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Predatory IPPs Contracts Should be declared null & void: FPCCI

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Mr Saquib Fayyaz Magoon, Acting President of FPCCI, has said that the federal government should cancel all agreements with Independent Power Producers (IPPs) and procure electricity for the national grid from cheaper and more 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. He added that there is an installed generation capacity of over 40,000 MW, while peak demand and transmission capacity are merely 25,000 MW – resulting in a significant excess and utilized generation capacity.

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

Mr Magoon maintained that studies reveal that IPPs have been enjoying returns exceeding 73 per cent in dollar terms, which is unusually high and predatory compared to international standards, and practice practice’s energy sector has been trapped in problematic contractual arrangements with IPPs since the 1994 Power Policy. These contracts have led to the escalation of 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 a debilitating financial burden on the government and the public alike. The initial return on equity for IPPs was set at 18 per cent and later reduced to 12 per cent in the 2002 Power Policy, but it is still high compared to 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 led 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 the FY25 power purchase price. Therefore, he added that imported coal-based plants have the highest capacity charge of PKR 60.48 per kWh compared to PKR 26.01 per kWh for the second highest capacity charge out of all thermal generation.

Acting President FPCCI stressed that significant misreporting and overbilling by IPPs are common practices, as tariffs are guaranteed under take-or-pay contracts protected by international law. The 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 Pakistan’s business community.

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

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