Key Takeaways:
- UBG leader urges government to cancel IPP agreements.
- High capacity payments to IPPs are crippling industrial activity.
- IPPs’ return on investment far exceeds international norms.
Patron-in-Chief of the United Business Group (UBG), S M Tanveer, has called on the federal government to annul all agreements with Independent Power Producers (IPPs) and transition to procuring electricity from more cost-effective sources without capacity charges. In a statement released on Wednesday, Tanveer expressed serious 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 severely hampered the country’s economic activities. He criticized the capacity charges of IPPs as unjust, pointing out that these charges are paid even when no electricity is generated. He explained that these capacity charges make up two-thirds of the total cost, with fuel costs comprising the remaining one-third.
“Capacity payments to IPPs are paralyzing our economic activities,” Tanveer stated, emphasizing the urgent need for the government to reassess these agreements. He underscored that previous investigations revealed 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 attract private investment to alleviate the energy crisis, 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.
Tanveer also pointed out that significant misreporting and overbilling by IPPs have exacerbated the issue, as their tariffs are guaranteed under take-or-pay contracts protected by international law. “These take-or-pay contracts have led to excessive billing and operational costs,” he noted. Attempts to audit these discrepancies have often been obstructed by IPPs through legal means. Furthermore, operation and maintenance costs are frequently overstated, further straining the financial system.
“Misreporting and overbilling by IPPs are serious concerns that need to be addressed,” Tanveer emphasized. He urged the government to take decisive action to audit these contracts and ensure transparency in the billing processes.
In summary, Tanveer’s call to action highlights the urgent need for the government to re-evaluate its agreements with IPPs and move towards procuring electricity from more cost-effective sources. This, he argues, is essential to revitalize industrial activity and prevent widespread job losses across the country.
