FPCCI Demands Immediate Cancellation of IPP Contracts

FPCCI Demands Immediate Cancellation of IPP Contracts

Karachi, July 5, 2024 – The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has called for the immediate cancellation of contracts with Independent Power Producers (IPPs).

Saquib Fayyaz Magoon, acting president of the FPCCI, issued a statement urging the government to terminate all agreements with IPPs and seek alternative, more economical sources of electricity for the national grid. He emphasized the need for these new sources to be free from capacity charges, which the federation considers a significant financial burden.

Magoon highlighted the crippling impact of high electricity tariffs, citing widespread industrial closures and substantial job losses. He pointed out the disparity between Pakistan’s installed generation capacity of over 40,000 MW and the peak demand and transmission capacity of merely 25,000 MW, resulting in significant excess capacity.

The FPCCI acting chief expressed concern over the immense financial strain placed on the national economy by capacity payments exceeding PKR 2 trillion to just 40 companies. He emphasized the troubling fact that IPPs continue to receive these payments even during periods of zero electricity generation or supply. He further noted that capacity charges account for roughly two-thirds of the total electricity cost, compared to only one-third for fuel costs.

Magoon cited studies revealing excessively high returns for IPPs, exceeding 73% in dollar terms. He condemned these profits as exploitative and far beyond international benchmarks. The FPCCI blames the 1994 Power Policy for trapping Pakistan’s energy sector in unfavorable contractual agreements with IPPs, leading to a spiraling circular debt that reached PKR 2.64 trillion by February 2024.

Magoon elaborated on how the dollar-linked guarantees benefit IPPs at the expense of the government and the public. Any depreciation of the Pakistani rupee translates to higher returns for IPPs, further straining the national budget. While the initial return on equity for IPPs was set at 18%, it was later reduced to 12% in the 2002 Power Policy. Despite this reduction, the FPCCI maintains that these returns remain excessive compared to global standards.

The federation alleges that cost comparisons with similar projects in other countries suggest inflated invoicing on capital goods by many IPPs. This practice, according to Magoon, has led to a system rewarding returns on non-existent investments. He pointed to the substantial disparity in electricity tariffs, with coal-based plants in Pakistan charging 9 cents per kWh compared to 5.6 cents for similar plants in Bangladesh. This difference is reflected in the high capacity charge of PKR 60.48 per kWh for imported coal-based plants in Pakistan, significantly exceeding the second-highest charge among all thermal generation sources.

The FPCCI raised concerns about widespread misreporting and overbilling by IPPs, a practice facilitated by the take-or-pay contracts protected under international law. The federation alleges that several oil-based plants are billing for more oil than they actually consume, and attempts to audit these discrepancies are often met with legal resistance. Additionally, operational and maintenance costs are allegedly inflated, with IPPs charging significantly higher rates than actual expenses.

Magoon warned that the recent surge in electricity prices could lead to social unrest and business dissatisfaction. To address this situation, the FPCCI proposes a comprehensive review of IPP agreements, price reevaluation within legal boundaries, and stricter oversight to prevent overbilling. They also emphasize the need to examine energy infrastructure contracts for clauses enabling misinformation and fraud. Finally, the FPCCI urges the government to develop a strategy for dealing with IPPs that prioritizes affordable electricity prices for Pakistani industries in the national interest.