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Power Policy 1994 and the ‘take or pay’ clause

First introduced by a Power Policy announced almost three decades ago, the ‘take or pay’ clause has plagued Pakistan’s power sector ever since. While this clause has caused heavy loss to the country in the form of high power tariff and mounting circular debt, it has remained part of successive power policies – up until now that is.

Apparently, those entrusted with the nation’s affairs over this time failed to see the injustice of paying power plants not contributing power generation. For the first time, the incumbent government has signed settlement pacts with Independent Power Producers (IPPs) established under Power Generation Policy 1994, paving the way for substantial reduction in power tariff and circular debt.

After the government clears 40 percent of the IPPs’ dues in the first instalment, tariff of these power producing companies will be reduced and this will benefit the country with approximately PKR 60 billion per annum.

As per parity wise payables to IPPs on 30 November 2020, total outstanding payables of 46 IPPs including HUBCO & KAPCO were PKR 403,098 million. The total payables of IPPs established under Power Policy 1994 were PKR 57,210 million, and payables of IPPs of 2002 Power Policy were PKR 145,702 million while total payables of renewable plants were PKR43,203 million.

The total payables of remaining IPPs including under MoU and non-MoU were PKR 94,676 million as on 30 November 2020.

Power sector sources say some IPPs have been found indulging in malpractices like over-invoicing and use of fake documents to maximize benefits under Power Policy 1994. The National Electric Power Regulatory Authority (Nepra) was unable to conduct forensic audit of the documents and data presented by IPPs owing to poor capacity. The IPPs’ claims regarding heat rate and efficiency rate of power plants have likewise remained unverified.

The sources said that the Nepra has so far merely calculated the figures and approved tariff of the IPPs which resulted in additional burden on the public as well as the national exchequer. The IPPs have raked in lucrative returns due to the ‘take or pay’ clause of Power Policy, 1994.

In the past, the Securities Exchange Commission of Pakistan (SECP) had taken up the matter as the Nepra desired forensic audit of the IPPs. But the IPPs approached the courts and were able to evade audit of the heat and efficiency rates of their plants.

“The National Accountability Bureau (NAB) Lahore has also taken up the matter of abnormal profits of IPPs to find facts in this regard”, said the sources. “However, the IPPs were able to thwart this move because of the ‘take or pay’ clause”.

The government had initially agreed up to 17 percent return to IPPs. The IPPs, however, took home profits as high as 60 to 70 percent.

The sources said the IPPS were well aware how to get maximum benefits with this clause of ‘take or pay’ while instead of introducing take and pay policy the government has continued with ‘take or pay’ policy.

“Absence of fuel audit, no check on heat rate and efficiency rate of the power plants by the Nepra and power division has added miseries to common public and additional burden on the national exchequer.”

It is also learnt from sources that Shaukat Tarin, an important member of Economic Advisory Council (EAC), has alleged vested interests in IPPs as he as finance minister during Pakistan People’s Party (PPP) tenure protected the interests of Rental Power Plants (RPPs).

Similarly, he used his influence in PML-N tenure to ensure benefits for IPPs. He is also said to have a very close association with Abraaj Group and is currently spearheading efforts to find a new buyer for KE, one probable being the Chinese firm Shanghai Electric Power (SEP). After receiving a clean chit from the NAB, the Ministry of Energy has sent a summary to the federal cabinet’s Economic Coordination Committee (ECC) regarding PKR 85 billions payment to IPPs as first instalment ostensibly to clear the pending dues. The ECC is likely to grant its approval to the initiative in its next meeting.

The deadline for the payment under the new agreement with IPPs was 29 March as the federal government had promised to clear payments within 30 business days from 11 February. Similarly, it is estimated that if the pending dues are not cleared, the IPPs which were established under the power generation policy of 1994, will not be able to ensure fuel storage for their plants.

Salient features of the 1994 Policy

The federal government issued the Policy Framework and Package of Incentives for Private Sector Power Generation Projects in March 1994, in the face of an acute power shortage in the country. The government estimated a conservative 8 percent demand growth over the next 25 years.

The 1994 policy offered an internationally competitive package of incentives in order to attract overseas and domestic entrepreneurs to invest in power generation projects in Pakistan.

The federal government offered a bulk power tariff of US cents 6.5/kWh (PKR 1.952/kWh) on average for the first 10 years while the levelized tariff worked out to US cents 5.9/kWh (PKR. 1.776/KWh) over the life of the projects (25-30 years).

A review of the profits and dividends from the available financial statements for the 1994 Policy thermal IPPs showed that almost all IPPs reported enormous profits, large chunks of which were withdrawn in the form of dividends. In fact, cumulative withdrawals in the form of dividends for some IPPs amount to as high as 22 times the initial equity contribution.

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