In the past few years, the government of Pakistan (GOP) has been involved in unproductive, lengthy legal battles with many Independent Power Producers (IPPs) and private investors in the energy and mining sector.
Many cases have gone to international courts – the latest is the Reko Diq case that the government lost in the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). Reko Diq comes in a long line of cases (Orient Power, Saif Power, Sapphire Electric etc) that GOP has lost because it does not take contractual obligations seriously and follows bad legal advice, which eventually makes the situation even more embarrassing for the government.
The start of the dispute with the IPPs goes back to 2011-12 (during the Pakistan People’s Party government’s tenure), when the National Transmission and Dispatch Company Limited (NTDC) delayed payments to the IPPs to the point that IPPs did not have sufficient funds to procure fuel to keep their plants running. The IPPs were forced to shut down because of their inability to buy fuel. Instead of making payments, NTDC imposed heavy penalties on the IPPs for shutting down. The IPPS challenged these unwarranted penalties and the case has decided in their favour by the local expert Justice Sair Ali.
The GOP had 75 days to either pay or appeal. In case it chose to appeal, it also had to pay the due amounts first. Instead of abiding by the contract, the GOP chose to obtain a stay from a local civil court on the 75th day. The IPPs were left with no choice but to go to London Court of International Arbitration (LCIA) for the enforcement of the expert’s order. The LCIA said that local stay order cannot be obtained, but the GOP did not change its stance and continued to influence judges to repeatedly obtain such stay orders from civil courts, which do not even have the jurisdiction to hear cases involving tens of billions of rupees.
When Pakistan Muslim League-Nawaz (PML-N) came into power, it promised reforms in the energy sector to end the load shedding misery- it promised privatisation of distribution companies, conversion of furnace based plants to coal to get cheaper electricity and bringing more efficiency in the whole sector. None of these reforms have been undertaken- the energy sector keeps haemorrhaging due to distribution and collection losses and our circular debt keeps snowballing. The circular debt today, adjusted for the oil prices, is at an unprecedented highest level. “How is a plant supposed to keep providing uninterrupted power to the grid when it does not have cash to buy fuel or pay its expenses?” an IPP representative asked.
Let us ask ourselves a few questions here. The government offered IPP contracts in 1994, 2002 and 2013. The distressing reality is that, barring a few, those companies set up in 1994 did not come back for investment in 2002 and similarly (again, barring a few) those that initiated plants under 2002 contracts did not take up the opportunity in 2013. Why would investors run away from such an apparently profitable industry? What has gone so wrong in the energy sector that no one wants to reinvest in such a promising venture?
The answer is simple. It is the disregard the GOP has for contractual obligations. Over the last two decades, the government has not paid any heed to the contracts that it has signed with the investors and this is causing much friction in the industry that we are looking at a future scenario of increased load shedding and higher electricity charges.
The current battle is about delayed payments and arbitrary deductions by the GOP that are against the contracts. GOP has been far from current in their payments and IPPs have invoices which are due for two to three years. At the LCIA, the GOP took the position that when IPP payments were being delayed, instead of shutting down, they should have called the GOP guarantee. Today, in a similar situation, the IPPs continue to run with overstretched working capital lines, and have called the GOP guarantees for payment. The call was triggered by not only the long overdue receivables, which continue to rise, but also due to unjustified deductions being slapped on IPPs regularly by NTDC. However, now again the government is antagonised and instead of making payment, is resorting to undue and unfair methods to malign and harass the IPPS.
The government took no notice of the guarantee call- instead Minister of Water and Power Khawaja Asif openly said in the Senate that IPPs are “robber barons”. One is forced to question, will the Chinese investors be also declared ‘robber barons’ when they ask for payments?
To counter this bad publicity, the IPPS gave ads in the papers with facts and figures to make the public aware of the true picture. The mounting circular debt was also mentioned. Subsequently, the government called for arbitration and IPPs agreed. At the very last minute GOP cancelled the meeting and the Ministry of Water and Power sent legal notices to those IPPs that had called the guarantee. The content of these legal notices is ludicrous at best and would not hold weight in any court of law.
One of the demands of this notice is that the IPPs “tender an unconditional apology within 7 days from the date of issuance of this legal notice”. The ministry has asked for an apology because it feels IPPs “resorted to extraneous means to malign the GOP and its entities….an advertisement with the heading: ‘Circular debt soaring again’ contained ill founded, baseless, disparaging, maliciously false statements and insinuations”.
When every citizen of Pakistan is aware of the circular debt and its alarming proportions and the disastrous consequences, it is amusing that the GOP considers the IPPAC report “baseless”.
Furthermore, the legal notice points out that the IPPs “purportedly called upon to the GOP guarantee without adhering to the terms and conditions of the IA and the guarantee”. The fact is that the IPPs have called out the guarantee before and the GOP did not raise any objection. The government has so far given no valid rejoinder as to what contractual obligations were not followed by the IPPs.
Adding insult to injury, GOP sent another legal notice to only the IPPs who called out the guarantee. This notice is even more farcical than the previous one; in a nutshell, it states that the Public Accounts Committee feels that the IPPs are getting unfair profits and so “we hereby dispute all the invoices raised by you (IPPs) on the grounds that you were in default of your own obligations under the PPA and in non-compliance with the direction of the PAC”.
So the government is effectively claiming that the payments it made on invoices verified by the GOP are now disputed. The legal notice gives no reference to the timeframe of these invoices or details of which contractual obligations were broken by IPPs. To make matters worse, the GOP has decided to arbitrarily revise efficiency rates without any discussion with the IPPs which is again a violation of the contracts.
The IPPs have repeatedly asked for discussion within the framework of the contracts rather than arbitrary decrees by the GOP, but there has been no response from the government. The message from GOP is loud and clear; there is no sanctity of contracts.
While this battle rages on the suffering of the masses is not going to end anytime soon.
The energy sector is losing close to Rs400 billion annually due to inefficiencies in distribution and collection. Currently, Pakistan has enough capacity to end load shedding, but because the government does not pay the power producers, the people are subjected to unnecessary misery through unfair load shedding. Adding more generation capacity will not resolve the issue as the current plants are also underutilised.
This government won the last elections on the promise that it would end load shedding- with the current situation load shedding will get worse in the next few months which may cost PML-N the next elections.
Another alarming factor is that the Chinese investors are already wary of how the GOP does not honour its contracts. So we are looking at hesitation from many investors and a large number of projects are not going to reach the stage of financial closing. They are also demanding special guarantees from the GOP to protect themselves against risk of non-payment.
The government must get its act together and resolve this issue fairly and amicably so that the people of Pakistan do not suffer the consequences. We as a nation need to realise the importance of honouring one’s contracts. A nation’s strength does not come from riches, it comes from how justice is rendered in the country; for a man does not lose hope because of poverty, but because of lack of justice.
“The stations of uncensored expression are closing down; the lights are going out..Let me, then, speak in truth and earnestness while time remains,” Winston Churchill.
