It’s a debt problem

Before any problem can be solved, it is important to identify and frame the problem well. The noise regarding Independent Power Producers (IPPs) is one such issue where the noise isn’t solving the problem, but further exacerbating it. The noise is about capacity payments, but not about the breakup of capacity payments. A capacity payment is simply the cost that has to be paid to ensure that a dedicated power-producing facility is available to generate power. Such a cost is a function of capital costs, which can be a mix of both debt and equity. Such infrastructure projects are primarily funded by debt, which makes up about three-fourths of total capital, followed by equity. A review of capacity payments demonstrates that almost half of the capacity payments can be linked to the repayment of debt and associated interest. It may be noted here that almost all of this debt was assumed in US dollars at a time when interest rates in US dollars were close to zero. Those were the days.

Fast forward to a post-pandemic world, and interest rates in US dollars increased from 0.5 per cent to 5.5 per cent, which made debt servicing more expensive. The previous democratically elected government ran a current account deficit of more than $17 billion during 2022-23, right before liquidity for dollar-based debt tightened up, and interest rates increased. Due to such a massive deficit, there was severe pressure on the Pakistani rupee, resulting in its depreciation. The Pak rupee lost more than 50 per cent of its value within six quarters, only to recover a bit later. Due to the depreciation of the rupee, debt that was assumed for such infrastructure projects – whether nuclear, coal-fired power plants or dams – increased in rupee terms, resulting in higher capacity charges. It may be noted here that in dollar terms, the price of electricity per kilowatt-hour (kWh), has largely remained in the same range – the increase can primarily be attributed to depreciation of the rupee.

So how do we fix it? The consumer is effectively repaying debt and interest on the same for power projects in the first ten years, which have a useful life ranging from thirty to fifty years. There exists a case that the same debt and interest repayment is effectively removed from the electricity bill and assumed by the sovereign. The reduction in tariff would be sizeable to kickstart the economy and get some kind of industrial growth in place. More importantly, it will provide much-needed relief to households at the same time, who can then reallocate available capital to either savings or consumption to revitalize the economy. Any decisions taken must be to revitalize the economy. It may also be noted here that capacity costs are largely fixed irrespective of how much energy is consumed. A case can also be made to stimulate incremental demand for electricity through deep discounted tariffs, such that industries use more electricity, and the overall impact of capacity costs can be diluted. There are multiple policy levers out there to solve this problem – not identifying the correct problem is not one of them.