Pakistan’s Power Sector Reforms Spark Controversy with International Lenders
Pakistan’s ambitious power sector reforms, aimed at curbing the escalating circular debt and reducing electricity costs, have sparked a contentious debate with international development finance institutions (DFIs). The government, led by Special Assistant to the Prime Minister (SAPM) Muhammad Ali, has been renegotiating power purchase agreements (PPAs) with independent power producers (IPPs), claiming significant savings for the national exchequer. However, a consortium of eight DFIs, including prominent institutions like the World Bank’s International Finance Corporation, the Asian Development Bank, and the Islamic Development Bank, have expressed serious concerns about the government’s approach, alleging coercive tactics and warning of potential damage to investor confidence.
The core of the dispute lies in the government’s renegotiation strategy with IPPs. The DFIs, in a letter addressed to key government officials including the finance minister, power minister, and SAPM Ali, criticized what they perceived as a "non-consultative manner" in the renegotiation process. They argued that such an approach undermines the sanctity of contracts and discourages future private investment, crucial for the long-term development of Pakistan’s power sector. The letter acknowledged the challenges facing the sector and appreciated some government initiatives, but urged a reconsideration of the PPA renegotiation tactics.
SAPM Ali, in response to the DFIs’ concerns, vehemently denied any coercion in the negotiations, characterizing them as "civilian-led," "cordial," and "amicable." He attributed the lenders’ apprehension to "misinformation" and asserted that while there might be some impact on the IPPs’ equity returns, they would still maintain reasonable profits. The government has touted significant financial gains from these renegotiations, claiming savings of approximately Rs1.571 trillion in future payments to 27 IPPs. Furthermore, an "unwilling" producer is now facing a forensic audit.
The government’s power sector reforms extend beyond PPA renegotiations. Measures include suspending gas supply to captive power plants to incentivize reliance on the national grid, expediting the Competitive Trading Bilateral Contract Markets to promote competition and efficiency, and addressing the legacy of late payment surcharges owed to IPPs, amounting to approximately Rs300 billion, with a portion already written off. These actions collectively aim to tackle the chronic issue of circular debt, a significant drain on the national economy.
The clash between the government and the DFIs highlights the delicate balancing act between addressing pressing economic challenges and maintaining a stable investment environment. While the government emphasizes the necessity of these reforms to stabilize the power sector and reduce the burden on consumers, the DFIs caution against actions that might jeopardize future private investment, crucial for sustainable development.
The renegotiation process has involved various phases, from the initial agreements with 14 IPPs in January, projected to save Rs1.4 trillion, to the termination of agreements with five older IPPs in October, anticipated to save Rs411 billion, and subsequent settlements with eight bagasse-based IPPs in December, aiming for Rs240 billion in savings. The government’s ongoing efforts to reform the power sector represent a decisive attempt to address long-standing structural issues and achieve financial sustainability, but the concerns raised by international lenders underscore the need for a transparent and collaborative approach to ensure long-term investor confidence and continued development of the sector. The outcome of this ongoing dialogue will significantly impact the future trajectory of Pakistan’s energy landscape.