IPPs: The Real Issues

Since May 1998, an important issue facing Pakistan policy-makers has been whether independent power producers (IPPs) produce expensive electricity. It is contended that IPPs’ expensive power has rendered the state utility, Water and Power Development Authority (WAPDA), bankrupt. It is also alleged that IPPs indulged in corruption and colluded with WAPDA officials to get their signatures on contracts which allowed procurement of expensive power by WAPDA and which it can ill afford now. This paper shifts through the rhetoric surrounding IPPs and focuses on the central issue of whether IPPs produce expensive power. If it can be established that IPPs produce cheaper power than WAPDA, then the second part of the argument that WAPDA became financially weak because of IPPs’ expensive power is destroyed. The alleged corruption issues are not discussed as they are beyond the scope of the paper. Section 1 provides a background to the establishment of the private power sector in Pakistan. Section 2 discusses various project risks faced by shareholders and lenders. Section 3 outlines the components of the electricity tariff. Section 4 traces the reasons for increase in electricity tariffs since 1994 when the Power Purchase Agreements (PPA) were signed. Section 5 shows the comparative costs of production of IPPs and WAPDA.