Recently Ahsan Iqbal from PML-N made a statement that political instability and policy reversals are more important in holding back Pakistan than corruption (Source). While its shocking to hear a Wharton graduate state this, he did attend the school four decades ago. For many, such a statement is evidence enough of the incompetence of Pakistan’s leaders but I might as well provide more direct evidence of it. In this post I will highlight a few important long term energy initiatives from the PML-N era, which raise a few questions about the incompetence of PML-N.
Capacity Costs:
Before diving in, here are a few facts about the electricity sector. By June 2019, after PML-N left, the country’s capacity to generate electricity was roughly 40,000 MW (Nepra - section 2.2). In contrast, the transmission capacity for 220 kv lines is 31000 MW and 550 kv lines is 22350 MW (NTDC). Big firms may directly connect to 550 kv lines but most of the electricity is stepped down from 550 to 220 before being provided to the end consumer. As such, we have had more capacity than the ability to transmit due to the poor grid.
I will analyze the case of capacity costs of a single IPP but it should be sufficient to highlight the incompetence rampant in Pakistani politics. The IPP under consideration is CPHGCL - you can google the full name. It is a coal powered IPP, which was given a license under PML-N.
The first document to look at is the mutually approved tariff in 2016 (Tariff). This document has several important features.
The first page shows the capacity and energy charges to be paid to the IPP in PKR in 2016
Page 7 shows a guaranteed return on equity to the IPP of 27.2%
Page 14 shows that the return on equity will be in dollars, and shows that the various components of the capacity payments will be in dollars
Page 14 shows that the 2016 rate, computed at 2016 numbers, will be applicable till 2018, the election season, at which point it will be revised. So any increase in price will be on the next government’s head (talk about “baroodi surangein”)
The second document to look at is the licensing agreement from 2016 (license). This document has several important features.
Page 10 verifies that the document refers to a long term contract of 30 years
Page 5 shows that a law firm warned the government to not give the license on the “take or pay” tariff basis due to its cost to the public
Page 7 shows that in response to the law firm, CPHGCL argued that the license issue is separate from the tariff determination issue. The same page shows that the government found this argument satisfactory and moved forward with issuing the license
The license document presents evidence of the take or pay tariff regime, whereby the government has to pay the IPP for the capacity charges whether the government buys electricity from them or not. And this is happening for capacity we potentially can't even transmit.
PML-N left the country in a state of default with little to no foreign reserves. Pakistan got help from the IMF after floating the exchange rate, which PML-N kept artificially low. This is where the pain starts because the return on equity, and the capacity payments were dollar-indexed, and the contracts were take or pay. By September 2020 the capacity payments (including ROE) had risen by roughly 90% (source page 2).
The capacity cost is passed onto the consumer in the form of higher unit price on the utility bill and also parked in the circular debt. On Dec 2021, the adjustments containing capacity costs constituted roughly 10% of the bill of those who consume above 300 KWh of electricity in a month.
Load-Shedding:
On April 25th when the country was dark the PM tweeted that PML-N removed load-shedding (at what cost? check the capacity cost section), and the causes for the current load-shedding were that PTI did not buy fuel, and that the power plants are inefficient (Source). Lets examine each of these in turn:
Inefficient power plants:
Miftah Ismail claimed in January 2022 that Pakistan has the most efficient power plants in the world (Source timestamp - 41:23). So which story is true?
PTI did not buy fuel:
The fuel was not bought because two contracted suppliers refused to supply as per the contract (Source). This is not the first time these suppliers have defaulted (Source). These contractors were given long-run lucrative contracts under the PML-N regime similar to the 30 year IPP contracts (One of them has a 15 year long as per the cited sources).
Why do these suppliers default? They would rather sell to others on the spot market than at the agreed lower contract prices to make more profit. The penalty for the default was set astonishingly low at $3 per unit as per the cited sources. Due to the failure of these suppliers, we were forced to go to the spot market (Source).
Conclusion:
Why is it that the PML-N government accepted these inefficient long-run contracts? How incompetent do you have to be that despite a law firm warning you of the burden of take-or-pay agreements on the public, and fairly so, you move ahead with them? Is this really incompetence or is this something that is not really responsible in holding back Pakistan? How is it that for so many long run contracts with foreign firms, somehow or the other, Pakistan gets the short end of the stick?
Moral of the story: A profit seeking firm will always take up lucrative deals. It is up to the leaders and the institutions to protect the rights of the Pakistani people. Sadly our leaders have been incompetent and through such long-term contracts have undermined the citizenry which bears the cost of expensive electricity, load-shedding, and higher taxes due to the buildup of circular debt. And this is just the electricity sector!