The Committee for negotiations with Independent Private Power Producers (IPPs), had several rounds of discussions and the IPPs have agreed to alter their existing contractual arrangements to the extent of, and strictly with respect to, the matters listed under a Memorandum of Understanding (“MoU”) signed. The MoU had the following key highlights:
• The MoU states that IPPs and government have agreed that savings achieved in oil-based projects will be shared through a sliding scale starting from 70:30 in favor the government for the first 0.5% efficiency improvement above currently determined benchmark by Nepra, followed by 60:40 for next 0.5%, followed by 50:50 for next 0.5%, and finally 40:60 for any efficiency above that. The government will not share efficiency losses.
• Whereas, savings from O&M (operations and maintenance) of these plants will be shared on 50:50 basis after accounting for any reserves for major overhauling. If the reserve remains unutilized, it will be shared in the ratio of 50:50 between IPP and the government. Furthermore, government will not share losses observed in O&M and major overhaul.
• For gas projects, the fuel and O&M will be taken as one consolidated line and any net savings will be shared 60:40 by the government and IPP, after accounting for any reserves for major overhaul. The unutilised reserve for overhaul would be shared on 60:40 by the government and IPP. Power purchaser will not share in fuel, O&M and major overhaul losses.
• The government shall appoint an independent to perform a one-time detailed heat rate test for all IPPs, for which the GoP and IPPs’ representatives shall agree on the TORs, standards and corrections required. To ensure that the actual efficiency is matching the efficiency reported in the financial statements
• For future invoices, Delayed Payment Rate (“DPR”) will be reduced to KIBOR + 2% for the first 60 days after the due date, and thereafter at KIBOR + 4.5%. IPPs with Gas Supply Agreement with an entity with significant ownership of GoP, same DPR rates shall be payable by the IPP to Gas supplier. Further, for all invoices, the power purchaser shall ensure that payments follow the PPA mandated FIFO payment principle.
• In future, foreign investors registered with the State Bank of Pakistan, return on equity ROE will be 12%. For local investors, the ROE will be changed to 17% in PKR without dollar indexation. The equity approved by the National Electric and Power Regulatory Authority (Nepra) on commercial operation date in dollar shall be converted into rupee at an exchange rate of Rs145 for prospective calculation. The miscalculation of IRR, on account of periodicity of payments, has been addressed through reduction in return component.
• Projects will convert their contracts to Take and Pay basis, when Competitive Trading Arrangement is implemented and becomes fully operational, as per the terms defined in the license of each IPP. In the interim period, CPPA (G) shall work towards providing access to the bilateral market at the earliest.
• To assess if a company has made any excess profits, the reconciled numbers between the Committee and the IPPs engaged in this exercise, shall be submitted to NEPRA. After which NEPRA shall hear and decide this matter in accordance with the 2002 Power policy, tariff determination and PPA, and provide for a mechanism for recoveries, where applicable.
• Payment of the receivables of the IPPs is an integral part of this MoU. The two sides shall devise a mechanism for repayment of the outstanding receivables with agreement on payment of receivables within an agreed time period which shall be reflected in the final agreement to be signed.
• This MoU or any of the terms of this MoU shall not be construed as an alteration or amendment to the Power Purchase Agreement or Implementation Agreement. Once NEPRA, Federal Cabinet and Board of Directors of the IPP approve the terms of this MoU, the parties shall agree and document details and procedures of these understandings preferably within 30 days, after which the same shall be submitted to NEPRA and CPPA (G), to be followed by legal documentation to reflect the amendments needed in the relevant agreements.
• This MoU is valid for six months from the date hereof and shall stand terminated on signing of the detailed agreement referred to in clause 12 above.
Conclusion
We believe the sharing of efficiency savings and O&M savings to reduce the revenue of IPPs as they were receiving while tariff Indexation on fixed exchange of PKR 148/USD will restrict the PKR devaluation gains. Moreover, the reduction ina interest rate on Delayed Payment also to reduce the financial support from government. All the measures restrict the IPPs profitability going forward. However, government intends to improve transmission sector would reduce the line losses and improve cash flows of the sector.
Negative impression goes to investors, in fact it’s a big win win situation for both government and IPPs. IPPs and government amicably resolved issues, no investigations or threat to IPPs, circular debts clearance ahead so cash flows will be better for IPPs for paying hefty dividends. Rates of IPPs shares are already trading on discount from their high book values. Time to invest in selective IPPs.
