Predatory IPPs Contracts Should Be Declared Null & Void Saquib Fayyaz Magoon, Acting President FPCCI

Karachi: Mr. Saquib Fayyaz Magoon, Acting President FPCCI, has said that federal government should cancel all agreements with Independent Power Producers (IPPs); and, procure electricity for the national grid from cheaper and cost-effective sources – without any strings vis-à-vis capacity charges.

Mr. Saquib Fayyaz Magoon, Acting President FPCCI, informed that exorbitant and unbearable electricity tariffs have led to widespread industrial closures and massive job losses. There is an installed generation capacity of over 40,000 MW; while peak demand and transmission capacity is merely 25,000 MW – resulting in a significant excess and utilized generation capacity, he added.

Acting FPCCI Chief apprised that PKR. 2 trillion capacity payments to 40 companies are paralyzing the national economy; and, IPPs continue to receive payments in the name of capacity charges even in the instances when there is no electricity is generated or supplied. Capacity charges constitute two-thirds of the total cost of electricity; while fuel costs comprise of only one-third.

Mr. Magoon maintained that studies reveal that IPPs have been enjoying returns exceeding 73 percent in dollar terms; which is unusually high and predatory when compared to international standards and practices. Pakistan’s energy sector has been trapped in problematic contractual arrangements in perpetuity with IPPs since the 1994 Power Policy. These contracts have led to escalating circular debt to PKR. 2.64 trillion in February 2024, he added.

Mr. Saquib Fayyaz Magoon elaborated that guarantees indexed to the US dollar mean any depreciation of the Pakistani rupee increases returns for IPPs – adding debilitating financial burden on the government and the public alike. Initial return on equity for IPPs was set at 18 percent and later reduced to 12 percent in the 2002 Power Policy; but, still high as compared to the global norms.

Mr. Magoon stated that cost comparisons with similar projects in other countries suggest many IPPs were funded through inflated invoicing on capital goods; which lead to perpetual returns on ghost equity. The tariff for coal based plants in Pakistan is 9 cents as opposed to 5.6 cents for similar plants in Bangladesh as per FY25 power purchase price. Therefore, imported coal based plants have the highest capacity charge of PKR 60.48 per kWh as compared to PKR 26.01 per kWh for the second highest capacity charge out of all thermal generation, he added.

Acting President FPCCI stressed that significant misreporting and overbilling by IPPs are common practice as tariffs are guaranteed under take-or-pay contracts protected by international law. Actual oil consumption of several oil-based plants is less than what is billed by IPPs; and, attempts to audit discrepancies are often obstructed through legal means.

Additionally, operational and maintenance costs are overstated with actual expenses billed at significantly higher rates. The recent surge in electricity rates could trigger civil unrest and discontent among the business community of Pakistan.

FPCCI demands that a comprehensive review of IPP agreements; price re-evaluation within legal bounds and improved oversight to prevent over-invoicing are utmost needed. Examining the energy infrastructure for clauses related to misinformation and fraud is also required. The federal government must devise a strategy to deal with IPPs and ensure affordable electricity prices for the industry in the national interest, Mr. Magoon proposed.

Brig Iftikhar Opel, SI (M), Retd.
Secretary General