uch Power did not sign the agreement and will get 15% dollar-linked returns under the old arraignment as it did not enter into any agreement with the government.