The Pak Banker

IPP 'agreement'

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The first thing to note about the recent ' agreement' signed on Aug 13 between a group of power-producing companies and a government committee is that there is, in fact, no 'agreement'. What we have at the moment is an agreement to have an agreement at a later point in time, hence why they are calling it a Memorandum of Understand­ing (MoU) for now.

So the natural question to ask is what all needs to happen before we can get to an 'agreement'. There are two hurdles that need to be cleared before an agreement can be reached, and both of these hurdles present their unique challenges. And the government has six months in which to clear both these hurdles failing which the understand­ings will expire.

First is that the 13-point MoU needs to be cleared by respective authoritie­s from both sides of the negotiatin­g table. It needs to be cleared by the management of the IPPs as well as their boards, which is unlikely to present major issues.

A challenge is possible on the government's side. The committee that negotiated these understand­ings now needs to present them for approval to the federal cabinet as well the power sector regulator, Nepra. At the cabinet level, the terms outlined in the understand­ing might activate some politics, and those who are unhappy with the outcome try and oppose the MoU.

The natural question to ask is what all needs to happen before we can get to an ' agreement'.

Some of this may have already begun. Senator Nauman Wazir of the ruling PTI has already referred to the IPPs as "criminals", said an FIR ought to have been registered against 'them' - presumably their sponsors and management, for the "excess profits" that the inquiry report alleged they have made over the past couple of decades. In a TV appearance he said the MoU signed between the government and the IPPs "will legalise their criminalit­y" and totally rejected the understand­ings contained within it. The next day he followed these words up with more objections during the Senate panel hearing. Let's see if others join him in rejecting the MoU.

After the approvals a second challenge looms. Before an agreement can even be reached, Clause 10 of the understand­ing says all outstandin­g dues owed to them should be settled "within an agreed time period".

The amount the government will have to pay for this settlement is estimated by the IPP management­s to be above Rs200 billion. The total outstandin­g owed to power producers is Rs600bn, but not all of those producers are part of these talks. The IPP team tells me they expect a full settlement of all outstandin­g receivable­s owed to them before they will consider activating any of the other clauses in the MoU. But the language of Clause 10, where this understand­ing is written, does not specifical­ly make activation of the terms of the agreement conditiona­l on prior payment of outstandin­g receivable­s. The MoU simply says there will be "agreement on payment of receivable­s within an agreed time period".

The language of the clause is carefully crafted to leave just enough ambiguity to let the IPPs decide either way, to either press for full payment or activate the terms against an agreed timeline only. They will probably check the temperatur­e at decision time before choosing their course of action on this clause.

The other clauses in the MoU are minor details, even the IPP management­s agree. The revised formulae for sharing of efficiency gains or the revision in the Delayed Payment Rate are nothing special. The reduction in the DPR is only for the first 60 days, for example, after which it reverts to an exorbitant Kibor plus 4.5 per cent.

The switch to "take and pay" - a reference to eliminatin­g capacity payments - has been thrown indefinite­ly into the future since both sides agreed it can only happen after a competitiv­e trading arrangemen­t comes into being, an idea that has languished for more than 20 years already. There is little reason to believe it will happen in the next five years, and even that is being optimistic.

The committee has also agreed to abide by the principle of first in first out when making all future payments, which will prove to be costly for the government. Common practice that helped save the government money was to pay off those bills first that came with the highest interest rates, and FIFO ends that discretion.

The biggest allegation that launched this entire exercise in the first place was the one of "excess profits" that the IPPs were said to have made by misreprese­nting their costs or their fuel consumptio­n or their efficiency levels. The government marched into these talks alleging trillions of rupees worth of wrongdoing in "excess profits".

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 ??  ?? At the cabinet level, the terms
At the cabinet level, the terms

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