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The World Bank’s private finance arm has criticised Pakistan’s army-led renegotiation of wind and solar power contracts in a letter co-signed by seven other international development institutions that have financed projects in the country.
The Financial Times last month reported Pakistan’s military and intelligence agencies were heavily involved in talks aimed at changing the terms of renewable energy agreements signed with power companies a decade ago.
“Preserving the sanctity of contracts signed by the government and honouring its contractual commitments are central pillars of building investor confidence in . . . Pakistan,” the International Finance Corp and other lenders wrote in the letter, dated February 18 and seen by the FT.
“We believe that renegotiating [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,” they wrote.
The lenders, which include the Asian Development Bank, Islamic Development Bank, its private lending arm and four European development finance institutions, said they had provided $2.7bn in financing for Pakistan’s power sector over the past 25 years.
Pakistan is desperate to attract foreign investment to stabilise its crisis-stricken economy, including through the privatisation of its debt-laden airline and power distribution companies.
IFC managing director Makhtar Diop said this month the lender aimed to invest $2bn a year in Pakistan over the next decade to support private sector growth.
That pledge came despite rising discord over the power contracts, after negotiations were reopened last year to bring down electricity costs. Businesspeople involved said the talks were conducted in military installations and security officials had threatened investors with investigations into their other business ventures.
They added they felt intimidated to agree to new contracts that would make their investments unviable and force them to shut down energy plants.
The IFC and other institutions wrote that power companies they had financed were “not permitted to agree to changes to any major project document”, including power purchase agreements, “without a prior written approval from the lenders”.
“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,” they wrote.
The ADB and FMO, the Dutch development finance company, confirmed they had signed the letter, which was addressed to Awais Leghari, Pakistan’s power minister, Muhammad Aurangzeb, finance minister, and Muhammad Ali, a special assistant to the prime minister.
IFC and British International Investment declined to comment. The IDB, German government-backed DEG and France’s Proparco did not respond to requests for comment.
Ali, who co-chairs the task force pursuing the negotiations, denied there had been any coercion, telling the FT that the lenders had been “fed misinformation”. He said the talks had been “civilian-led” and were “very cordial and amicable”.
Ali added “there will be some hit to returns on equity, but . . . [power companies] will still make reasonable profits according to our numbers”.
Asked for comment, the power ministry pointed to Leghari’s statement last month in which he said the renegotiations would enable the government to cut power tariffs for consumers and save at least Rs1tn ($3.6bn).
Pakistan’s military did not respond to a request for comment.
A decade ago, Pakistan promised government-backed, dollar-indexed returns and purchase commitments to draw billions of dollars into its power sector and end blackouts that were damaging its economy.
But soaring energy costs in recent months have caused some industries to shut down, prompted the government, in co-ordination with security services, to renegotiate the deals.
Pakistani energy businesses said the government had promised to guarantee power companies a fixed return on equity, but to do so in rupees, and at a significantly lower exchange rate to the US dollar than current rates.
“There will be no profit left,” said one businessperson, pointing to the repeated devaluation of the local currency and their need to repay foreign lenders in dollars.
Industry figures and western diplomats said much of the blame for the rise in prices stems from Chinese-backed power plants, which enjoy similarly lucrative terms but are protected from coercive talks because of Pakistan’s reliance on Beijing for loans and debt rollovers.
Pakistan has asked Beijing to reprofile loans taken by Chinese investors in the energy sector, but Aurangzeb, the finance minister, has repeatedly promised they would not face “haircuts”.
