Special Assistant to Prime Minister Muhammad Ali, in a comment to Financial Times, denied any “coercion” in negotiations with independent power producers (IPPs) following a letter signed by a group of international lenders.

On Feb 18, eight Development Finance Institutions (DFIs), which have financed power projects worth $2.7 billion in the country over the past 25 years, criticised the government’s renegotiations of wind and solar contracts in a letter, cautioning that renegotiating with IPPs in a coercive manner would undermine investor confidence and discourage future private investment.

The lenders include the World Bank’s International Finance Corporation, the Asian Development Bank, the Islamic Development Bank, and four European development finance institutions.

“We believe that renegotiating PPAs [Power Purchase Agreements] in a non-consultative manner will be detrimental to the long-term development of the sector, undermining investor confidence and discouraging much needed future private investment,” the letter highlighted.

The letter, addressed to the finance minister, power minister and the special assistant to the prime minister, also acknowledged the “difficulties” faced by the power sector and appreciated certain steps taken by the federal government to address longer-term structural challenges.

“We hope the Government will reconsider its approach to PPA renegotiations and work to find alternative ways of solving the energy sector’s structural challenges,” the letter read.

In a comment to Financial Times, the special assistant to the prime minister denied any coercion in talks with the IPPs.

He said that the lenders had been “fed misinformation”, adding that the talks had been “civilian-led” and were “very cordial and amicable”.

Muhammad Ali said that “there will be some hit to returns on equity, but . . . [power companies] will still make reasonable profits according to our numbers”, according to the report.

Yesterday, the government claimed to have secured about Rs1.571 trillion in savings in future payments to a total of 27 IPPs through negotiations so far, while another ‘unwilling’ producer would have to undergo a forensic audit.

SAPM Muhammad Ali had said the government was paying Rs70-80bn to five IPPs whose contracts stood terminated, including Rs30bn to Hub Power Company alone. He dispelled the notion that IPPs were forced to revise contracts through pressure tactics. He said payables to the tune of about Rs300bn on account of late payment surcharge were being waived through the negotiation process, including Rs100bn already written off.

In January, the federal cabinet approved the power division’s recommendation to revise the negotiated settlement agreements with 14 IPPs aimed at reducing electricity costs and saving Rs1.4 trillion for the national exchequer.

In October, the government prematurely terminated power purchase agreements with five of the oldest IPPs with the move projected to save Rs411 bn. This was followed by settlement agreements in December with eight IPPs running on bagasse, aiming to reduce electricity tariffs and save around Rs240bn for the national exchequer.

The government has undertaken extensive power sector reforms, including suspending gas supply to captive power plants, fast-tracking the Competitive Trading Bilateral Contract Markets and renegotiating contracts with IPPs.

These steps aim to curb the growth of circular debt in the power sector and reduce the burden of capacity payments on the government and consumers.