If we’re not careful, we’ll be looking at another IPP
In a week where there was not much good news, the approval of a 330 MW coal fired power plant based on Thar coal came as a welcome relief. But in the fine print lay the catch; namely, that power sales from this project will be priced in US dollars. This is inexplicable – in Germany, purchase of power is priced in Euro, in India in Indian rupee etc. so why should power purchase from indigenous fuel in Pakistan be priced in US dollars?
For a moment – and given our rulers’ predilection for off shore entities, this seemed entirely plausible – I feared that Thar too had been declared an offshore entity. Fortunately, this was not the case, and Tharparkar is still very much part of Pakistan. But it appears that by pricing purchases in dollars our government refuses to learn any lessons for the nineties IPP debacle. One of the principal reasons for which had been the reliance on dollar expensive denominated power. In 1994, when the policy was formulated, the rupee was trading at Rs 28 / dollar. Today it is trading at around 105 – a depreciation of over 370 percent – this, together with doubling of the oil prices caused an unaffordable six fold increase in electricity costs, resulting in load shedding, economic losses and huge subsidies – all in the end paid for by the citizens of Pakistan.
Our electricity bills are priced in Rupees accordingly in the event that the rupee depreciates, the price of electricity will increase regardless of increases fuel in fuel price. Admittedly this is still better than relying on imported fuel, but not by much. This increase will also apply to any profit that the utility makes, and given that over thirty percent of the revenue from electricity is lost due to line losses and bill delinquency, if priced in dollars, that portion too must be paid for in foreign exchange
The enterprise that is setting up this power plant – Engro – has a number of other businesses in country including a large fertilizer plant that it recently set up at a cost of almost $ 1 billion (more than twice what this power plant costs). This too had a substantial component of imported equipment, but all of the products sold from this plant are priced in rupees. Engro no doubt took a hedge on the dollar to cover its loan repayments – which was accordingly priced into the product sale price.
The same principal could have been followed here with the power priced in rupee but partially index linked to an inflation to compensate for any increase in price of fuel and profits. So why was this project an exception? It is poignant that a substantial portion of funding for this project has been raised from the local market.
The water and power ministry might do well to study the contrite IFC paper on the IPP debacle in Pakistan- written before the increase in oil prices, in that it clearly states that unaffordable power especially when denominated in dollars, together with a poor distribution system were the root causes of the energy crisis. The conclusion was that Pakistan can only afford a limited number of expensive power projects.
Due to adverse macro-economic factors such as the rapid increase in government borrowing, the falling exports and potential reduction in remittances, it can be safely said that, the rupee will depreciate against the dollar, so why should the consumers pay for this in the form of price increases when none of the inputs are imported? The power regulatory agency NEPRA should develop a backbone and realize that its primary function is to safeguard the rights of the consumers and not to bend over backwards to please potential investors, or the government to the long term detriment of Pakistani consumers.
The PML-N government must be lauded for its efforts to end load shedding, but in its desperation it is sacrificing the country’s long term interest for short term gains. Imported fuel based power plants as well as dollars electricity priced for indigenous fuel or renewable energy power projects may in the long run come to haunt the country. As far a power purchase price, we know that in India for similar lignite based plant the cost per unit is the equivalent of 5 cents / unit, let’s hope that power from this plant too is priced in a similar range.
This government is borrowing money faster than any other government in history at a rate of almost Rs 5.21 billion per day, or almost eight times more than the average of Rs 0.67 billion borrowing per day for the last sixty years. If all this money was going into productive money making ventures that would be acceptable but if not, it will adversely impact the country’s economy. This poorly structured power plant deal is just such an example.
Undoubtedly for the economy to improve more power must be available, but for Pakistan to remain competitive this power has to be affordable and majorly priced in local currency, by ignoring this, the government is on a slippery slope. The key to solving this problem is sustainable affordable power, one that is able to withstand potential economic stresses. By setting this precedence of dollar denominated rates, just as what happened in the nineties, the government is not solving the load shedding problem it is only kicking the can down the road and increasing the contingent national debt.
