If the past experience is anything to go by, the risk premium on energy projects will increase after this deal.
THE government has extracted concessions worth several hundred billion rupees in future payments to the 47 independent power producers (IPPs) set up between 1990 and 2013 by forcing their hand but the ‘deal’ has left a bad taste in the mouths of their investors.
The government has secured the lucrative deal in exchange for promises of payment of Rs403 billion it owes to the IPPs. What makes the bargain sweeter for the government is the fact that it will pay only a third of the amount in cash; the remainder will be disbursed equally in 10-year bond and 5-year Sukuk. The power producers will get 40 per cent of their money upfront after signing ‘binding agreements’ revising the terms of their original power purchasing agreements and the rest in six months.
This is not all. Instead of paying cash, the government has extended contracts of 12 IPPs in exchange for an award of Rs92bn won by them in an international arbitration a few years ago. “This alone will save us Rs32bn since the extension in contracts will cost the government around Rs60bn,” Special Assistant to the Prime Minister on power Tabish Gauhar told Dawn by telephone.
Moreover, the new revised agreements have a binding force for the IPPs, but will not be so much obligatory for the government as it retains the right to order forensic audit of their bills if and when it feels like. “The forensic audit option is there,” Mr Gauhar said. “It’ll be a major exercise and can have detrimental effects on (future) investments but it is a decision the government can take any time.”
Background interviews with senior executives of three power companies suggest that the IPPs may have been coerced into agreeing to new power purchasing agreements. They were unanimous in alleging that the government had used the Mohammad Ali Inquiry Committee report on the IPPs to build a case against the power producers and later force them into signing memorandums of understanding. “The threats of corruption inquiries and public humiliation through media trial are enough for a businessman to give in to the pressure from the government,” one of them said.
Khalid Mansoor, chief executive officer of Hubco, who was part of the process of negotiations, didn’t say anything when asked if the government had applied any kind of pressure on them to secure the deal from the IPPs. “This isn’t a deal. We have (voluntarily) given the government concessions for the stability of the power sector and the country and demanded nothing in return. The money they’ve agreed to pay us is ours and has been stuck with the government for the last many years,” he told this reporter from Karachi by telephone.
“We’ve given up Rs836bn in our profits (over a period of next 20 years) and we are still labelled as thieves and plunderers,” he said, pointing to the local arbitration ordered (under the agreement) on an amount of Rs53bn, which the government insists the 12 IPPs have received in excess payments. He said the concessions given by the IPPs would have an impact of Rs1.5 per unit of electricity.
Conversations with energy sector analysts suggest new contracts will significantly shrink future earnings of the IPPs after the removal of the dollar indexation from their returns (on equity), which was one of the main attractions for investors, and downward revision of their returns. “I see earnings of these IPPs shrinking at worst or stagnating at best,” one analyst said.
“The agreed changes in their power purchasing agreements will have a negative impact on the IPPs. The only positive for these companies is the settlement of their long overdue, unpaid bills, which are expected to alleviate liquidity pressures on them and reduce their reliance on borrowings to fund their operations.”
The agreements will cover 53 IPPs with a total capacity of around 8,000 megawatts or nearly 23pc of the installed generation in the country. “The agreements with the remaining six IPPs, including Kapco and Uch, will be signed in a few days as their foreign sponsors are not available at the moment,” Mr Gauhar said. The government owes them nearly Rs90bn in unpaid bills.
“Without going into a debate whether the agreements with the IPPs are fair or not, expensive or not, these are contractual dues of the power companies we are paying them. We have not given them an NRO. We have swallowed a ‘bitter pill’ but secured relief in return,” he argued
The agreements are part of the government strategy to resolve the issue of power sector circular debt. Mr Gauhar said the agreements with the IPPs would help reduce the existing circular debt stocks of Rs2.3 trillion — which includes Rs1tr parked with the state-owned power holding company and part of the public debt — down to Rs1.9tr.
“So once IPPs’ dues are paid, we will be left with circular debt stock of about Rs900bn with about Rs600bn to be paid to state-owned Gencos and around Rs200bn to the CPEC projects,” the SAPM added.
He also listed various measures the government is taking for the resolution of the power debt build-up in future by reforming the Discos to reduce their losses, encouraging electricity consumption to use large idle generation to cut capacity payments and so on.
He agreed that the power projects set up under the 2015 policy under or outside of the CPEC initiative were the bigger elephant in the room and said: “If we somehow succeed in convincing these companies to agree to the same terms we have offered the older IPPs, it will result in savings of Rs6,500bn-7,000bn over a period of 30 years.” But, he added, it was a sensitive matter (because it involved Chinese power companies and banks) and had to be settled by governments of Pakistan and China.”
The management of the IPPs and sector analysts are unanimous that the way the government has forced the power producers to agree to revise their contracts will have a long-term impact on investments in the power sector. “It will have negative fallout on future investments. The future investors might not find investments in future power projects economically viable after all (since the governments here cannot stick to the original agreements),” Khalid Mansoor argued.
If the past experience is anything to go by, the risk premium on energy projects will increase after this deal. But, of course, that will be in future. For now, the government appears to be in a celebratory mood.