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August 23, 2019

Investors in Pakistan’s power sector under siege

Lahore

August 23, 2019

ISLAMABAD: The PTI government is desperately seeking foreign direct investment but at the same time those who invested and signed business accords to help country overcome energy crisis are being coerced and insulted. The whole exercise has generated wrong message to the local and foreign investors telling them not to invest in Pakistan.

The Chinese and Qatari companies that invested in power projects under umbrella of CPEC and helped the country at a time when no one was ready to invest, are currently facing an music by accountability body. The investigation by anti graft body against the CPEC power projects will certainly haunt and offend China and Qatar, who helped Pakistan at a difficult time. As a consequence, the Chinese investors are no more interested in the Pakistan’s power sector, one of the top officials at the Power Division told The News.

Abdul Razak Dawood, Adviser to PM on Commerce, Textile, Industry & Production and Investment, told The News that the business community on last Monday raised the issue of their undue harassment with Prime Minister Imran Khan. Dawood said the Prime Minister heard them intently and asked to “leave this issue with me.” The Foreign Direct Investment has already gone down by 50 percent and the treatment being meted out to investors in Pakistan is sending wrong signals to investors.

The bureaucracy is suffering from low morale due to the crude behavior of the anti graft body. They have become so scared and demotivated that they are not prepared to take decisions. Federal Minister of Railways Sh Rashid has mentioned this problem even in tv talks shows.

The Tuesday’s federal cabinet meeting with Prime Minister Imran Khan in the chair has decided to amend the accountability law softening it towards the business community who are investing in various sectors of economy in Pakistan including the energy sector.

The anti graft body on the other hand says every investor wants transparency and a transparent environment free of shady deals, corruption and kickbacks will bring more investors. The spokesman of the anti graft body asked to refrain from speculations about its modus operandi.

The Gallup Pakistan conducted surveys over the role of the anti graft apparatus. As many as 59 percent Pakistanis expressed confidence in the accountability mechanism. They were asked 9 questions including if the country is fit for investment and why there is flight of capital and inventors form the country. They were also asked why the anti graft body is taking actions against IPPs and why NEPRA officials are not inclined to work? Similarly the anti graft body didn’t offer any specific answers and resorted to their oft repeated statement that every investor wants transparency which will boost investor confidence and pave way for more investments. However, in several background interviews with the top mandarins of the anti graft body, Power Division, power sector investors and NEPRA’s top officials confirm rising incidence of harassment and intimidation for the business community and in particular the power sector.

According to them, top officials at the Power Division, PPIB, CPPAs and NEPRA are summoned by the anti graft body on a daily basis. The members of NEPRA are quite upset as in the last one month they were unable to hold Authority’s meetings since their professional regulators have to appear before the anti-graft body every day. This has practically brought the official work in NEPRA to a virtual standstill. Because of the abrasive behavior of the anti-graft body, no one is prepared to work as their predecessors (old members of NEPRA) are facing the investigations.

This correspondent happened to discuss the issue with four members of the NEPRA who were unanimous that with this intimidating environment, official work is not possible and it has become next to impossible apply one’s mind. Furthermore, they apprehend if NEPRA invokes criminality for any IPP, for instance, under the 2002 power policy, then other IPPs having same specifications will automatically get close down. This will exclude over 1200 MW from the system exposing the country to massive load shedding.

One of the top officials at the Power Division confirmed to The News that NEPRA has refused to work any more under the environment of intimidation. It has refused to give tariff of Port Qasim coal based power plant at true up stage. The delay in tariff at the true up stage offended China and to this effect some Chinese companies have also already conveyed their serious concerns to the Power Division.

The official said that now the Inquiry Commission on Debt, headed by Hussain Asghar, has started probing against IPPs for allegedly making huge ungainly profits. The investors have also contacted the Power Division and said if they are involved in any breach of power policy and contract, then are prepared to be punished. The top official said the issue will soon be taken up at the highest level as the treatment with the investors is sending a wrong signal abroad and also to those who wanted to invest in Pakistan. He said the probe should be done by the experts who know the power sector thoroughly not by those (pseudo experts) hired by the anti graft body.

The anti graft body ultimately wants, he said, with the willingness of many in the corridors of power, to exert pressure on investors to review the Power Purchase Agreements (PPAs) which are supported by sovereign guarantees. Pakistan is already facing the fine of $5.9 billion given by ICSID in Reko Diq case after Pakistan scuttled the agreement and about $800-900 million in Karkey Rental Power dispute. In view of this the anti graft body should avoid stressing investors to review PPAs.

However, in contrast to the anti graft body policy, Prime Minister Imran Khan in a meeting with business community held on June 20, 2019 expressed government’s inability to review the the power purchase agreements (PPAs) signed with with the Independent Power producers (IPPs) saying the government has extended sovereign guarantees against the said PPAs.

Responding to the assertion, famous business tycoon Iqbal Dadi from Karachi said reviewing the PPAs with IPPs is not possible as the government has extended the sovereign guarantees and if the government goes against them and start reviewing the PPAs, then the government will be confronted with legal repercussions internationally as the IPPs can draf the government to international arbitration.

The top decision makers in the PTI government and senior officials privy to the developments said, they are also extremely perturbed and fear the ongoing harassment and arm twisting of the investors will create hurdles in luring investment for the government in the renewable energy sector. The government wants to emphasize focus on electricity generation through wind and solar mainly to harness the cheaper electricity and mitigate the escalating issue of capacity payment charges. ‘If the coercion by the anti graft body continues unabated, the government will not be able to lure investors in renewable sector,’ they said. ‘’The PTI needs

According to the official documents available with The News, the government’s anti-graft body has started investigations against 88 IPPs (Independent Power Producers) which are under various stages. The anti graft body has also started investigations against 16 gas based captive power plants ( 6 old plants that include Agar Textiles private Limited, Meko Tex Private Limited, Fateh Textile Mills Limited, High Tech Pipe and Engineering Industries Private limited, Salim Yarn Mills Private Limited, Roomi Fabrics Limited and new 10 plants that include Omni Power Private Limited, Anoud Textile Mills Limited, Tathatta Power Private Limited, Luck Cemenet Limited, Agar Textiles Private Limited, Shikarpur Power Limited, Dadu Energy Priavte Limited, Naudero Energy Private Limited, Galaxy Textil Mills Limited and Roomi Fabrics Limited). It also includes 22 bagasse based power plants (Shakar Ganj Sugar Mills Limited, Kamalia Sugar Mills Limited, Shakar Ganj Energy Private Limited, Ramzan Sugar Mills, Noon Sugar Mills, RYK sugar Mills Limited, Jamal Din Wali Sugar Mills Limited, Humza Sugar Mills, Thal Industries Corporation Limited, Indus Sugar Mills Limited, Ashraf Sugar Mills Limited, Bandhi Sugar Mills Limited, Tando Allah Yar Sugar Mills Private Limited, Chamber Sugar Mills, Faran Sugar Mills, Habib Sugar Mills Limited, Mehran Sugar Mills Limited and Sanghar Sugar Mills limited, JDW Sugar Mills Limited, Al-Noor Sugar Mills Limited, Deharki Sugar Mills Private Limited, and Al Moiz Industries) and 4 solar based power plants (M/s QA Slar Private Limited, M/s Appolo Solar Pakistan Limited, M/s Crest Energy Pakistan Limited, M/s Best Green Pakistan Limited ) and 2 coal based power plants (Qasim Port coal power plant and Sahiwal Coal Power plant).

The IPPs installed under 2002 power policy are also under the radar of the anti graft body. The anti graft body is also probing oil fired plants under 2002 policy, which includes, Nishat, Nishat Chunian, Atlas, Liberty Tech, Attock and Hubco Narowal.

The anti-graft body is also making its mind to probe into the RLNG based power plants established by Federal government at Bahadur Shah Haveli and Balloki and other two RLNG based power plants set up by Shahbaz government one at Bhikki and the second at Trimmu. Top officials at Power Division also told The News that the anti graft body has also indicated that it wishes to review the wind plants. ‘And that essentially covers everything put up in the last 10 to 15 years.’

The anti-graft body has tried, in accordance with the documents in possession with The News, to make point that the projects with specifications are set up in India and Bangladesh at lower tariff comparatively ignoring the bitter fact that Pakistan is a high risk country with political instability and inconsistent economic policies. In Bangladesh and India, there is continuity of commercial agreements with political stability and more importantly there is also an enabling and investor friendly environment, but in Pakistan, the political instability, law and order situation and deviation of commercial agreements even supported by sovereign guarantees always forces investors to seek high rate of return ensuring the safety of their investment.

However, the anti graft is investigating on the plea that the IPPs in order to seek high tariff rate presented falsified, deceptive and fraudulent figures on account of the costing factors. The Nepra officials being hands in glove with the IPPs accepted the falsified and fraudulent cost without verification and without checking the efficiency level of the power production units.

‘The current business environment of the country is quite suffocating as the business community is under tremendous duress and many business tycoons have virtually left the country. One business tycoon with his whole family surrendered his Pakistani citizenship and opened a business enterprise in Malta in the wake of intimidating environment. And many are in process of making up their mind to leave the country,’ some notables business tycoons of the country told The News.

‘We are ready for punishment under the law of the land if any IPP is found breaching the power policy and power purchase agreement (PPA) supported by sovereign guarantees of government of Pakistan.’

Now the question arises as to why the business community feels harassed, and coerced who particularly have invested in the power and LNG sectors. In power sector, under various government power policies, foreign and local investors signed power purchase agreements (PPA) supported by sovereign guarantees by the governments and foreign and local investors have installed Independent Power Producers. But country’s towering business personalities are summoned by the anti-graft body and forced them to sit there for long time every day, besides they are named and shamed in the media as proven criminals hurting their reputation irreversibly without proving any wrongdoing.

If a company, regardless of origin, the industry sources again emphasized, has violated law or policy, it should be taken to task but only after having concrete and prosecutable evidence. If someone has not violated the law or contracts, but has managed to do better than expected because of their management expertise, cost cutting, reinvestment, or just change of each rate environment, don’t treat them as a criminal, sources at some of the business houses said. There are others who have done worse than expected. In situations like these, honoring agreements but asking for mutually agreeable adjustments in contracts in spirit of cooperation will yield more results rather than pressure alone. When the anti graft body defames businessmen when they have not done anything illegal, they will fight back to protect their reputation more than their money in that project. Khalid Mansoor, CEO Hubco and executive member of IPPAC (Independent Power Producers Advisory Council) while talking to The News confirmed that apart from the investigations by the anti graft body, the Inquiry Commission on Debt has also started probing into the IPPs affairs. ‘’We are asked to submit the whole details of their power plants starting from tariff petitions to CoD and then from CoD to the status till now. ‘We are ready to fight our case at every level, but we are being maligned and vilified. He said Pakistan is a high risk country and it ranks at number two after Iraq, then followed by Eygpt, Turkey, Bangladesh, India, China, UAE and US.’

But our competing economies, he said, such as Bangladesh and India are less risk country in terms of investment and this is why the investors do not prefer Pakistan. More importantly in the case of India and Bangladesh the successive governments always honour the commercial agreements but in Pakistan the situation is otherwise.

Until now, he said he does not feel that the government wants to review the power purchase agreements (PPAs). However, whenever government intends to review the power purchase agreement unilaterally, then the IPPs will certainly move London arbitration under contractual right.

He also mentioned saying last time the IPPs won the case in London arbitration courts. However, the said issue is being settled with willingness of the government and IPPs may lower the payments due from government as this country is ours. “However, we will go by the book by invoking the dispute mechanism clause enshrined in the agreements.’’ Khalid Mansur also said an impression has been made in the media that the IPPs are mopping huge profits of as much as 61 percent. He said this is the accounting profit not the actual profit of IPPs. In the 61 percent profit shown as accounting profit, there are many heads such as insurance, debt and its servicing and O&M. If the amount is deducted as it ultimately goes to insurance, lender and some spent in O&M, and then the rest 15 percent is the return of IPPs.

‘So much so, foreign companies from China, Qatar and other countries who invested in CPEC power projects are facing the investigation by the anti-graft body knowing they have helped the country to get out of energy crisis under government policy in the presence of storing regulator—NEPRA.’

Khalid Mansoor further said there is an impression that investors in the power sector are making illegal, windfall profits and if that is the case then why those who invested under 1994 power policy have not invested more under 2002 power policy and why those who invested under 2002 power policy are not the part of those invested under 2013 power policy and why those who invested under 2013 power policy are no more part of those who installed IPPs under 2015 power policy. This is a bitter fact that one who invests in Pakistan under one policy does not dare to invest more under other policies as investors is time and again harassed and subjected to too much coercion. However, It is only Fauji Foundation which established Fauji Kabirwala power plant under 1994 policy that also established Fauji Dharki power plant under 2002 and under 2015 policy, it also set up three wind power plants.

When asked as to why there is an impression that IPPs are hesitant in getting the heat rate audits of their plants, Mansoor said the IPPs representatives offered to get heat rates audited twice to Nawaz government in the presence of the then Finance Minister Ishaq Dar making it conditional that after the audit, the government will treat IPPs based on actual basis heat rates, but the CPPA officials refused the proposal saying it will incur loss to CPPAs in toto.

More importantly, he said, NEPRA is responsible for due diligence of every power project and for the tariff. The investors start installing the projects under Power Purchase Agreement under government power policy. So if the probe is required, it’s okay to include the government and regulator’s officials not the investors. ‘However, we are ready to get investigated by the anti graft body but it would be better if the investigation process is done in-camera and our names are not made public and run in electronic and print media as it compromises our credibility. ‘We have to run businesses and do not want to see ourselves branded as criminals in the eye of our employees. More importantly we do not feel encouraged to invest more in the country,’’ he they said.

The more bitter fact is that the investors have virtually started repenting investing in Pakistan’s power and LNG sectors, though they were lured and attracted and compelled to invest under the government policies in energy sector to bailout the country out of energy crisis.

According to the top officials at Power Division, the rate of return in power sector ranges between 5 to 25 percent with dollar indexation. Highlighting the history of IPPs, the official said under the 1994 policy, the tariff was offered at 6.5 cents to the investors. The then PPP government, he said, had constituted a commission which recommended the 6 cents for power tariff, but the World Bank had recommended to the then government 6.5 cents per unit tariff arguing that 6 cents per unit will not work. The return on investment was at 12.5 percent. But those who invested under 1994 policy faced tough time during 1997-1998 and they were harassed and arm-twisted to review the Power Purchase Agreements (PPAs). The investors from Europe, Japan and US who invested in Pakistan under 1994 policy left the country and never returned.

However, under 2002 power policy, the then prime minister Shaukat Aziz during Musharraf regime offered to the foreign investors 15 percent rate of return with US dollar indexation, but to local investors’ the rate of return in rupee terms. Later on, Mr Aziz amended the policy and also offered the local investors 15 percent rate of return with US dollar indexation. At that time value of dollar stood at Rs60 which has now increased to Rs160 and this is the main reason that the profits of the IPPs have increased. However, some IPPs have invested more on their plants to increase the efficiency gains but they didn’t breach the contracts and the respective power policies.

When Fukushima Daiichi nuclear disaster took place in Japan, then it was decided by the Japanese government that it will not run its nuclear power plants rather it will cater to its energy needs through renewable energy. The Japan government at that time offered for investors 38 cents per unit tariff for installing solar plants. Those who invested at that time are still getting the 32 cents per unit as the Japan government is still honoring the agreement. Though the solar technology had advanced and now it has become cheaper, but the Japan government continues to honour the agreements under which the investors had installed solar plants at 32 cents per units.

The correspondent also sent a questioner to the anti graft body on July 8, 2019, but it took one and half week saying it will respond in detail to every question, but at the end of day, the answers it gave were not in detail and rather it skipped many questions.

Following was the questionnaire sent to the anti graft body. The first question was that the IPPs say if they are involved in any kind of deviation of power policy and the contract they are ready to face music but if they are not involved then the anti graft body ‘s investigation is only harassing the investors. Please respond in detail.

Q: I have come to know that the anti graft body has started probing against IPPs, captive power plants and new CPEC power projects that include Port Qasim power plants installed by Qatari and Chinese investors, Sahiwal coal power plant installed by Chinese companies. Don’t you think it will send a wrong message to China and Qatari investors?

Q: The power plants are set up under power policy having incentives to attract local and global investors. But the investors are summoned, harassed by the anti graft body arguing they with connivance the government (PPIB, CPPA), Nepra officials have managed to have higher tariffs. Investors always want maximum dividends don’t you think if there is any wrongdoing, then the power policy, govt officials and Nepra functionaries should be held responsible as PPIB makes the petition and NEPRA carries the postmortem of the petition and gives the tariff through due diligence and when the project takes the shape regulator at the true up stage also goes through every information investors have already given in the petition and then finalizes the tariff. So my question under this scenario is to why the anti graft body takes on the investors?

Q: I have come to know that in the last 8 months of the PTI government, the capital flight of billions of dollars has already taken place and many business tycoons are making their mind to leave the country and shift their business outside the country, don’t you think the anti graft body shouldn’t harass local and international investors as it will send wrong signals. Why the anti graft body doesn’t keep the factors in its mind that for investors Pakistan is high risk country in terms of investment as Instability, law and order situation and changing of the agreements with sovereign guarantees has been the hallmark of the country and under this scenario don’t you think it is not logical to compare the tariffs of the projects of one kind and specifications installed in Pakistan with tariffs of the same nature of projects set up in India and Bangladesh where in stability, law and order situation and continuation of agreements is very much there.

Q: In Nepra there is too much harassment and chaos, owing to which the regulator is unable to give any decision which is why everything came to a standstill. The authority I came to know failed to hold meeting many times as the professional officers are summoned by the anti graft body. Please respond.

Q: NEPRA says it has flawless system of giving tariff. It says there are various mechanisms such as upfront tariff, cost plus and competitive modes. And the projects being probed are given tariffs under different modes but the anti graft body is saying why the tariff given under upfront mode is highest than the tariff of the competitive regime. Please respond.

Q: The anti graft body is investigating solar plants, captive power plants, bagasse plants, and CPEC power plants. I want to know exactly what’s the number of total plants the anti graft body is probing as it is authorized to start probe after a complaint verification.

Q: After nuclear power plants debacle in Japan, the Japanese government decided to go for renewable energy and at that time Japan offered investors 38 cents per unit tariff for solar plants to investors, still they ( investors) are getting the same tariff knowing the fact that solar technology has now become cheaper but the Japanese government still continues to honor the costly agreements (PPAs), but the anti graft body wants the IPPs in Pakistan to modify the PPAs knowing the facts they are backed with sovereign guarantees. Under this scenario the anti graft body’s probe to ultimately modify the PPAs don’t you think will force IPPs to go for arbitration against the country.

Q: The Nepra officials say if criminality against any IPP is invoked, other IPPs having the same specifications and tariffs will automatically be forced to closed down as the relevant Nepra officials will remain unmoved on this account fearing the anti graft body and it will cause darkness in the country. Needs the anti graft body comments.

Q: The anti graft body is also proving into heat rate audit issue of IPPs but I know that IPPs have offered the government that they are ready for getting done heat rate audit but it should be implemented on actual basis by CPPAs but the government backtracked on the issue pleading it will harm the interest of the CPPA. So under this scenario will the anti graft body continue to probe into hear rate audit issue?

Ultimately the anti graft body replied to a few answers skipping many questions saying that it is informed that the matter of NEPRA is sub judice in the court of law, and the queries about NEPRA cannot be addressed at this stage being sub judice in the court of law as well as in the light of the direction of Honourable Supreme Court of Pakistan, that till filing of reference, the anti-graft body will maintain secrecy.

As far as investor’s confidence is concerned, the anti graft body said that every investor wants transparency and if there is transparency in the country, more investors will come. Kindly avoid speculations in this regard as the anti graft bdoy is an apex anti corruption organization of Pakistan. As per recent survey carried out by Gillani and then by Gallop, 59 percent Pakistanis have shown confidence upon the anti graft body.

The anti graft body is committed to eradicate corruption from Pakistan with iron hands by adopting Accountability for All” policy across the board and our actions speak louder than words. The anti graft body always work according to law. The anti graft body is the only organization in Pakistan which has 70 percent conviction ratio in the respected accountability courts. Ends

Q: After nuclear power plants debacle in Japan, Japan government decided to go for renewable energy and at that time Japan offered investors 38 cents per unit tariff for solar plants to investors, still they ( investors) getting the same tariff knowing the fact that solar technology has now become cheaper but Japan government still continues to honor the costly agreements (PPAs), but the anti graft body wants the IPPs in Pakistan to modify the PPAs knowing the facts they are backed with sovereign guarantees. Under this scenario the anti graft body probe to ultimately modify the PPAs don’t you think will force IPPs to go for arbitration against the country.

Q: Nepra officials say if criminality against any IPP is invoked and other IPPs having the same specifications and tariffs will automatically forced to get closed down as concerned Nepra officials will remain unmoved on this account fearing the anti graft body and it will cause darkness in the country. Need comments of the anti graft body.

Q: The anti graft body is also proving into heat rate audit issue of IPPs but I know that IPPs had offered the government that they are ready for getting done heat rate audit but it should be implemented on actual basis by CPPAs but the government backtracked on the issue pleading it will harm the interest of the CPPA. So under this scenario will the anti graft body continue to probe into hear rate audit issue?

Ultimately the anti graft body answered skipping many questions saying that it is informed that the matter of NEPRA is subjudice in the court of law, and the queries about NEPRA cannot be addressed at this stage being subjudice in the court of law as well as in the light of the direction of Honourable SCP, that till filing of reference, the anti graft body will maintain secrecy.

As far as investor’s confidence is concerned, the anti graft body said that every investor wants transparency and if there will be transparency in any country, more investors will come to have investment. And kindly avoid to have speculations in this regard as the anti graft body is an apex anti corruption organization of Pakistan. As per recent survey carried out by Mr Gillani and then by Gallop, 59 percent Pakistanis have shown confidence upon the anti graft body.

The anti graft body is committed to eradicate corruption from Pakistan with iron hands by adopting Accountability for All” policy across the board and our actions speak louder than words. The anti graft body always work according to law. The anti graft body is the only organization in Pakistan which has 70 percent conviction ratio in the respected Accountability Courts.

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