Govt forcing default on 9 IPPs who served notices


The government is twisting the arms of nine independent power producers (IPPs) to force them into a default, for invoking sovereign guarantees against non-payment of their Rs 31 billion in outstanding dues and also to warn other IPPs to desist from following suit.
An official source said the government-owned Pakistan Electric Power Company (PEPCO) had stopped routine daily fuel payments of Rs 250 million to nine IPPs, which was almost 50 percent of their daily usage. In the last six days, these IPPs have not been provided any cash for daily fuel purchase. “Only on this count their outstanding dues have increased by Rs 2 billion,” said the source.
The government is using arm-twisting tactics against IPPs, all owned by big local groups, to teach them a lesson for invoking sovereign guarantees, a move that had affected its credibility before international financial institutions and international investors at a time when it was seeking foreign investment in key hydel power projects, import of Liquefied Natural Gas (LNG) and gas transmission networks, he added. All these IPPs were set up under the 2002 power policy and the government of the time had invited local business groups to invest in the sector. Unlike the 1994 power policy, it contained a clause that IPPs would buy fuel for their operations themselves. Nobody had any idea then that the massive increase in fuel prices would hold the power sector hostage. Two major IPPs set up under the 1996 policy, HUBCO and KAPCO, remained immune to the problem as they were ensured fuel supplies from the Pakistan State Oil (PSO). The construction of power projects started after 2006 and had added 3,000 megawatts of power to the national grid in the last three years. The guarantees were invoked as IPPs exhausted their credit limits provided by the local banks. Other than paying for the fuel supplies, IPPs have to repay the loans to local banks. The banking sector is not providing more credit to the IPPs as 30 percent of its total exposure is in the power sector.
Owing largely to this uncertainty in the power sector, not a single agreement to set up an IPP was signed in the last three years, while the demand is continuously increasing at the rate of 10 percent per year, the source said. There seemed to be a deliberate attempt by the government to push these IPPs to default, as stoppage of operations by four gas-based IPPs, with a combined capacity of 800MW, would make them liable to a capacity payment penalty of $150,000 per day, he said, adding that it would shift the pressure from the government to the IPPs. These IPPs were ensured gas supplies till June 30, 2011, with the assurance that they would be supplied with gas in future. These dual-powered IPPs could run on diesel as well but its cost was seven times more than natural gas.

The gas-based IPPs already defaulted in June this year and if the government did not take immediate steps they were likely to default again in September, the source said, adding that they had adopted the legal method of invoking sovereign guarantees provided in their implementation agreements. “Their approaching of the Supreme Court would have created more embarrassment for the government,” said the source.
Independent Power Producers Advisory Council (IPPAC) Chairman Abdullah Yousaf confirmed that nine IPPs were not getting daily fuel allowance for the last six days. He said the IPPs were anxiously awaiting the response of the government for the clearance of their outstanding dues, which had increased to Rs 210 billion. He said IPPs followed the procedure laid down in their agreements and after exhausting every option, they had invoked the sovereign guarantees “with a heavy heart”. “We will wait for the decisions of the prime minister on the recommendations of the ministerial committee on energy and then will decide on our future course of action,” he said. The IPPs that served notices to the government are Atlas Power, Attock Gen, Liberty Power Tech, Nishat Chunian, Orient Power, Nishat Power, Sapphire Electric Company, Halmore Power and Saif Power. The 30 days’ notice ends on September 25, after which a final notice of 10 days had to be given to the government for the termination of the agreements.