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ISLAMABAD/KARACHI: Islamabad has not yet engaged Chinese independent power producers (IPPs) operating in Pakistan on revising the terms of their multibillion-dollar contracts, the privatization chief said this week, contrary to recent statements from the power division that talks are underway as part of efforts to restructure the debt-heavy energy sector.

Successive governments in Pakistan have relied heavily on private power plants to end decades of electricity shortages, offering high guaranteed returns and capacity payments even if power goes unused. Some of these large plants were built and financed by Chinese firms after 2015 under the China-Pakistan Economic Corridor (CPEC). But a deepening economic crisis has slashed power demand in Pakistan, while the state remains locked into paying these fixed costs, pushing up consumer electricity bills and fueling public protests.

Amid pressure from the International Monetary Fund (IMF), whose loans are critical for Pakistan to avoid default, and from local industry demanding lower power costs, Islamabad has renegotiated some older IPP deals and announced plans to stagger debt payments to Chinese plants to gain budget breathing room and slow tariff hikes.

“We have not really spoken to them [China], so there is no sense at the moment,” Muhammad Ali, chairman of Pakistan’s Privatization Commission, told Arab News in an interview, when asked if Chinese firms were frustrated by the prospect of renegotiating IPP deals.

Under the CPEC program, China financed and built mainly coal, gas and hydro power plants across Pakistan to help end blackouts. These deals included guaranteed “capacity payments,” a major factor behind Pakistan’s so-called circular debt: the repeated shortfall between what consumers pay for electricity and what the government owes power producers.

To reduce this debt, Islamabad has been negotiating lower capacity payments with plants set up under its 1994 and 2002 policies, and is now revisiting wind and solar deals signed under Pakistan’s 2013 Alternative and Renewable Energy Policy.

However, it has not yet formally approached Chinese CPEC investors, Ali confirmed. He did not say when the Chinese side would be engaged.

“At this stage, we are working on the [IPPs producing] renewables first,” he said. “After that only we will start looking at the 2015 [Chinese] plants.”

Ali’s remarks are in contrast to recent comments by Pakistani Power Minister Awais Leghari who said the Chinese contracts were being revised. Islamabad has also formed a steering committee, of which Awais is a member, to negotiate new repayment terms with Chinese IPPs and their lenders for $15.4 billion in debt through 2041.

While the power division has said publicly it wants to spread out debt payments to Chinese IPPs to ease near-term fiscal stress and potentially reduce tariffs by Rs2–3 per unit, Ali reiterated that direct talks at a government-to-government level had not begun.

Plans reported last year by The News, a major Pakistani newspaper, showed Islamabad hoped to secure a three- to five-year extension of repayments, pushing total liabilities to $16.6 billion but giving breathing space for strained public finances.

PUSH TO PRIVATIZE POWER DISTRIBUTION AND GENERATION

Parallel to the contract talks, Islamabad is also accelerating the privatization of state-owned power companies in a bid to curb losses and inefficiencies, a longstanding IMF condition attached to loan programs.

Ali said the government would soon offer three relatively healthier power distribution companies (DISCOs) for sale: Faisalabad Electric Supply Company (FESCO), Gujranwala Electric Power Company (GEPCO) and Islamabad Electric Supply Company (IESCO).

“We’re targeting [their sale in] December, but it might go to the first quarter of next year because there’s a lot of work which needs to be done on policy and regulatory frameworks,” Ali said.

Pakistan has long struggled to privatize its power distribution sector. An earlier attempt to sell FESCO and Hyderabad Electric Supply Company (HESCO) in 2014 collapsed at the last minute due to political pushback and labor unrest.

This time, Ali said, Islamabad aimed to demonstrate commitment by starting with firms with healthier balance sheets and stronger interest from local buyers.

“We have very good interest in all three [DISCOs],” he said. “There are investors who are actually waiting for us to go ahead... These are some of the largest business groups in the country, some companies in the energy sector, even they are interested in acquiring these.”

Ali declined to name the firms.

Beyond these three, he said, the privatization of four more loss-making DISCOs — Hyderabad, Sukkur, Peshawar and Hazara — would follow.

“We’ll be advertising for the financial adviser this week [June 23–29]. We’re giving the advertisement for that,” Ali said. 

“We’ll be simultaneously working on these seven [DISCOs], but we’ll be timing it out.”

Two large state-owned thermal generation IPPs (GENCOs), the Guddu and Nandipur power plants, are also up for privatization. The timeline for their divestment is the second quarter of next year, Ali said. 

“With the four DISCOs [Hyderabad, Sukkur, Peshawar and Hazara], we’ll be giving the ad for the GENCOs also,” the privatization chief said, adding that while all deals may not conclude simultaneously, the pipeline would move forward in stages to avoid flooding the market.

BALANCING DEBT, TARIFFS, CONSUMERS

A key question for both investors and the public remains how the government will protect households from sudden tariff hikes once new private owners take charge.

Ali said the government was working on a sectoral policy and regulatory framework to shield consumers from sudden price shocks and ensure companies met service obligations in regions with high electricity theft and low bill recovery.

“The tariff increase has to be, according to a certain formula, it cannot be at the whims of an investor,” he said.

The chairman added that, unlike the national carrier PIA, whose debts were transferred to a separate holding company ahead of its targeted privatization by December, the DISCOs mostly had small or positive equity, so liabilities would generally pass directly to buyers as part of the final purchase agreement.

“If you’re giving a positive balance sheet, a positive equity, then with the assets, they get the liabilities also,” Ali said. “If they don’t take over the debt, then they have to pay a higher amount day one, which they would not want to do.”

The current government is determined to restore investor confidence and see deals through after years of failed privatization attempts and abrupt policy reversals, according to Ali.

And while the process would be gradual and complex, a steady privatization drive was essential to stop annual losses, estimated at over Rs850 billion ($3 billion) for state firms, from further straining Pakistan’s fragile public finances.

“Once we start working on a transaction, unless it’s a rare thing, we should try and complete the transaction,” the privatization czar said.

“Because then we involve investment banks, they’ll make money on the success-based model primarily, and if the transactions are not complete, then they lose confidence. Investors are putting in money in their due diligence, they lose confidence. So if we decide to really privatize, then we should complete the transaction.”