Is PTI giving an NRO to IPPs?

Reports suggest changes being made in MoU to favour power producers

Zafar Bhutta January 12, 2021
PM Imran Khan speaks during a press conference in Kabul. PHOTO: AFP/FILE


The ruling Pakistan Tehreek-e-Insaf appears to be giving an NRO to the Independent Power Producers (IPPs) as the Centre seems to be ignoring the excess payments made to them, industry players and analysts said.

According to reports, changes are being made in the Memorandum of Understanding (MoU) reportedly to favour the IPPs.

The move comes at a time when Prime Minister Imran Khan has denied giving an NRO to the opposition leaders, which has resulted in the formation of the Pakistan Democratic Movement – an alliance of 11 opposition parties formed to oust the incumbent government.

The National Reconciliation Ordinance, or NRO, was a controversial law introduced by then military ruler Pervez Musharraf to drop cases against dozens of politicians in 2007.

The inquiry report on the power sector has recommended recovery of all excess payments amounting to over Rs1,000 billion. However, the government signed an MoU with the IPPs that offers payment of Rs450 billion to 47 IPPs.

Experts and officials say it amounts to giving an NRO to the IPPs.

Meanwhile, key office-bearers in the government, who also own IPPs, started beating the drum of reducing electricity rates.

However, the proposed new agreement does not capture actual frauds committed by the IPPs and recovery of illegal gains made by them.

The government is bending backwards to arrange Rs450 billion funds to make payments to the IPPs for old outstanding dues, whereas recovery of excess payments of more than Rs100 billion relating to 1994 power policy plants, Rs40 billion due to excess payments of fuel price indexation for fuel not consumed, Rs50 billion excess profits etc identified by the head of government committee on power sector audit, Muhammad Ali, in his report, is being ignored.

The issues identified in the report are missing from the MoU and certain clauses are being diluted to favour the IPPs.

There are some issues, which the decision makers need to take action before finalising new agreements with the IPPs.


Capacity payment adjustment of $600m

Tariff of IPPs formed under 1994 power policy is subject to adjustment based on any change in assumptions specifically with reference to the taxation of contractors.

Tax was assumed as part of set-up cost, however, income tax was not deducted by the IPPs on the offshore part in some cases without giving due adjustment in the tariff.

Schedule 6 of the Power Purchase Agreement (PPA) states that that the company shall be liable to withhold and pay government as full and final tax liability of contractors at 4% of the relevant payments. As the adjustment was not done in time, the amount of tax would be in the range of $40 million to $50 million.

The financial impact of excess capacity charges including default interest charges thereon, may result in recovery of more than $600 million, which consumers paid in electricity tariff.

The Inquiry Committee on Power Sector has also failed to perform its duty relating to key term of the reference pertaining to the cost of setting up private power generation units in the country. It said that government may take up the issue.

Officials and experts say that the IPPs had received 40 to 50 per cent excess payment on account of set-up cost of various power plants. However, this aspect has been ignored and the committee did not touch the role of departments.

The committee’s report does not evaluate the merit of issuance of Letter of Intent, which should have been based on the demand forecast and optimal power basket.

Moreover, the power sector report provided details relating to various power plants set up under 2002 and 2015 power policy, but it avoided the detailed analysis of power plants having total capacity of 6,000MW under the 1994 Power Policy.

Initial analysis had indicated that some of these plants had payback period of two to three years from the Commercial Operation Date (COD).

The committee failed to check over-invoicing and thermal efficiency of the IPPs in comparison with other countries for similar plants.

Industry sources maintain that there was 15% over-invoicing in wind power plants which have a 75:25 debt equity ratio.

The power policy and Power Purchase Agreement (PPA) had allowed certain thermal efficiencies. The computation of initial tariff is based on the price of furnace oil (FO) or other fuels and then the tariff is adjusted for actual price of FO through price indexation.

The 1994 Power Policy had a base price of Rs2,843 per tonne and Rs22,415 per tonne under the 2002 Power Policy. Current price of FO is approximately Rs70,000 per tonne.

The question arises that why should the country pay for fuel not actually consumed at Rs70,000 per tonne. Recovery of excess payment over the last 20 years amounts to around $200 million to $250 million in this regard.

Industry officials say that the IPPs had been allowed to charge operation and maintenance (O&M) cost in line with the international standards. However, the IPPs set up their own O&M Companies but continued charging maintenance cost according to international standards allowed in the PPA. The IPPs also received 30 to 40 per cent excess payment on this head.

They say that contracts of these IPPs were going to expire, but the government had committed to extend the agreements of the ones that had already received multibillion rupees excess payments. They added that majority of the plants remain shut due to merit order and therefore, it was a lucrative deal they were going to sign with the government.

Officials say that forensic audit is essential to identify irregularities and bring the IPPs to the negotiating table.

The IPPs will try to shield themselves on the back of the PPA and the International Court of Arbitration. The scope of an audit may include tariff-setting procedure by Nepra or the government and power requirement assessment by the official bodies including the National Transmission and Despatch Company.

Officials say it should also cover plant efficiency and dependable capacity testing, and cost of plant and machinery, including comparison with acquisition cost for a similar plant in other countries in the relevant time period.

It should further cover reasons for extensions in financial close granted to various IPPs by the PPIB/AEDB.

The findings could be used to bring corrupt elements into the accountability process, besides asking the identified IPPs to improve their contractual terms to avoid criminal proceedings and termination of the PPA.

The higher acquisition cost was claimed by the IPPs while some of the OMCs, other than the PSO, have paid part of margin on fuel invoices and transportation charges to the project sponsors. It may be identified by reviewing OMCs bank payments and comparing actual delivery of fuel and invoice issuance dates with the comparison of sales tax record and payments by the IPPs.

The committee was also expected to review the merit order computation as well as compliance. It seems that the committee has not fulfilled this scope of work requirement.

There may have been instances wherein dispatch was given to a power plant based on merit order, but the same has not been given to facilitate specific IPPs.

The favour extended to them – Lalpir and PakGen – should have been checked by the committee. The diversion of dispatch might have resulted in higher EPP besides higher CPP cost or lesser LD due to not having full/partial plant availability of the IPPs required to have dispatch instruction as per the merit order.

Further, the Committee on Power Sector should have reviewed whether the payments for capacity and energy purchase were on merit or out-of-turn payments were made to certain favoured IPPs.

The IPPs might have dispatched lesser to the grid but declared higher availability to avoid liquidated damages or earn higher capacity revenue.

There is a possibility that the IPPs might have declared higher than the actual available capacity to protect their LDs or earn excessive capacity revenue.

This could be identified by careful analysis of the IPPs' dispatch pattern.

Late payment charges

The IPPs claim late payment charges at Kibor plus 4.5% and in case of exchange rate variation in dollar of more than 5%, they also claim exchange difference on delayed capacity payment. This duplication of charges may be in the form of interest rate of rupee as well as rupee depreciation.

The report on power sector also indicated that the IPPs had not maintained the required fuel inventory as per agreements. However, this issue has been ignored in the MoUs inked with the IPPs.

It was agreed in the MoUs with 2002 Power Policy plants that excess profits identified in the committee report would be referred to Nepra for verification and reconciliation.

However, now as per media reports and industry sources, this clause is being either removed or diluted to favour the IPPs. This may attract the National Accountability Bureau.

One of the major conditions in the MoU was agreement to convert the 2002 Power Policy plants into “take” and “pay”, upon introduction of market mechanism. However, as per industry sources, this clause is also being modified to favour the IPPs.

The committee report had identified excess operations and maintenance expenses charged by the IPPs in the past. The MoUs have ignored past excess charges and only negotiated sharing future savings.

An inquiry should be held to investigate why the issue of transmission network congestion was not resolved and licences for generation were issued knowing the fact that power could not be purchased due to transmission congestion.

When contacted former Independent Power Producers Advisory Council (IPPAC) chairman and Hubco CEO Khalid Mansoor, he said, “How can it be termed an NRO for IPPs?”

In the best national interest, the IPPs left over Rs840 billion by accepting claw back in their extremely water-tight contracts including departure from the dollar indexation, sharing of efficiency gains and O&M expenses. These unprecedented concessions would result in lowering the tariff of IPPs in the future remaining terms of their PPA. In view of the above, it will be quite unfair to term such sacrifices of IPPs as giving an NRO to them.


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