Tactics & strategy

Published October 3, 2020
The writer is an analyst.
The writer is an analyst.

THE country’s power sector continues to be more than eventful. Each of the numerous policy and operational level developments from the last few months merits detailed analyses. The one that stands out, however, is the settlement struck between the independent power producers and the government. Moreover, the latter has nodded to lower profit rates of state-owned power plants. Although the administration has demonstrated its tactical strength in more ways than one, the absence of a coherent, overarching strategy for the power sector gives rise to substantial risk of failure. If left unmitigated, it may lead piecemeal ‘successes’ to do more harm than good to the country’s power sector — and its economy. Let’s review some of the salient terms of the MoUs signed between the government and IPPs.

The de-indexation of local investors’ equity returns from the US dollar for projects built under the 2002 policy is noteworthy. Unfortunately, the government doesn’t have many options to introduce retroactive changes in this unfair and irrational incentive offered by the Musharraf regime in May 2007, which is arguably among the most damaging policy decisions concerning the cost competitiveness of our power sector. Depending on how much value the rupee loses against the dollar in the next 15 years, this arrangement can help the ratepayer save tens of billions of rupees. It also indicates that the government has sensed the gravity of this incentive’s destructive potential and aims to fix it sooner than later.

The government needs a plan for its incremental successes to make a lasting positive impact.

Secondly, there is a proposal to restructure the outstanding debt of power projects. The idea looks good, for now — at least at face value. IPPs in Pakistan usually finance 75 to 80 per cent of their project cost, ie capital expenditure or Capex, through bank loans which are repaid in 10 years. Therefore, the cost of power generated during the debt-servicing period is higher when compared with the later years of a plant’s operational life after debt capital has been fully amortised. Generally, power projects have a debt tenor of more than 10 years in many other countries. An extended debt-servicing period deflates the amount of regular payment but results in higher cumulative interest charges. In other words, the borrower has a choice to repay a 100-rupee loan either in 10 years with, let’s assume, Rs10 in interest payments or in 20 years but with significantly higher interest charges.

Many of the 2002 policy projects have paid their debt, and the rest will do so within a few years. The proposal to extend debt tenors beyond 10 years is most relevant to renewables and thermal projects contracted through the policies of 2006 and 2015, respectively. The gigantic fleet comprising mainly coal and LNG plants is estimated to devour several billion dollars of annual capacity payments within no time. That makes the incumbents visibly anxious about their ability to meet these contractual obligations. The extended tenor makes sense to ease this burden and let the government get its act together in the meantime. Without improving the structural deficiencies of the power sector, however, this arrangement could become a successor to the ECC’s clumsy decision of May 2007.

The several figureheads of the administration shared the ‘good news’ of Rs650bn in savings with the nation. Since the government hasn’t published the basis on which it made its calculations, one may reasonably expect that another presser will reveal savings of Rs6,500bn. But these numbers are worthless unless shared with the underlying assumptions which can be examined independently. More importantly, nobody seems interested in informing the public that the fate of these MoUs hinges on the government’s ability to fulfil its own undertakings. The commitment to settle IPPs’ outstanding payments, which currently amount to several hundred billion rupees, is understood to have triggered their apparent willingness to concede ‘lower’ returns. And that feat is easier ‘promised’ than done.

It is challenging not only because it requires the finance ministry to ‘bail out’ the power purchaser to clear its payables, but also because the government’s earnings will take a hit as soon as it follows through on reducing profit rates of state-owned power plants. The cut in profit rates is an appreciable move and is advocated by this analyst. Still, it’s estimated to cost the treasury about Rs28bn per annum, which will have consequences for the country’s already slim finances, requiring careful considerations to produce alternate revenue streams. The ongoing IMF programme and lower dividends may leave little wiggle room for the country’s economic managers to liquidate their payables anytime soon. Since the MoUs are valid only for six months, a solution has to be crafted and agreed upon between the parties within this period. Failure to do so, for whatever reason, will leave the whole edifice of ‘success’ crumbling.

If you were to share these concerns with senior government officials and ask if they have thought through them, the answer, this analyst reckons, would be a resounding ‘no’. Although an army of advisers and well-wishers is working diligently to bring about improvements in the sector, there are several indications that they are operating in silos. The administration’s tactical efforts can indeed yield some short-term gains, but they cannot leave a lasting positive impact. While the government is encouraged to follow through with its tactics, the need for an overarching strategy cannot be stressed enough. In Sun Tzu’s words, “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

Rumour has it that someone is preparing some kind of ‘reform plan’ somewhere which will be unveiled someday. The opacity surrounding the preparation of the so-called plan is unfathomable and cannot be appreciated. Any such programme ought to be developed in a consultative manner, for it will provide much-needed credibility — an oft-missing ingredient from our various administrations’ public policy agenda. The jugaads engineered in mysterious circumstances and deployed by the past governments only hastened the sector’s demise. The current administration must tame the urge of quick fixes, develop a strategic plan, and execute it by flexing its tactical muscles.

The writer is an analyst.

Twitter: @sohaibrmalik

Published in Dawn, October 3rd, 2020

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