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IPP enquiry report

The IPP enquiry report has surfaced after equally contentious Wheat and Sugar report. It is a good omen that questions are being asked and the system is not afraid of the powerful. Irrespective of the outcome, the transparency and fearlessness of the GoP and its agencies is to be appreciated.

The IPP report has been received in the midst of a lot of controversy and has been described as unfair, one-sided singling out IPPs alone for power sector’s problems. A cursory reading, however, indicates that the report has focused on most of the problems and issues including private sector IPPs and government projects and organizations including Discos and CPEC. Excessive interest and capital costs and fuel and O&M costs have long been under discussion. The report brings these issues in a formal framework for the purpose of discussion and resolution. It has enabled beginning of a consultation process with IPPs and something is expected to come out of it.

The IPP Report depicts a very serious situation of the power sector with a circular debt of about Rs 2 trillion and annual financial cost of Rs 200-250 billion. It recommends conversion of circular debt to public debt, i.e., transferring power sector liabilities to federal government. The GoP subsidies to power sector have reached a cumulative level of Rs 3.2 trillion between 2007 to 2019 on an average of Rs 250 billion per year in that period. The subsidies peaked in FY2013 to Rs 686 billion and gradually came down to a minimum of Rs 83.98 billion in 2018 but almost doubled next year in 2019 to Rs 160 billion in 2019 probably due to the currency depreciation effect.

It points out several reasons for such a precarious situation:

Overpayments to private-sector IPPs in various forms; high O&M expenses; irregularities in fuel expenses and payments, over reported Capex, iniquitous escalation and indexation and mismatch between Nepra tariff and the payments made by CPPA to IPPs. The IPP Report recommends a recovery of Rs 104.43 billion from the IPPs; out of which a major share (Rs 64.22 billion) pertains to excess fuel and O&M issues.

The report highlights 7 private-sector IPP companies of making excessive RoE varying between 31 to % to as much as 87%. One has to search for the rationale of such high RoE. It has been alleged elsewhere that a number of factors including but not limited to excessive fuel charges and O&M expenses are involved. It does sound scandalous, though. Similar are three times expensive HVDC CAPEX discussed elsewhere.

It does not spare government sector projects including CPEC and RLNG power plants. It points out undeserved IDC (Interest during Construction), high CAPEX in coal power plants and HVDC transmission line. It also points out high interest rates in the form of Libor and Kibor spreads. The Report suggests corrections and rescheduling of loans of government sector projects in order to reduce the cash-flow load posed by these projects. The Report points out excess capacity and recommends moratorium on new capacity and investments. It also suggests integration of NTDC and KE allowing free movement of electricity and avoiding an ugly situation of KE making investments in new capacity of LNG and Coal Power plants while in the country there is excess capacity.

The report also suggests gas pricing reforms recommending introduction of weighted average cost of Gas (WACOG). Currently, LNG is treated and accounted separately resulting in waste in gas consumption in inefficient Genco plants and creates other complications. It also recommends doing away with the provision of mandatory capacity utilization of 66%. It recommends shutting down all inefficient Gencos and IPPs which have completed their contractual period.

The report brings Discos’ lack of performance into sharp relief putting its cumulative losses and receivables at more than Rs 1 trillion out of which 55% are private sector bills defaulters; 18.2% are to be paid by federal and provincial governments; 10.7% are unpaid subsidies while IPPs and KE have to pay another 8.4%. Total Disco losses during the period 2014-2019 have reached a cumulative total of Rs 788 billion out of which Rs 567 billion is under recoveries and T&D losses are of Rs 222 billion. As a result, most Discos are in negative equity; Pesco topping the list at Rs –227 billion followed by Hesco at Rs –126 billion. A modest reduction of less than 2% in T&D losses has been reported over the past five years, from 19% to 17.7 %. Under recoveries of bills stand at a constant yearly level of 7%.

It recommends action in improving their performance, possibly, by breaking Discos into smaller companies. It also recommends separating distribution from supply business and introducing electricity traders. It also recommends separation and independence of System Operator (NPCC) and transmission (NTDC). These recommendations have been on the table for almost a decade being pressed by IFIs and their foreign consultants. The report also recommends a mechanism of sharing subsidies (losses) with the provincial governments (to alleviate financial burden of Federal government and make provincial governments more cooperative in loss reduction activities of DISCOs)

The report recommends bringing in competition by introducing CTBCM which is already under process and suggests bringing CTBCM under Nepra regulations whole reverse may be more appropriate. The Report does not display much understanding of the competitive electricity market issues and its implication but, nevertheless, supports it.

Without criticizing the Power Division, the report recommends reorganizing and restructuring of the power division and even puts in an organogram in order to increase technical capabilities and skills in the division.

The report estimates the supply cost of electricity without subsidy to be Rs 22.5 per kWh for FY2020 out of which CPP is 9.9 Rs per kWh. Only the highest tariff of 700 units plus of Rs 22.5 equals the cost, all other domestic tariff are lower than the supply cost.

The report criticizes NHP (Net Hydro Profit) and considers it a heavy load on power sector and recommends bringing it in line with international practice. It points out that the dangers that KPK enthusiasts demand Rs 400 billion for NHP under the AGN Kazi formula which may completely render electricity economics off the balance.

There are some issues that are quite difficult. The report recommends switching to Take and Pay as opposed to Take or Pay as is the case in IPPs. Frankly, Take or Pay is not feasible under the single buyer market system that prevails in Pakistan. It is feasible in a multi-buyer competitive markets. Even if somehow Take or Pay is accepted, in that case investor would demand higher tariff for lower capacity utilization and may ask higher tariff in case of peak times and seasons, negating any purportive advantage. And then, Take or Pay is contractual stipulation. Secondly, here is a recommendation of converting to local currency payment and producer tariff, which again is a contractual requirement and may not be negotiable. Implementation anomalies can only be negotiated. Then, Nepra has determined upfront tariff which is an independent regulator supposed to have made a fair determination without fear or favour. It is a separate matter that IPPs may be able to offer some concession in the peculiar circumstances voluntarily such as debt rescheduling.

Concluding, a circular debt of 2 trillion rupees in addition to subsidies of 3.2 trillion rupees given in the past is certainly not sustainable for the government; nor is a supply cost/tariff of Rs 22.50 payable by consumers. All of this compounded by the incoming recession does indicate need of accommodation on both the sides.

Syed Akhtar Ali, "IPP enquiry report," Business Recorder. 2020-04-22.
Keywords: Economics , Economic situation , IPP enquiry , Government projects , Capital costs , Power sector , Power plants , Coal power , Provincial governments , Electricity traders , NPCC , NTDC , IFIs , CTBCM , DISCO , NHP

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