Unjustified investor criticism puts mega projects at risk

The country is going through serious macroeconomic challenges. The recent inflationary wave in the form of high electricity prices – among myriads of taxes and more to come in the next few years – has really shaken the industry and commercial users to the ground.

Many have rightly started pondering over a permanent structural change, making industries uncompetitive against the regional comparative economies.

The declining purchasing power is further squeezed in real terms by high inflation, poor job prospects, income strains, low demand, high taxes and much higher utilities’ costs. No wonder, why the entire attention is paid to the independent power producers’ (IPPs) contracts.

On a separate note, several key policymakers are already requesting our long-term friend, China, to elongate debt repayment terms and convert imported coal power plants into domestic coal.

While the latter may be an easier task, the former would set a dangerous precedent for global investors in terms of contractual obligations. The impact of this could reverberate through continents where the Belt and Road Initiative (BRI) has stretched with scores of infrastructure investments by China in emerging and frontier market economies.

Already, reportedly several Chinese investors are expressing grievances over their inability to repatriate profits from Pakistan due to low foreign currency reserves.

Invariably, the price of energy has reached precarious levels at which most of the salary or income of the lower, middle and upper-middle classes is consumed by high electricity bills.

The cherry on top is the expected decline in the net metering buyback rate that reduces the benefits of installing environmentally friendly solar panels to reduce carbon emissions as well as curtail domestic electricity bills.

Commercial and industrial users are also feeling the heat in times when the topline is strangulated due to the contraction in the overall macroeconomic demand, expenses are increasing due to energy, transportation and salaries, interest expenses are at record high and additional taxes are imposed to erode the bottom line, if not already pushing it in the red.

While the government can always push the IPPs’ owners to reconstruct the terms “willingly” under certain circumstances with negotiations over other eventual benefits, this is likely to create an adverse material impact on the credibility of policymakers and any future mega investments in the country.

In 2021, a similar exercise of ending the dollar indexation and capping it at Rs168/USD was undertaken to save the country from massive capacity charges. Unfortunately, the situation has further escalated today when power offtake is lesser, cheaper alternatives are not being utilised, economy is further squeezed, deindustrialisation is rapidly increasing and energy prices have spiked.

The capacity payments – payments despite no utilisation – are contractual agreements with long-term investors betting on Pakistan and solving the country’s energy issues.

With the benefit of hindsight, terms could always have been better with a longer repayment cycle and take-and-pay contracts. However, instead of reneging on the defined and taking risks on future investments, efforts should be diverted to spurring demand and controlling inefficiencies.

Giving electricity at marginal cost can revitalise industries and make them competitive by bringing USD exports, creating jobs and offering taxes.

Similarly, the expensive RLNG power plants and imported coal plants would need to be less utilised to pave the way for domestic coal, hydel, efficient thermal, nuclear and renewable plants.

Pakistan’s debt addiction has already dented its position as a borrower, and further manoeuvres to reduce returns on investment will negatively impact the investment environment in the country.

Instead, the domestic demand should be increased to absorb the capacity payments over the next three to five years and either buy back or shut down the inefficient power plants to reduce the impact.

Similarly, efforts should be afoot to liberalise the market through the Competitive Trading Bilateral Contract Market (CTBCM) – still baby steps, privatise DISCOs to bring efficient management instead of long-term concession agreements and unbundle utility behemoths for structural change that threatens long-term outlook of the country’s economic potential.

Merely demonising the IPP investors would worsen the already poor investment climate and create risk aversion among the capitalists responsible for job creation and tax payments in the country. Shortcuts will not suffice this time around.

The writer is an independent economic analyst