These are nervous times for investors in Pakistan's power sector, which has attracted around $3 billion since 1994.
Allegations that agreed tariffs were set too high and that several of the 18 independent power projects (IPP) that have achieved financial closure involved illegal gifts to members of Benazir Bhutto's government have prompted Nawaz Sharif's administration, which took office in February, to scrutinize terms and conditions.
Claims that sponsors, many foreign, are making exorbitant profits and a prediction by the new minister for water and power, Chaudhry Nisar, of looming overcapacity have added to the sense of urgency. So too has the poor financial condition of the state utilities, the Water&Power Development Authority (Wapda) and Karachi Electricity Supply Company (Kesc), which pay for IPP power.
A review committee set up by in April was due to report this month. Its brief: "all aspects of the agreements which the former government entered into with the private power project owners". But the government has said it stands by international agreements and tariff renegotiation will be made with "mutual consent" of IPP sponsors.
Sources in Islamabad towards the end of last month suggested the committee appeared to have retreated from a unilateral tariff reduction. A Japanese trade mission in May made it clear foreign investment would dry up if economic policies shifted with the political wind.
The World Bank has said the tariff compares favourably with that in other countries and if anything "is on the low side".
UBS Securities in Karachi rules out the possibility of the government violating IPP agreements: "The call for a tariff renegotiation that could threaten the IPPS' returns and lead to international default is not a real option," says its recent report. "Apart from the costs of future litigation, it would have a devastating effect on Pakistan's international image and its ability to attract future foreign investment."
UBS power analyst Aalia Bux says investors should instead focus on "core problems", the cash-strapped utilities and the pressure on forex reserves which have been compounded by the constraints in raising retail tariffs.
Even if IPP rates were much lower, Wapda and Kesc would find it difficult to maintain the contractual payments, leaving the financial burden to the state under the sovereign guarantees.
Operational inefficiencies and doubled oil prices over the last year have seriously damaged state electricity utilities. They are owed some RS15 billion in receivables by the government, further limiting their cashflow, all of which renders them unable to afford IPP payments.
Wapda's sorry state may well have lain behind its decision, on May 16, to send a notice of termination of its power-purchase agreement to Hubco, the largest private-sector project, citing alleged tampering with meters. A week later the minister for water and power conceded Wapda had acted "too hastily".
The conflicting postures, say observers, indicate a division between the government and elements of the state utilities' bureaucracy resistant to the private sector's growing role. There are also rumours Wapda and Kesc are delaying the commissioning of projects such as 120mw Kohinoor and Tapal, both said to be completed.
Utilities' cash dearth has braked development of the transmission and distribution network. New electricity generation from IPPS cannot be sold without an adequate transmission and distribution infrastructure.
Revenue is therefore not keeping up with fixed-capacity payments owed the IPPS. UBS says the most feasible solution would be to export power to India. But this would be politically difficult in view of shortages in Pakistan.
If Wapda and Kesc can no longer meet obligations to the IPPS, the burden will fall on the state under the terms of the sovereign guarantees, a responsibility it can ill afford. Fuel imports for IPPS and their forex requirements for debt servicing and dividend repatriation will add to pressure on forex reserves: UBS Global Research estimates the aggregate forex outflows connected with IPPS will reach $736 million by 1998.
Power companies are waiting to see what other moves Wapda may make. A number of smaller projects are alleged not to have fulfilled their obligations to the government and could be turned away on legal grounds. But other ipps complain of Wapda claiming not to have received letters relating to financial closure, which may provide grounds to repudiate the contracts. Philip Eade