Prime Minister Imran Khan government has successfully concluded renegotiation of the terms of Pakistan’s agreements with private power producers, exacting cumulative monetary concessions to the tune of PKR 7 trillion over the next four decades, The Truth International (TTI) reports on good authority.
The new deal, signed between government representatives on the one hand and Independent Power Producers (IPPs) and Wind Power Projects (WPPs) on the other, would help lower electricity cost and reduce the crippling circular debt.
With the negotiation for revision of contracts with 53 IPPs the Government signed agreement with 47 IPPs and agreed on a mechanism for recovery of access payments of the past too, will be saving at least PKR 836 billion over next fifteen years. The agreement led towards executing similar terms to the government owned projects which will enhance these projected savings around PKR 7,000 billion over the next 40 years.
The savings secured through the renegotiation amount to PKR175 billion a year.
This is worth mentioning that PML-N second government in 1997-1999 also tried to re-negotiate agreement with IPPs and used NAB but badly failed. Why this negotiation with arm twisting was started and why it was aborted remains a mystery to date.
This time, Led by Chairman Federal Land Commission Babar Yaqoob Fateh Muhammed, the government negotiators secured the key policy change in the power projects agreement -a shift from earlier policy of “take or pay” to “take and pay”.
To achieve all this is not less than miracle, said a senior executive serving in Power sector for years.
Interestingly there was no official correspondence in between IPPs and negotiation team, no arm twisting, and no agency (FIA, NAB etc.) was used during negotiation. They were invited on telephonic messages and they came, said a team member. The only commitment given to the IPPs was that everything will be done in the national interest – and both parties sitting on either side of the table followed this commitment, said a member of the government’s negotiating team on condition of anonymity.
He paid special tribute to Babar Yaqoob Fateh Muhammed whose was able to motivate the team to work 15 hours a day on average – sometimes without the weekly day off.
Private Sector strongly believe negotiation team comprises of highly professional members and establisher also provided full support to make negotiations with IPPs a success story. This was unprecedented coordination.
The two sides agreed to reduction in the rate of return on equity, reduction of interest rate on late payment for two months, heat testing to judge capacity of projects and take profit in Pakistani rupee instead of US dollars at a rate of 15 percent. The rate of dollar has been fixed at PKR 148 for the life of these projects.
A look at the agreement showed that the government would save a minimum of PKR 675 billion in the next seven to ten years. A Power Ministry official who attended the briefing of the negotiation committee said IPP experts hold firm view that approximately PKR 5,000 billion would be saved in the next 25 years if this agreement is applied to the government-owned RLNG and coal fired projects.
Sharing details of a saving of at least PKR 675 billion, the official told this correspondent that the government would save PKR 225 billion under the Power Policy 1994, another PKR 200 billion under the Power Policy 2002, and PKR 250 billion would be saved on the payments to be made under the Power Policy 2006 over the lifetime of these projects.
He termed the negotiation a success that would plug the black hole that was eating hundreds of billions of rupees and affecting businesses and industrial activities.
As far as the recovery of overpayments to some units is concerned, the National Electric Power Regulatory Authority (NEPRA) has been asked to negotiate with the IPPs and ensure a decision is taken on merit and without any arm-twisting.
The agreement further reads that local investors’ USD based returns have been converted to Pakistani currency at 15 percent and foreign investors’ returns have been reduced from 15 percent to 12 percent but in US dollar. It has also been agreed that heat rate test (to be conducted by June 2021) to ensure accurate reporting of efficiency.
Up to 70 percent sharing in fuel efficiencies and 50 percent sharing in Operations & Maintenance Efficiency also form part of the MoU. On delayed payments from government side rate of interest has been reduced from 4.5 to 2 percent. The government would also devise the mechanism for payment of IPPs receivables.
Any receivable left unpaid for longer than two months will be subject to interest at the rate of 4.5 percent.
In order to assess if a company has made any ‘excess profits’, the reconciled financials between the committee and the IPPs would be submitted to Nepra to take a decision and provide for a mechanism for recoveries where applicable.
Further details reveal that the parties have agreed that nothing contained in the agreement shall be deemed or construed as an admission of liability, wrongdoing or improper action on the part of ITPs. Furthermore, agreement or any of the terms of this agreement shall not be considered as an alteration or amendment to the power change agreement or implementation agreement.
Salient Features of Revised Agreement Terms – 1994 policy ipps, HUBCO and KAPCO (8 ipps = approx.. 4,046 mw )
• 11 % reduction in capacity payment and variable operation & maintenance costs (O&M).
• USD indexation removed from 50% of reduced capacity payment and these will be based in PKR (instead of USD).
• Interest on interest to be waived against payment of present and future invoices in the order of due date.
• All arbitration and out standing claims between IPPs and GoP amicably settled
• 15 legal disputes got settled Out of court court/arbitration cases in lieu of non-availability of fuel supply due to payment delays also settled with benefit or these settlements to consumers.
• 2 court/arbitration of KAPCO against government are being withdraw which will likely to save of RS. 60 billion.
• Heat rates tests agreed to be conducted through international consultant to determines fuel efficiency for finding actual fuel use. After this heat test, efficiency can be reset from 45 % to say 46 % which will result reduction of fuel cost component and ultimately tariff for consumers. Bidding advertisement has been published in leading newspaper(attached). So far 10 consultant have showing interest (USA-2, south Korean 1, UAE -1, Canada 1 and 5 x Pakistani). Process likely to take 2/3 months.
• Local investors: rupee based return instead of USD based: maximum 17% p.a. in PKR fixed at RS. 148/USD without any future USD linkage.
• Foreign investors; return reduced to 12 % USD instead of 15% USD.
• GoP Share in all future savings of Fuel and O&M costs
• Interest rate on Payments reduced from KIBOR + 4.5% to KIBOR + 2% for first 60 days.
Salient Features of Revised Agreement Terms – 2006 Policy Wind and Solar IPPs (18 IPPs = Approx. 815 MW)
• Return reduced to 13% USD instead of 17% USD.
• O&M Costs reduced BY 20-25% FOR Wind and 15% for Solar.
• Insurance costs reduced to Actual.
• Long outstanding curtailment issue of Wind IPPs resolved: 50% reduction in.
• Generation costs above benchmark and curtailment up to 1.25% per month (15% p.a.).
• Waiver of interest on interest & Interest rate on payments reduced from KIBOR + 4.5% to KIBOR + 2% for first 60 days.
Salient Features of Revised Agreement Terms _ Bagasse based IPPs (8 IPPs = Approx. 204 MW)
• Return reduced to 12% USD instead of 17% USD for next 5 years. Thereafter fixed in PKR at 17% @ Rs. 168/USD without any linkage for the next 20 remaining years.
• O&M costs reduced by 10%.
• Insurance costs reduced to 0.7% of EPC.
• Waiver of interest on interest & Interest rate on payments reduced from KIBOR +
4.5 to KIBOR + 2% for first 60 days.
Resolution of Past Excess Payment (Rs 56 Billion) to 2002 Policy IPPs
• Issue to be decided through 3 member Arbitration Panel. Two members will be retired Supreme Court judges who will jointly decide the third member.
• Decision of Arbitration Panel will be final and cannot be challenged and therefore, avoids the risk of GoP event of default.
