Payment to IPPs

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The government has finally paid the first tranche of the outstanding bills of 20 independent power producers out of the 46 generation companies with whom it had signed revised power purchase agreements months ago to secure future tariff concessions. The SAPM Power took to Twitter on Friday to announce that this represented the government’s firm resolve to settle the issue of the power sector’s circular debt once and for all. In all, the government has paid Rs89.2bn to the 20 IPPs or 40pc of their unpaid bills of Rs225bn. The first payment to the rest of the IPPs is being withheld owing to various reasons, including inquiries launched by NAB against power companies set up under the 2002 power policy for allegedly making excess profits of around Rs54bn. The disputed excess profits constitute just above 13pc of the total unpaid bills of Rs403bn the government owes to the 46 IPPs. The government had agreed to pay these bills in two instalments within six months of the revision in their PPAs as part of its plan to liquidate the power sector’s growing circular debt that has already topped the Rs2.3tr mark.
The government decision to withhold payment defies all logic since the revised PPAs with the 2002 IPPs provided for independent arbitration under the Arbitration Submission Agreement option on alleged excess profits for an amicable resolution of the dispute. The decision of the accountability watchdog to target particular IPPs is also surprising since the profit earned by the IPPs, according to Nepra, “would be higher or lower than the return on equity allowed to them” because of such factors as operational efficiencies, cost-saving measures, better project management, etc. NAB intervention in purely technical issues is uncalled for since the regulator had already started investigating allegations of excess profits. Pakistan has a very poor track record of honouring commitments made to investors, and has suffered immensely on this count. Consider the example of Reko Diq where an international arbitration tribunal slapped a fine of nearly $6bn on Pakistan for revoking the agreement with Australian mining giant TTC, damaging the country’s credibility in the eyes of foreign investors. In order to avoid further damage, the government needs to tell NAB authorities to back off, and implement the agreements with the IPPs unless it wants to sour ties further with investors. The sooner the matter is closed the better for foreign investment in the country.