News Analysis |
The Supreme Court of Pakistan has expressed serious concerns at Pakistan’s existing power purchase agreements (PPA) with the private sector power producers while hinting that it could send these agreements to the National Accountability Bureau for investigation.
Chief Justice of Pakistan (CJP) Mian Saqib Nisar says agreements with the independent power producers (IPPs) have become a noose around the nation’s neck since the government had been paying these private companies millions of rupees based on their capacity of power generation instead of the actual power generated and added to the grid.
A number of incentives were offered to investors which, among others, included guaranteed purchases and guarantees for fuel supply obligations of the state’s fuel companies.
When the apex court took up a suo motu case of excessive payments made to private power producers on Wednesday, power division’s federal secretary informed the court that the government made payments based on IPPs’ capacity, as per agreements with them, whether government purchases the power or not. At this, the CJP remarked that billions of rupees had been given away to IPPs in this way. He observed that such agreements were being cancelled the world over, adding the matter could be forwarded to NAB for an investigation into these agreements.
“Agreements with IPPs have become a noose around our necks. We don’t know who those people were who made these agreements. Whether electricity was provided or not, money was given,” the chief justice remarked.
Read more: SC inquires about excessive payments to IPPs
The court has summoned Federal Minister for Power Omar Ayub at the next hearing for an explanation on the agreements under which the government guaranteed to purchase power and pay for the available capacity, not the actual power purchased.
IPP Agreements: No Easy Way Out?
PPAs or the IPP agreements were signed with the private power producers during the 1990s by Prime Minister Benazir Bhutto’s government. The measure was designed to address the acute power shortage during the late 80s and early 90s when the population and the economic growth led to the consistent rise in demand for power. At the time, the country’s total power generation capacity (consisting only of WAPDA and KESC) hovered around 10,800MW. Supply side did not keep pace with demand, which led to a shortfall of around 2,000 MW at peak load.
The IPPs case was another setback for the PTI government which is already facing challenges at several legal forums in the world, including the Reko Diq and Karkey rental power plant cases.
To address the pressing issue of electricity shortfall, Benazir Bhutto’s government launched the 1994 power policy to attract private power producers from all over the world. A number of incentives were offered to investors which, among others, included guaranteed purchases, capacity payments and guarantees for fuel supply by the state’s fuel companies. As a result, a total of 16 IPPs were commissioned between 1997 and 2001.
Though the 1994 power policy was widely applauded, as it was designed to produce sufficient power for industrial expansion. Benazir Govt had locked a long term rate of US$ 0.0624 cents per kilowatt hour (KWH). However multiple setbacks to the economy over the following years meant reduced demand for electricity. On one hand, the country went through an economic slowdown and on the other, an obligation to pay for a minimum 60 percent of the capacity of IPPs irrespective of the actual utilized capacity led to the credit crunch for WAPDA and KESC, the state utilities which were paying the IPPs. In later years PSO was often unable to supply oil to IPPs, as it was unable to get reimbursements from WAPDA and the government. WAPDA and KESC were often unable to collect power dues from consumers – as part of overall governance problem.
Challenge of International Arbitration
This situation, which continues to date, has often led to fuel shortage for IPPs which they blamed on nan-payment of dues by the National Transmission and Dispatch Company (NTDC). The IPPs took the matter to the courts and in 2013 the government signed a MoU with the private power producers for an out of court settlement of PKR480 billion circular debt, when Ishaq Dar was the finance minister.
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However, the other issues kept lingering, several months ago nine IPPs working in Pakistan moved the London Court of International Arbitration (LCIA) which in its final award in October 2017 asked Pakistan to pay PKR 14 billion to the nine IPPs.
NTDC challenged the LCIA’s decision in the Court of Appeal in the UK on the plea that LCIA is undercutting the jurisdiction and sovereignty of Pakistani courts but the state-owned power distributor lost its final plea in the Court of Appeal in October last year – probably due to the nature of initial Power Purchase Agreements (PPA) which had defined London as the place for arbitration.
The IPP agreements are thus another inherited problem for the PTI government which is already facing challenges at several legal forums in the world, including the Reko Diq and Karkey rental power plant cases.
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According to a report published in a local daily, the country is facing more than 40 cases of different natures in international arbitrary forums. However despite Supreme Court’s frustration with these PPA Agreements Pakistani courts has no solution at their disposal, since these agreements are already linked with arbitration in the UK courts. While court can fume at NTDC, Ministry of Power and on the government it has no stick at its disposal to force IPPs to comply on issues related to capacity payments. Govt however can negotiate with the IPPs to define the terms since both have to manage a long term relationship – and Pakistan an energy starved country of 220 million remains an attractive market for the Independent Power Producers (IPP).