Govt urged to cancel IPP agreements

Patron-in-Chief of the United Business Group (UBG), S M Tanveer, has urged the federal government to cancel all agreements with Independent Power Producers (IPPs) and start procuring electricity from cheaper sources without any capacity charges. In a statement released on Wednesday, Tanveer expressed grave concerns about the widespread closures in various industrial sectors due to exorbitant electricity tariffs, predicting job losses across the country as a direct result.

Tanveer highlighted that the pending Rs2 trillion capacity payments to IPPs have paralysed the country’s economic activities. He criticised the capacity charges of IPPs as unfair, noting that they are paid even when no electricity is generated. He added that these capacity charges constitute two-thirds of the total cost, with fuel costs comprising the remaining one-third.

Tanveer emphasised that previous investigations revealed that IPPs have been enjoying a return on investment exceeding 73% in dollar terms, an unusually high rate compared to international standards. The contracts, initially designed to alleviate the energy crisis by attracting private investment, have instead led to an escalating circular debt, which reached Rs2.64 trillion in February 2024.

The incentive structures provided to IPPs, including guarantees indexed to the US dollar, mean that any depreciation of the Pakistani rupee increases returns for IPPs, placing a heavier financial burden on the government and public. Although the return on equity for IPPs was initially set at 18% and later reduced to 12% in the Power Policy of 2002, it remains elevated compared to global norms.

Significant misreporting and overbilling by IPPs have exacerbated the issue as their tariffs are guaranteed under take-or-pay contracts protected by international law. Attempts to audit these discrepancies have often been obstructed by IPPs through legal means. Similarly, operation and maintenance costs are overstated.