ECC okays conversion of MoUs into agreements for IPPs

The Independent Power Producers (IPPs) on Monday finally won the revised deal with the government after the Economic Coordination Committee (ECC) of the Cabinet approved converting Memorandum of Understandings (MoUs) into agreements to continue dollar indexation and capacity payments.

The agreements are aimed at devising payment mechanism for clearing outstanding payables amounting to Rs403 billion.

The Inquiry Committee on Power Sector had pointed out that the government had made excess payments of Rs1,000 billion to the IPPs.

It further noted that indexation with dollar and capacity payments were major contributors to excess payments. However, the government had frozen dollar indexation at Rs160 as the ceiling.

In the revised deal, the government also made amendments in the MoU signed with the IPPs on December 12, 2020.

The government claimed that approximately Rs836 billion was involved during the entire period of the project.

Sources said that one-third of the projected savings would be on assumed devaluation of the rupee against the dollar.

Secondly, as many as 12 IPPs had won the case in an international court against Pakistan as a result of which, the government had to pay Rs92 billion.

In order to avoid default on this account, the government had extended agreements with these IPPs. The government assumed that it would save Rs32 billion in this case.

Moreover, the IPPs had been taking benefits of efficiency gain on account of use of furnace oil in power plants. Now, they will share the efficiency gains with the government.

There had been a controversial clause of “take or pay” in the agreements signed with the IPPs under the 2002 power policy which forced the government to burden the consumers with capacity payments.

Under this clause, the consumers had to pay for those power plants which remained shut.

The government hoped that it would introduce the concept of competitive market under which the IPPs would be able to sell electricity to the third party reducing the burden of capacity payments on the consumers.

During the negotiation, the government team ignored taxes worth billions of rupees against the IPPs.

According to officials, IPPs had been receiving 4% tax from Engineering, Procurement and Construction (EPC) contractors but they had not deposited it into the national kitty. The power producers disputed this tax, saying that they were not supposed to pay the levy to the government.

The officials maintained that the government would conduct pre-audit of invoices generated by the IPPs before making payments.

The PML-N government had paid Rs480 billion to the IPPs without conducting audit that had resulted in observations by the anti-corruption watchdogs.

According to Inquiry Committee on Power Sector, the IPPs had received Rs1,000 billion excess payment, which required a forensic audit. The government had ignored the fact in the revised deals with them.

On Monday, Federal Minister for Finance and Revenue Dr Abdul Hafeez Shaikh chaired the meeting of the ECC.

Ministry of Energy secretary briefed the committee about the detailed report by the implementation committee regarding conversion of MoUs into agreements with the IPPs to devise a payment mechanism for clearing outstanding payables.

The implementation committee has agreed the payment mechanism with 46 IPPs to clear the outstanding dues as of November 30, 2020. The payment will be made in two instalments.

The first instalment will be 40% of the payables and will be paid 1/3rd in cash; 1/3rd in 5% Sukuk and 1/3rd in 10-year PIBs at floating rate of T-bill plus 70 bps and remaining 60% of the payables in six months of the first instalment in almost the same manner.

The ECC commended the efforts made by the implementation committee and acknowledged the input of all concerned including the federal minister for energy, federal minister for planning, SAPM on Power, Finance Division, Federal Land Commission chairman, SBP governor and others in working out a viable payment mechanism with the IPPs which will eventually save approximately Rs836 billion for the government over the average life of the projects.

The ECC approved the report of the implementation committee with a direction to present the same before the cabinet for final approval.

Meanwhile, the FBR presented a summary regarding procurement of video analytics system (VAS) for proper monitoring of the production and sale of sugar in compliance with the directive of the prime minister.

The ECC approved an allocation of Rs350 million as a Technical Supplementary Grant for installation of the most optimal VAS solution at the sugar mills’ premises during the current crushing season as requested by the FBR.