Sanctity of contracts
THE Pakistani taxpayer has to foot yet another bill. The government is paying a whopping $28.7m from the national treasury to a Washington-based asset recovery firm Broadsheet LLC because it reneged on a contractual agreement. At the centre of this debacle is the National Accountability Bureau that had signed the original agreement with the company to recover stolen assets stashed in various offshore accounts.
The disagreement between the two parties ended up in court which ruled against NAB and the government of Pakistan, resulting in the payment of damages. It is a familiar story of official incompetence, poor judgement, irresponsible handling and shoddy legal defence leading to a steep cost being paid by the country. If this were a one-off issue, perhaps it could have been attributed to one department’s blunder. Sadly, it has now become a trend. There is a long list of cases where Pakistan has lost in international courts and is either appealing the judgements or negotiating with the aggrieved party on the amount to be repaid. The most glaring example is of the Tethyan Copper Company which won an award against Pakistan totalling nearly $6bn. The story of the blunder was similar: a contract agreed upon and then reneged upon.
Read: Mining firm moves Virgin Islands court for enforcement of Reko Diq award against Pakistan
At play is a deeper malaise — the inability of Pakistani officialdom to recognise the sanctity of contracts. This grave weakness — perhaps bordering on criminal apathy and negligence — manifests itself in the casualness with which such disputes are handled. It is also reflective of a deeply flawed understanding of how disputes of an international nature should be tackled and what could be the costs of blundering on the legal front. A similarly cavalier approach is visible in this latest case. Officials of the federal government and NAB are, as usual, blaming previous governments instead of pinning specific responsibilities, learning the right lessons, and putting in place a corrective mechanism that ensures such huge blunders are not repeated. The unavoidable conclusion at this stage, however, is that soon this too will become business as usual in order to cover up internal weaknesses and systemic inadequacies. No one will be held accountable for the steep cost that Pakistan has been compelled to pay for official incompetence.
There is, however, an opportunity for the PTI government. If it really means what it says about fixing this broken system, it could treat this latest issue as a diagnostic and prescriptive test case. Prime Minister Imran Khan is in the unenviable position of having to pay these enormous damages under his watch, and therefore, instead of just signing the cheque and moving on, he should order a thorough inquiry at all levels to determine what went wrong, who made it go wrong and what can be done to fix the loopholes in the system. Pakistan cannot afford this trend any longer.
THE government’s plan to settle the outstanding dues of IPPs amounting to Rs450bn in three tranches is only the first step towards liquidation of the power sector’s circular debt. According to reports, the IPPs will get 30pc of their existing debt stock this month and the remaining amount in two equal tranches in June and December. Under the plan, one-third of the arrears will be paid to the power producers in cash and the remainder in the form of Pakistan Investment Bonds at the floating rate. The IMF also gave its nod to the plan after the government agreed to heftily increase the base electricity tariff as demanded by the lender of the last resort. The payment of the first tranche will immediately lead to materialisation of the MoUs signed between the government and power producers in August last year into formal agreements. The MoUs provide for changes in the terms of the existing power purchase agreements that will reduce the size of the guaranteed capacity payments or fixed costs paid to the IPPs, a major source of accumulation of the circular debt. The government is expecting savings of Rs850bn over a period of 10 years, following the modifications in PPAs. The IPPs, which had demanded full payment of their money before they agreed to implement their revised PPAs, seem to have moved away from their earlier position in the ‘larger interest of the country’ as the plan will also help them improve their tight liquidity position and make new investments in new schemes.
The settlement scheme covers the 50-odd IPPs which were set up in the 1990s and 2000s and had consented to the alterations proposed in their power purchase deals with the government. The majority of these plants have completed their life cycles or paid off their debts. Therefore, we should not expect an immediate resolution of the circular debt problem even after materialisation of the revised deals with the IPPs. In recent years, the major build-up in the circular debt has been caused by capacity payments to large power projects set up since 2015, primarily as part of the multibillion-dollar CPEC initiative, with Chinese money. So far, no progress has been made to get the terms of the PPAs with these companies renegotiated although we are told that contacts have been made with Beijing at the highest level. Until these contacts pay off, the resolution of the mounting power-sector debt will have to wait.