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July 10, 2019

IPPs, it is déjà vu, all over again


July 10, 2019

It is an open season on the IPPs and by extension on the private sector. While idiot-box pundits are pontificating, the related public servants at Nepra etc., IPP employees and IPP owners are scurrying for cover. If this continues, the rump IPPs’ leadership, so far free from NAB’s “person of interest” moniker, will, before long, find themselves in cold, bony embrace of NAB.

Ironically, the IPP sector is perhaps the best and the only success story in investment space. Earlier persecutions of IPPs were duly followed by investment deficit, power supply crisis, the circular debt, etc., which forced the governments’ hand, hence LNG projects, 3,600 MWs and the CPEC projects, owned by the people of Pakistan and China respectively. Thanks to the IPPs we have 24/7 frigid refrigerators and light in our lives. Lest we forget.

This toxicity around IPPs is a lethal layer off a toxic cloud enveloping our collective judgment and national hysteria. This ill-informed debate, negativity and demonization are poisonous for the IPPs, and cancerous for investment in general. More so when sinking GDP growth rate, shrinking Pkr, rocketing interest rates, are spurring on the deathly merry-go-round of contraction, higher debt, price escalation, rates increase and contraction.

What happened? Why this sector, tens of billions of USD of patient, long term invested capital, is of interest to NAB?

We, as a culture, hate success and successful people -- if it is not us. And then the unfolding macroeconomic nightmare has forced some hammers to look for nails and who else but the black, fat cats of the IPP variety. IPPs should make good villains simply because of the wads of cash GoP has to pay. It is in our cultural DNA.

For lack of any admissible evidence of criminality, laughable charges that the IPPs have been making too much money, was all the hammer could come up with. How do they know that they make “too much money”, because the IPP(s) declare too much profit. There is a nail for you. Let us start whacking.

This is not the first time when IPPs have been in the crosshairs. Saifur Rahman’s Ehtasabi pursuit of 1994 Policy IPPs etc. directly led to investment deficit and then to years of loadshedding and severe economic losses. Hammers do not have neurons, hence they cannot remember.

But what is an IPP, that the hammers are so fond of whacking? IPPs are single product companies, they sell electricity -- well there are two more “products” but let us keep things simple -- under 20-30 year sale contracts with a single buyer of “questionable credit”, denominated in a “diminishing” Pkr, in a “society” -- absence of “economy” may be noted-much given to periodic policy convulsions, loosely interpreted policy regimes, and whimsical enforcement of fickle laws whereas investors want certainty and risk-based, acceptable returns.

At around 2002, investors and their good angels seemed to have believed that the worst was behind them. Justifiably so, as there had more than a decade long history of IPP operations, contract interpretation and enforcement, ehtesab, case law, creation of Nepra, public hearings, etc. They thought Mr Saifur Rahman had only one life, but little did they know that he would resurrect as NAB ur Rahman, but only worse. The ehtesabi junoon, though, did extract its pound of flesh via tariff concessions from some, but not all, IPPs, some arrests and the standard pakkar dhakar. At what cost? A lost decade of power sector investment dearth, loadshedding to be followed by the sorry saga of Nandipur!

Whereas the private investors, knowing full well the risks associated with the projects and the power purchaser, in a project finance mode, warranted risk mitigation, e.g., protection against Pkr devaluation. This equity risk, its pricing and de-risking are perhaps too thick a concept for the Einsteins at NAB.

Nominal Pkr profits will seem high as the return on equity, ROE, and return of equity, wherever applicable, have been indexed to USD. Pkr goes down against USD, ROE in Pkr goes up to compensate. Real ROE, however, does not budge.

Any long term investor, in a regulated market, with single customer, would not wish to be saddled with a soft currency of an accident-prone, at war, conflict ridden economy, facing sanctions, domestic strife, and terrorism. After all, Pakistan is a frequent flier on the IMF air ambulance. Let us accept, Pakistan is a risky place to put money in. Imagine if you had invested in an IPP in January 2018 at a 15% Pkr ROE, with no indexation. By today, Pkr devaluation would have eviscerated your equity.

One can cheat the taxpayer and the ratepayer but investors and their bankers are a bit thick-skinned. It is precisely against such risks and eventualities that investors demanded indexation and protections e.g., against change in taxes, etc. If tomorrow the Pkr slides to 200/ USD, why should the investor suffer? Nominal Pkr returns would rise again to protect the real return. The GoP should fix its fiscal house, stem losses in the power sector, sell discos, improve recoveries and stop blaming the IPPs. Investors should not suffer the cost of power theft, bad loans and predictable, fiscal profligacy of the GoP.

Pakistan Banao Certificates, PBC, is another rude awakening for the GoP. Shameful, but logical, response of its most vocal cheerleaders, expat Pakistanis, to PBC has been rather underwhelming. Why did they not wire the dollars? Because, according to their calculus, the returns are too meager. Remember, they were asked to invest in bonds. Finance 101, equity risk is pricier. The Pkr/ USD indexation has been borne out by the GoP’s fiscal profligacy, aka diminishing Pkr. Even Thar coal, the local fuel, has been indexed to USD. Here is a 200 year long job for NAB, the expected life of the Thar’s black gold, proven and probable, reserves!

Pkr indexation is not such an anathema that IPPs are the only business where the GoP buys at regulated prices in USD or linked/ indexed to USD? E&P companies, including GoP owned entities, are paid Pkr equivalent of USD, the sale proceeds of their goods, gas and crude? Like IPPs, Pkr goes down, PPL, OGDC, POL, OMV etc. receive more Pkr. Few more nails here!

Who are the next NAB target IPPs? The CPEC IPPs? They are the largest troupe in this circus and must be watching worriedly. NAB can also start working at Thar IPPs and its coal mines. Catch ’em young, NAB, before their first invoice, even before their CoD. The posse of NAB CAs can model their Pkr profits and squeeze a few billions while the economy goes through this IMF led fiscal Armageddon.

Here is a solution. If these IPPs are the money spinners that NAB purports them to be, the GoP can acquire them under the relevant clauses of the Implementation Agreement, after giving fair compensation and make money for itself. GoP may even hand the acquired IPPs to Pakistan Sarmaya Company. Problem solved.

What should the GoP do then? Simple,get out of investors’ hair. Strengthen Nepra and, immediately, give its rank and file a pat on the back. They are scared. Then sell discos. That is all she needs to do.

PS: Ironically, the GoP has a high voltage panel of serious IPP owners, operators and developers on its rolls. One would love to be a fly on the wall and listen to their soliloquies on IPP travails during their morning shave. They have not been NABbed yet, but the wheels of justice grind selectively, may be they need not worry.

The writer is former deputy CEO, ZONG as well as a top business strategist and management consultant. He can be contacted at [email protected]

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