World Bank steps into IPP row

Disagreements between Pakistan and independent power producers have escalated over the past few months. The issue over tariffs has been complicated by allegations of corruption, and now the World Bank has stepped in to try and salvage what it can from the country`s pioneering private investment programme.

The World Bank last month stepped into a deepening row between the Pakistan government and a number of independent power producers (IPPs) active in the country. It has warned that unless progress is made on the issues at stake, new loans to the country will not be forthcoming.

The row centres on electricity prices in the IPPs` power purchase agreements (PPAs) with Pakistan`s Water and Power Development Authority (Wapda), which the government claims are too high, and allegations by the government of corruption by the some of the IPPs. The World Bank has urged Pakistan to keep these two issues separate.

Prominent in recent events has been Hub Power Company (Hubco), developer of the Hub River power project. On 12 October the government announced criminal charges of fraud and conspiracy against Hubco after investigations by the Federal Investigation Agency. It was alleged that the Hub project had been `improperly negotiated` and that Hubco had `fraudulently` increased its tariffs. The government also said that it was repudiating part of the company`s PPA.

Essentially, the row stems from the Asian economic crisis, and the resulting financial problems of the severely cash-strapped state-run Wapda which cannot afford to keep up payments to power producers. Parallel situations are also occurring in Malaysia and Indonesia.

In Pakistan, however, it has escalated into a protracted and complex political and legal affair. It is difficult to see how the two sides` differences could be happily resolved, and while the IPPs, at worst, could walk away with a large dent in their wallets and a slightly tainted reputation, Pakistan and Wapda have a lot more at stake.

These problems come at a time when Pakistan is negotiating with the International Monetary Fund (IMF) over a lending programme vital to underpin a $5bn debt rescue and rescheduling package to prevent the country from defaulting on loans. The IMF recently suspended a mission to Islamabad for talks over the loan, and like the World Bank, it is unlikely to finalise any loan agreement until the dispute is resolved and power sector reforms are implemented.

Problems began earlier this year when allegations were made that a number of foreign-backed private power projects amended their PPAs to obtain a higher rate for the power they produce. The amendments were made during the former administration of Benazir Bhutto, whose government was ousted on corruption charges in 1996.

The present government wants to annul this amendment but the companies in question are adamant that the tariffs should remain as they are. In May this year, the High Court in Lahore issued an interim order directing Wapda to pay Hubco ยข3/kWh, less than half the contracted rate. More recently, it has ordered a 40 per cent cut in Kapco`s rates.

Matters were complicated in June when the government issued cancellation notices to six IPPs on charges of corruption and violation of terms of agreements, alleging that bribes and kickbacks were offered for contracting the high tariffs. Two others were served notices on technical grounds, and the government also terminated a power purchase agreement with Southern Electric Power Company (see Table).

Hubco has responded to Pakistan`s recent allegations and refusal to pay part of the PPA by starting legal proceedings and asking the World Bank – which has backed the Hubco project – to intervene. In mid-October the company stated that Wapda was in breach of its contract and that if this is not rectified within 30 days then Hubco would be entitled to serve a preliminary termination notice. This would require the state authorities to buy out the $400m invested in the project by its foreign backers.

At stake for Pakistan is its image as a pioneer of private investment. Hubco is the country`s largest private investor and the Hub project is a flagship of foreign investment in Pakistan. The project is also a World Bank model of private power investment in south Asia.

The backers of the Hub River project include the World Bank and the Japanese Export-Import bank (Jexim) which have underwritten a large part of the $600m of senior debt raised by a consortium of 40 international banks. The two organisations also provided $400m of subordinate loans. Equity for the project was raised by Hubco`s shareholders, including around $100m from National Power of the UK which owns a 26 per cent stake in the company.

Several multilateral institutions are thought to have warned Pakistan against the consequences of harsh action against private investors such as those involved in Hub. Given its need for long-term investment in the power sector, the country is hardly enticing those companies already involved to invest again, or attracting new investors.

In addition, the IMF package is essential to ensure that the country`s financial crisis does not deepen. Pakistan has already defaulted on some of its $30bn foreign debt. It is behind schedule on payments to the World Bank and the Asian Development Bank. The government has also worsened its relations with the IMF by cutting electricity tariffs for consumers by 30 per cent. The IMF is trying to encourage Pakistan to reform Wapda to help improve its financial performance.

Wapda is reported to be close to bankruptcy with losses of around $1.2bn. It also has “triangular debt” of around $1.65bn, with some companies owing it money and it owing other companies. Its line losses are among the highest in the developing world at 30 per cent. Reform – including an increase in electricity prices to consumers – is therefore needed, according to the IMF.

Pakistan therefore has much to lose, both financially and in terms of its relations with investors, and any further escalation of its disagreement with Hubco and the other IPPs would be disastrous. But by forcing the hand of Hubco and other IPPs, it has put itself in a difficult – and weak – position.

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