Tax exemptions to IPPs, corruption cost power sector billions

ISLAMABAD: Independent Power Producers (IPPs) have received tax exemptions worth Rs170 billion in the last one year, while electricity theft cost the national kitty billions of rupees at the same time.

The electricity crisis that began during Gen (retd) Pervez Musharraf and Shaukat Aziz’s tenure reached a dangerous level during the tenure of the Pakistan People’s Party (PPP) government in 2009 and 2010. At that time, the country was facing a shortfall of 8,500 megawatts or 40 per cent of the total power generation.

In response to the crisis, the National Energy Programme was launched in 2010, and the National Electric Power Regulatory Authority was established for better electricity transmission and distribution strategies. However, some significant projects initiated by the PPP government, such as the 900MW Neelum Jhelum project and the 1,400MW Tarbela Fourth Extension Hydroelectric project, did not perform as expected.

In the meantime, Independent Power Producers (IPPs) minted billions of rupees in profits while taking advantage of shoddy agreements. The government has revoked contracts with six IPPs aimed to give relief to consumers as these power producers were minting billions from the government without producing electricity.

Since 2014, Chinese companies have been working on projects to generate 20,000 MW of electricity. By last year, these private plants had sold electricity worth Rs3 trillion to the government.

The first IPPs were introduced in 2002. In 1994, the tariff for IPPs was fixed at 60 paisas, but by 2013, it was jacked up to Rs15, but now it exceeds Rs77.

The Pakistan Muslim League-Nawaz (PML-N) government introduced the 2013 energy policy, and it acquired coal plants from China for 27 IPPs. However, plants like the Hubco Power Plant in Balochistan, worth $2.5 billion failed to produce electricity.

During the PML-N government, 16 IPPs were set up, while the PPP government established 12 IPPs. In 2015, 13 new IPPs were added, including significant projects like Datang Pakistan Karachi Power Generation Limited, ICI Pakistan Limited, K-Energy Limited, and others.

According to an investigation report, private power plant owners received tax exemptions worth Rs170 billion in violation of tax laws. These exemptions were granted to 220 individuals owning private power plants. The audit report for the last fiscal year revealed that between 2018 and 2022, IPPs received tax exemptions of Rs168 billion, taking a heavy toll on the overall electricity system.

The audit said that tax authorities failed to monitor these exemptions. The discovery of these exemptions surfaced after the government revoked electricity purchase agreements with five IPPs.

The government paid billions of rupees to these IPPs under the ‘take-or-pay’ mechanism, also known as ‘capacity payments,’ regardless of the electricity they generated or supplied to the national grid.

Minister for Power Owais Leghari told HUM News that negotiations are under way to revise agreements with other IPPs, and people will soon see the impact on their monthly bills. The federal minister admitted that the government had overestimated electricity consumption and signed more agreements with IPPs unnecessarily.

An audit revealed that electricity theft worth Rs120 billion occurred in Khyber Pakhtunkhwa with Rs7.5 billion worth of electricity stolen in the areas around Warsak Dam and another Rs7.5 billion in Shabqadar.

The PESCO’s special forensic audit also revealed that PESCO’s police spent Rs390 million but only recovered Rs230 million. Additionally, Rs450 million worth of electricity equipment and cash were also stolen and 1,700 inquiries were conducted against PESCO employees involved in electricity theft.

The audit found that billions of rupees of corruption and embezzlement occurred in the distribution companies, with Rs1 billion of corruption detected annually in the funds of five distribution companies. Over 4,000 employees were involved in theft, fraud, and embezzlement.

The special audit report found that Rs1.5 billion of corruption occurred in the Hyderabad Electric Supply Company (HESCO), PKR35 million in the Gujranwala Electric Supply Company (GESCO), andRs36 million in the NTDC.

According to the report, despite the audit’s recommendations, no action has been taken against the officers and employees involved in corruption.

The report further revealed that Rs459 billion worth of electricity is stolen annually, with large-scale thefts occurring in cities such as Peshawar, Lahore Hyderabad and others.

In Balochistan, districts with the highest electricity theft rates, such as Jhal Magsi and Awaran, see theft levels reaching up to 99 per cent, with many areas exceeding 90 per cent.

The IPP system was first introduced in Pakistan in 1994, and cases involving IPP owners reached the Supreme Court and international judicial forums between 2012 and 2015, resulting in Pakistan facing fines worth billions of rupees. Several IPP plants and individuals linked to the energy sector also faced probe by the National Accountability Bureau for alleged corruption, estimated at over Rs200 billion. Former Prime Minister Raja Pervaiz Ashraf was among the key figures named in these cases.

A task force is currently reviewing agreements with IPP owners, and five IPPs — Hubco, Lal Pir Power Limited, Saba Power, Ross Power, and Atlas Power — are being taken off from the energy system following the revocation of their agreements, affecting a total capacity of 2,400 megawatts

Negotiations will begin next week with 18 more IPPs, whose combined capacity is 4,267 MW. These IPPs, operating under the 1994 and 2002 energy policies, would be transitioned to a “take-and-pay” model, where payments would only be made for electricity consumed.

According to data shared by the Private Power Infrastructure Board, Pakistan’s power generation mix included 15 plants running on furnace oil, 19 on gas and RLNG, four on hydropower, three on imported coal, five on Thar coal, 10 on solar, and 36 on wind energy.

The key question remains whether the revocation of these shoddy agreements leads to lower electricity prices for consumers. However, data suggests that a major relief was unlikely. The bigger concern was whether the government could reduce the burden of capacity payments, which consumers ultimately bear.

Capacity payments ensure plants remain operationally ready to meet future demand, even when they are not generating electricity due to low consumption. The government’s negotiations with IPPs aim to lower this financial burden, but experts argue that the move may not yield substantial benefits for either the government or consumers.

An investigation has also revealed that over 30,000 government officers receive free electricity worth PKR 12 billion annually. Around 220,000 employees consume electricity worth Rs25 billion annually, while active and retired government employees receive Rs2 billion worth of free electricity every month.

Similarly, Rs39 billion worth of electricity is stolen monthly with the alleged connivance of thousands of employees in power distribution companies.

Government departments, including the Presidency, the Prime Minister’s Office, and the judiciary, also receive substantial amounts of free electricity.

Among power distribution companies, 3,752 defaulters in Islamabad Electric Supply Company (IESCO) owe over Rs1.5 billion, 12,718 defaulters in Lahore Electric Supply Company (LESCO) owe Rs5.5 billion, and Faisalabad Electric Supply Company (FESCO) defaulters owe Rs2 billion.

Furthermore, federal and provincial government departments collectively owe Rs205 billion in unpaid electricity bills.