Pakistan has long faced a power – electricity – crisis and successive governments have been unable to solve the problem. A large part of this has to do with repeat instances when a government signed a contract with an Independent Power Producer (IPP) only to have the next government or the Supreme Court cancel the contract. Pakistan has thus the unfortunate distinction of being viewed as a country that does not abide by its international commitments.
There is once again a raging discussion in Pakistani media that is blaming the exorbitant electricity prices on expensive power purchase agreements with IPPs. The current campaign is spearheaded by former caretaker trade minister and textile lobby leader Gohar Ejaz, who has dubbed the power purchase contracts with IPPs a “rip-off.”
However, as an editorial in Dawn rightly pointed out, “contracts with IPPs — that also include fixed capacity payments and guaranteed returns to ensure their availability — and expensive consumer prices are only partly to be blamed for our growing power woes and high electricity rates.” Other reasons include “steep exchange rate depreciation, elevated interest rates, increased cost of imported fuel for generation, shrinking demand, and taxes” all of which are “responsible for the massive gap between the basket price at which the government buys electricity from the producers and at which it sells to consumers are not even a part of the ongoing conversation.”
However, as the Dawn editorial warned “the ill-considered demand for cancelling legally binding contracts with the IPPs amounts to asking the sovereign to default on its international contractual obligations, a step that will frighten foreign investors away. The report that Mr Ejaz intends to approach the Supreme Court on the issue has revived memories of the Reko Diq case where an adverse verdict had resulted in Pakistan suffering a loss of $900m, an amount it will not be able to recover from the project for many years. Sovereign default is not the answer.”
