Power Politics of IPPs in Pakistan

Energy has become equally important as breathing for living. Irregularities in both end up huge catastrophe, one can carefully imagine. Pakistan currently has been facing severe load shedding and escalating electricity bills despite of more than 100 Independent Power Plants (IPPs) installed in a country with massive power generation capacity than actually needed. Strange! Isn’t it?

‘Government doesn’t have the money to buy expensive electricity. Consumer tariffs are jacked up drastically. IPPs are facing pushback from the public and activists as they drain national budgets’

The story begins in 1994 when Benazir Bhutto Government offered lucrative and much generous incentives to attract private investors for the first time in power sector and IPPs were created. Incentives include, taxes exemption for import of any type of machinery or equipment for the cause, and choose any type of fuel to make electricity! Private Power Infrastructure Board (PPIB) was established for implementing ‘standardized’ power purchase agreements without leaving the room for negotiation and WAPDA was contracted to buy power output that IPPs would generate, at unjustifiable high prices, moreover, in US dollars. Such high tariff was calculated that is still unknown and public access to these statistics is restrained by ‘executive’ order claiming this a sensitive information! Moreover, WAPDA has to pay IPPs the amount as capacity charges each month even if they don’t generate single unit of electricity.

“Who got the benefit? ‘One can say it was just the political gains and to increase the government vote bank from the public. The idea was to increase the power supply in a country but she failed to do her sums properly and could not consider the long term devastating impacts of her policy could have”

In 1997, IPP’s control was given to NEPRA (National Electric Power Regulatory Authority) and now this authority is responsible for generation, transmission and distribution of electricity and licensing. The main responsibility was to ensure steady electricity supply at affordable price to consumers and looking for system losses, determining reasonable tariffs and controlling for high tariffs & generation capacity constraints etc. But this institution failed to fulfill these objectives. For example, giving license to less efficient power plants, and in one case, allowing utility to run power plant at 26% efficiency even though there were unutilized power plants that could have run on 62% efficiency. Secondly, the cost of renewable energy projects and coal power plants were not properly scrutinized according to global rates that is the big reason that cost of electricity in Pakistan is too high. Furthermore, the institution never performed technical audits of IPPs so that true efficiency of these plants could be substantiated that could result in low tariffs afterwards. Poor control over IPPs by this governing body has led them charge high tariffs by misreporting and over invoicing. But who cares!

IPPs business model has been arranged so rewarding that private investors don’t bear any investment risk as usual, rather it has been passed to Government of Pakistan as tariff is fixed and must be payable at any cost whether electricity has been generated, needed or not. It was such attractive business that from gambling companies to cable television owners, everyone rushed towards bidding for power plants, New York Times reported in 1995. Such steady stream of revenues without any risk has left IPPs not to look for less cost alternatives ever if otherwise, could help authorities paying less tariff and people in general footing less electricity bills. This concept was flawed. Secondly, the government agreed making payments to IPPs in US dollars, however collecting electricity bills in local currency Pak rupees which is constantly depreciating, hence, huge losses have to be faced due to excess payments. This clearly indicates that the agreements and sections within such framework are blemished and serve no good purpose. Surprisingly, almost 30 years have passed but no government has taken stance against this evil until now! Raised many questions to ponder upon.

The reason is most of the IPPs are owned by government of Pakistan 52%, Pakistan’s private sector i.e. 40 family or groups 28%, Mian Mansha Group, Zardari group, Sharif family, Jahangir Tareen group, Saifullah group are among few. Interestingly, when we look into the facts, these are the same families who have licensing power only to import and sell LNG & LPG and sole rights to import and export wheat & sugar. Moreover, most of these IPPs have retired military officers and their family members as partners and enjoyed millions of dollars. One can say that these families are big market players and market makers and approx. 240 million people’s destiny are on stake on these 40 families just. Capacity payments to IPPs have depleted public funds and exerted huge pressure on national exchequer. Over the past decade, IPPs have received Rs8.344 trillion in capacity payments, with Rs2.1 trillion expected in fiscal year 2024-25. However, in 2023, in one year, the government bought no electricity but paid Rs.1, 929 billion in capacity payments. This includes Rs46 billion to two producers with no power output and Rs370 billion to three plants operating at just 15 percent capacity. This has soared circular debt above Rs3,000 billion, posing a grave threat to the nation’s economic stability, fueled by unpaid subsidies, inefficiencies, and deep-seated corruption, thus, the need for sweeping reforms becomes ever more critical to salvage economic stability and secure a sustainable future.

Industry is declining and most of the industries have shut their operations due to high power tariffs. APTMA chairman demands Government to revise agreements with IPPs and bewailed noticing a 4% drop in textile exports for June 2024 compared to last year, attributing the decline to the lack of a 9 cents/kWh Regionally Competitive Energy Tariff (RCET) and the industry’s burden of paying 15.5 cents/kWh due to unfavorable IPP agreements. He warns that exports face bleak prospects, with half of APTMA members shutting down their units, resulting in job losses, increased poverty, and economic decline. Similar claims have addressed by KATI (Korangi Association of Trade and Industry) that the revised Rs12.9 trillion tax target and $100 billion export goal by 2030 are unattainable given the current economic conditions and high power tariffs. IPPs creation also advocates the politics of World Bank back in 1990 when it started pushing and convincing many countries to liberalize and privatize energy markets. It was the same time when big power equipment manufacturers faced reduced sales in mature markets of North US and Europe so they needed new customers elsewhere for their thermal power plants. We should not forget the story of ‘Frederic Pierucci’ who after his release from prison wrote in his book ‘American Trap’. His story provides a rare glimpse into the hidden world of power plant equipment suppliers and engineering firms who wanted to sell their machinery. For instance, General Electric, an American power equipment giant, major beneficiary of energy sector’s liberalization over the past thirty years. We should recall the case of Ghana whose public utility was producing and providing electricity to its people before but now have dozens of IPPs they don’t actually need, still facing blackouts. It was corruption and rent seeking behavior by politicians who gained extravagant financial benefits through IPPs deals. Zambia story is not hidden too who declared itself bankrupt and major reason was IPPs capacity payments burden. There are surely of vested interests by Government officials and big investors. 30 years have passed, this privatization experiment in power sector has turned into a nightmare of overstated and insurmountable electricity bills for tens of billions of people in developing countries and unfortunately Pakistan is one of them.

Our economic downturn is due to power crisis and needs appropriate actions. It is urged at this crucial time to halt new IPP projects and renegotiate the terms with existing ones or their closure which are not enough to generate electricity and still feeding themselves with halal income of people. It is advised that consumers must have option to select electricity provider that offers them cheap rates with better terms as true free market philosophy of privatization, shifting the payment through Pak rupees, abolishing ‘take or pay’ approach and initiating ‘take and pay’ agreement i.e. only those IPPs will be paid from which electricity will be purchased or taken. It would certainly create the sense of competition among private power generation companies, will reduce burden on public payments that otherwise could be spent on development projects and common man would get relief. Last but not the least, the nations where political interventions are rampant, corruption is prevalent, managerial level employees are changed according to each government’s preference, and where governance issues are not resolved, things will not get better. The story doesn’t end here, however, right policy directives augmented with integrity, time will not that far that we will be able to realize entrenching economic and social benefits for Pakistan.

Prof. Dr. Muhammad Shahbaz                                          

School of Economics

Beijing Institute of Technology, China

Muhammad Kashif

School of Economics

Beijing Institute of Technology, China