Independent power producers & economic growth of Pakistan | By Muhammad Nadeem Bhatti


Independent power producers & economic growth of Pakistan

Independent Power Producers (IPPs) are private entities that operate facilities to generate electricity and then sell it to the central government buyer and end users. In the current scenarios, the role of IPPs has become crucial in the economic growth of Pakistan. There has been an electricity shortfall of about 6500MW throughout the country.

And everyone has been tired of this shortfall as neither the people can do business nor they can study as the summer is at its peak and the sun is burning.

In these circumstances, nobody can effectively run their business and enterprises to run machinery; one needs electricity. Therefore, if we want to grow as a nation, we need IPPs that can generate electricity on their own and then sell it to the government.

This article will discuss how IPPs can help Pakistan grow in the right way and produce products at a lower price in comparison to its neighboring countries.

The government’s decision to allow municipalities to purchase electricity directly from independent power producers (IPP) is one of the most positive developments in recent years.

It is not only going to help create a more stable and sustainable power supply in the country. Still, it is already driving new jobs, skills, and economic opportunities in urban and rural areas across the state. Moreover, the Renewable Energy IPP program includes noteworthy job creation, economic transformation targets, and social upliftment, primarily through broader economic ownership.

Of course, independent power producers cannot come into an area, put up a wind or solar farm, and reap the advantages. But, they have to make a major difference to the communities around their operations. Therefore, there needs to be a shift from a short-term project mindset to a more permanent one that can take Pakistan to new heights of development.

The benefits of this approach have already been seen in different areas of the world, specifically in South Africa, where locals provide basic services like maintenance and catering to IPPs.

This will move the value chain towards a more strategic and significant supply. Organizations, including REISA, invest heavily in education, including early childhood development (ECD) centers, schools, and social infrastructure.

The next step is to help create sustainable small businesses that can tap into the various IPP projects to supply more meaningful products and services. Rural areas are hotbeds of enterprise and supplier development (ESD) programs just starting to happen.

Certainly, the potential is there as the general level of skills in areas of the country is surprisingly high, with an entrepreneurial mindset you don’t often find in bigger urban areas.

The government of Pakistan has secured the lucrative deal in exchange for promises of payment of Rs403 billion it owes to the IPPs. What makes the bargain sweeter for the government is that it will pay only a third of the amount in cash; the remainder will be disbursed equally in a 10-year bond and 5-year Sukuk.

The power producers will get 40% of their money upfront after signing ‘binding agreements’ revising the terms of their original power purchasing agreements and the rest in 6 months.

And this is not all. The newly revised agreements have a binding force for the IPPs, but will not be so much obligatory for the government as it retains the right to order a forensic audit of their bills if and when it feels like it.

It will be a chief exercise and can have detrimental effects on future investments, but it is a decision the government can take at any time.

In recent conversations with the social law-analyst and chief executive of Lahore Law Chamber, London (Mr. Raza Rehman), I get to know that the new contracts will significantly shrink the future earnings of the IPPs after the removal of the dollar indexation from their returns (on equity), which was one of the main attractions for investors and downward revision of their returns.

The only positive for these companies is the settlement of their long overdue, unpaid bills, which are expected to alleviate liquidity pressures and reduce their reliance on borrowings to fund their operations.” IPPs are contributing a significant role to fulfilling the requirements of energy needs worldwide, particularly in Pakistan, i.e., 30 % of the overall energy production, but no proper work has been done.

But the thing is, IPPs are facing two main problems, i.e., the problem of scarcity of liquidity and high cost per production due to the high dollar rate as most of them use diesel and furnace oil for their production, which is very costly for our inhabitants and the entire state. And in the existing scenario, the entire nation is suffering from over billing.

Pakistan is a thickly populated developing country currently facing several economic, power, health, and financial challenges. Several new projects and businesses have been shut down because of power crises, inflation, and political instability.

Moreover, no good jobs and investment opportunities are there that can lift the country from this crisis. In addition, Pakistan has been facing water scarcity for a few years, and we all know that some of our electricity is produced from Hydel plants. The rest of the percentage is generated using furnace oil and coal mostly.

If we peep into the depth carefully, the IPP system is unsuitable for a suffering country like Pakistan. Moreover, no government has planned and gotten serious about the ongoing issues in the recent 32 years.

And the question remains why nobody noticed a shortfall and why the strategies were not developed accordingly. The government has increased the electricity prices to more than Rs. Fifty per unit has made the survival of the middle and the poor almost impossible. Suppose a person earns 30,000 PKR a month, and his electricity bill comes out to be Rs. 35,000.

From where he’s going to pay all the other expenses? Similarly, the industrialists and factory owners are worried, too, as the electricity bills have come out to be almost double the prices after adjusting the fuel adjustment taxes.

—The Writer is a Senior Social & Economic Analyst

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