World Bank unit and other lenders criticise Pakistan’s energy negotiations

Karachi – Pakistan’s unilateral renegotiation of clean power contracts will undermine investor confidence and be detrimental to the long-term future of the sector, a group of eight development finance institutions said.

Pakistan said last year it was renegotiating contracts with independent power producers to rein in “unsustainable” electricity tariffs. 

The World Bank’s International Finance Corporation, the Asian Development Bank, the Islamic Development Bank and five other institutions said in a letter that Pakistan was renegotiating wind and solar power contracts with independent producers to bring down energy costs in “a non-consultative manner”.   

The move “will be detrimental to the long-term development of the sector, undermining investor confidence and discouraging much-needed future private investment,” the institutions said in the letter, seen by Reuters and sent to the country’s finance and power ministers, and the prime minister’s energy advisor. 

The Financial Times, which first reported on the letter dated February 18, said last month that power contract renegotiations were being led by the country’s powerful military. 

The military’s media wing did not respond to a request for comment.

No MILITARY COERCION

The prime minister’s advisor on power, Muhammad Ali, denied military coercion in the government’s renegotiations with power plants, calling discussions “very cordial and amicable”.

Ali assured lenders they won’t be affected, thanks to the government’s sovereign guarantee. He also noted that some wind plant owners may have misled lenders about the financial impact of the renegotiation, and announced plans for a forensic audit of some plants due to suspected inflated costs.

The International Finance Corporation declined to comment, while the Islamic Development Bank didn’t immediately respond. A source at the Asian Development Bank confirmed the letter, declining official comment.

In the letter, the institutions said they had invested around $2.7 billion in the clean energy sector over the past decade and the power producers they had financed were “not permitted to agree to changes to any major project document” without prior approval. 

An advisor to Pakistan’s finance minister, Khurram Schehzad said short-term energy sector adjustments may raise concerns, but will yield long-term benefits, attracting investment and driving economic growth. By tackling legacy issues, the government aims to create a stable and transparent market, boosting investor confidence.

A decade ago, Pakistan approved dozens of private projects by independent power producers, financed mostly by foreign lenders, to tackle chronic shortages.

But the deals, featuring incentives such as high guaranteed returns and commitments to pay even for unused power, resulted in excess capacity after a sustained economic crisis reduced consumption.

The letter comes after IFC chief Makhtar Diop told Reuters last week that the lender was increasing equity investments and eyeing large-scale infrastructure financing, including power, in Pakistan, in an investment plan that could unlock $2 billion annually over a decade.

Pakistan is currently hosting an International Monetary Fund delegation to discuss around $1 billion in climate financing, adding to a $7 billion IMF program that has been central in easing an economic crisis. REUTERS

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