THE coronavirus pandemic has put economies in turmoil. The global economy is estimated by the International Monetary Fund (IMF) to face negative 3 per cent growth this year. No major economy worth the name may avoid a recession in 2020, other than the two powerhouses — China and India — who may remain in a marginally positive mode with less than 2pc growth.

Pakistan is no exception. Its current year GDP performance is estimated negative 1.5pc.

But let us acknowledge the industry was already in the negative. Services came under attack as containment and quarantines came into effect. The economic output was down from 5.8pc in 2018 to 3.3pc in 2019. Surpluses emerged in electricity and gas availability, thus ballooned liabilities for unutilised capacities with no resources at hand to settle them. The economy was already in the stabilisation mode of the IMF bailout when the ‘act of God’ hit.

It would be interesting to examine how a federal secretary, writing recommendations for increasing costs, could become a credible judge as a regulator or investigator

For some, that provides an ideal opportunity, a chance in history, for the government to declare force majeure to get rid of the ‘wrongdoings’ of the energy investors. And why not? The consumer tariffs have become prohibitively unaffordable and yet unavoidable under the stabilisation programme. What can be a bigger event than a pandemic to announce a force majeure under the contract? Many firms around the globe are reportedly examining legal means of correcting their wrongs through the pandemic window.

For others, knee jerk actions could be counter-productive and expensive. Investor confidence is like a nest that takes decades to build and can be destroyed pretty quickly, leaving behind a lot of dust. Also, investors are ruthless when it comes to protecting their capital and interests in international courts where the Pakistan government’s track record has been far from ideal. At home, the intertwined business and political interests make it difficult to move past the smokescreen.

Hence, every step has to be cautious and must be based on a cost-benefit analysis. The force majeure can delay or suspend an obligation until the event is over. International arbitrations normally do not allow general economic hardships, of a firm or a party even if it is a sovereign, as the force majeure event. Hence, a bad business/economic decision in extreme conditions could lead to default rather than an easy exit through force majeure.

Suddenly, investigations and analytical reports of all sorts have sprung up to build a case. Such reports bring under the spotlight how profitable the energy business in Pakistan has been for private investors but appear wanting in answering questions such as how such allowances and illegal benefits seeped through ironclad sovereign guarantees. Also what was the role of a host of public sector forums – from policymaking bureaucrats to one-window facilitating agencies and from audit and regulatory agencies to law-making institutions.

It becomes all the more important for the inquiry committees to examine how many technocrats, rising as director finance or executive director policy to the top position of chief executive officer of a public entity over two decades, raised red-flags or facilitated tariff settings that are now being agitated. It would be equally interesting to examine how a federal secretary, writing recommendations with his/her signatures for increasing project construction cost, thermal efficiencies, fixed and variable operations and maintenance cost and change in plant factor, could become a credible judge of such standards as regulator or investigator. It would be no little feat to scrutinise how fairly an investor or private sector expert could avoid conflict of interest in decision making as part of the government.

These are very relevant questions given the changing roles of dozens of players involved in or related to the energy business, particularly independent power producers (IPP) given the amounts quoted in official reports, rightly or wrongly. But putting all investors in one basket and launching a campaign rather than a professional approach could be dangerous to the nation. The history of the power sector is full of such mistakes and their associated costs.

Every company could be separately examined through various regulatory and legal processes and overpayments, over/under-invoicing and misdeclarations addressed through adjustments within the framework. Negotiations could be held for government-to-government savings as the major financial burden is now emanating from plants set up under the China Pakistan Economic Corridor. Pakistan has already asked for relaxation in the interest rate and an extension in the debt servicing period.

But the numbers related to older plants are so huge that they could not be brushed under the carpet. For example, an audit report on the power sector finalised by a special inquiry team and presented to the prime minister last week reported that the circular debt stock has continued to grow. It increased by Rs465 billion in 2018-19 to around Rs1.6 trillion, leading to a total financial loss to the country of Rs4.8tr over 13 years, at an average annual loss Rs370bn.

This is especially alarming because the public indebtedness (public debt/GDP) increased to 85 per cent in 2018-19 from 52pc in 2006-2007, therefore the government’s ability to provide fiscal support to the sector is now severely constrained. The cumulative budgetary support to the power sector amounted to Rs3.2tr from 2006-07 to 2019-19, including Rs2.86tr in subsidies.

The reported noted that 16 plants under the 1994 Power Policy invested a combined capital of Rs51.80bn and have so far earned more than Rs415bn in profit, having taken out dividends in excess of Rs310bn. It needs to be kept in mind that both numbers are understated since they are based on the 275 financial statements available with the National Electric Power Regulatory Authority and Securities and Exchange Commission of Pakistan out of the total 312 statements required.

More importantly, most of these IPPs had an investment payback period of two to four years, profits generated were as high as 18.26 times the investment and dividends taken out as high as 22 times the investment. Six companies earned an average annual return on equity (ROE) between 60-79pc and four companies earned ROE of around 40pc. “These profits are probably unheard of in any other sector, especially with such low level of risk and guaranteed payments by the government”, the audit investigation noted.

Published in Dawn, The Business and Finance Weekly, April 20th, 2020