The jury is still out on the economic merit in re-engaging with independent power producers (IPPs) on their returns on equity.

Federal ministers hail it as the cornerstone of their energy reforms. They say the exercise is a necessary readjustment in a sector that is afflicted with duplicitous concessions, inconsistent SOPs and devious pricing arrangements.

Touting the process as a precursor of the elimination of structural discrepancies in the energy sector, PTI ministers call the move an important part of their accountability and reform mandate.

Many others, including political opponents and industry experts, have branded it a smokescreen intended to conceal the governance debacles of the incumbents. They see few reasons to celebrate and point out mechanical disparities in the estimates of financial savings as well as the lack of deliberation on transferring savings to consumers to justify their scepticism.

But there’s another angle, which is perhaps more important than all others. It goes beyond financial estimates and optics. No matter how the incumbents spin it, the whole exercise amounts to redrawing sovereign state agreements, which is a far more consequential affair than anything of immediate importance.

Governments cannot lure new investment while simultaneously strong-arming the existing investors into waiving or revising their contractual rights

When private-sector players — whether domestic or foreign — deal with any government, they account for a certain risk premium for political uncertainty. This is necessitated by the fact that commercial agreements tend to last longer than administrative tenures. The resulting vulnerability to changes in policies, regulations and personnel exposes private stakeholders to risk.

With its history of different forms of government, coups and general political instability, Pakistan is already trailing its peers on this front. A higher risk premium is used for countries with higher political risk. When a government arbitrarily decides to revise the terms of obligations that its predecessors agreed to on behalf of the state, it is not difficult to understand the reaction from potential investors.

It does not help that the criteria for choosing the agreements that needed to be re-examined are at best ambiguous. Also, there is scarcely any uniformity or clarity of direction.

Unfortunately, a government undermining contractual obligations that its predecessor signed off on is not unprecedented in Pakistan. Investments under Fertiliser Policy 2001 endured similar distress when the government refused to honour its commitment to providing such plants with concessionary gas. The matter was subsequently resolved through extended dialogue and third-party involvement.

The companies involved in this saga, however, have not yet emerged from hot waters. The recent verdict by the Supreme Court on the gas infrastructure development cess (GIDC) can make them liable to pay billions although the policy and subsequent agreements unambiguously stipulated a price inclusive of all taxes and duties.

Such inconsistencies in policymaking and ensuing commercial uncertainty do not just result in bad optics. They have wide-ranging financial implications. Political administrations cannot expect to cajole private investment into the country while simultaneously strong-arming the existing investors into waiving or revising their contractual rights. These antics have direct repercussions for ongoing as well as prospective projects where the government desires to take private players on board.

When a government arbitrarily decides to revise the terms of obligations that its predecessors agreed to on behalf of the state, it is not difficult to understand the reaction from potential investors

Prospective investors are bound to incorporate the risk of renegotiation in their proposals, increasing the cost of financing for the state or depressing the proceeds from privatisation transactions.

In fact, one does not need to look far to observe that incumbents are navigating through unflattering tender offers amid harsher negotiation terrains. In order to generate the budgeted privatisation proceeds, the federal cabinet had to recently waive off the re-gasified liquefied natural gas (RLNG) take-or-pay commitment of three power plants slated for privatisation.

The approval, intended to enhance investing interest, can put the entire domestic RLNG supply chain at risk in the backdrop of a burgeoning circular debt and persisting take-or-pay commitments of Pakistan State Oil (PSO) and Sui Northern Gas Pipelines Ltd (SNGPL).

What the cabinet’s decision means is that while PSO and SNGPL, both being state-owned enterprises, cannot renege on their long-term take-or-pay commitments with foreign stakeholders, the provision of the guaranteed purchase under the originally envisaged model by these power plants will not be there.

The deterioration in contractual credibility becomes unmistakable when the government resorts to waiving off stipulations that have industry-wide ramifications in order to get a better deal on privatisation transactions.

Whether the incumbents account for the corresponding surge in costs or not, the state will have to bear it. It seems imperative then to realign our cost-benefit assessments. Easy book-balancing fixes are more likely to trigger escalating structural ripples with grim and long-term consequences.

The writer is an equity research analyst

Published in Dawn, The Business and Finance Weekly, October 26th, 2020