🔲 Public Investigative Series | Episode 22
Title: How Pakistan’s Power Sector Can Be Fixed
Topic: Government of Pakistan vs IPPs
🔺 When institutions withhold facts, it becomes the responsibility of the public to pursue the truth
Research and Writing: Syed Shayan
Why Did Pakistan Lose to IPPs in a London Court?
🔳 Government of Pakistan vs IPPs
When Independent Power Producers took the government to international arbitration over non payment of dues
At a time when claims are made that Pakistan could play an effective mediating role in high level global conflicts such as tensions between Iran and the United States, such assertions appear weak. A state whose bureaucratic and leadership structures have struggled to comprehend the long term implications of agreements like those with IPPs or the Reko Diq project cannot realistically be expected to manage complex geopolitical negotiations of that scale.
The East India Company initially sought only trading rights from the Mughal rulers. However, the economic nuances overlooked in those agreements gradually transformed commercial privileges into revenue collection rights, hollowing out the foundations of the state.
The same pattern repeated in the case of IPPs.
On the surface, these were agreements to address electricity shortages. Yet provisions such as capacity charges, which require payment even without electricity generation, and returns linked to the US dollar created a financial grip that now resembles an inescapable burden.
Even at the time these agreements were signed, questions were raised: did policymakers prioritize the financial interests of certain groups over national interest? When decisions are shaped by personal or group interests rather than the state’s welfare, the outcomes often mirror historical precedents seen in regions like Bengal and Mysore.
The East India Company had the backing of the British Parliament and its military. In the modern era, the balance of power manifests through international arbitration courts. If Pakistan attempts to step back from these agreements, it risks consequences similar to the Reko Diq case, including heavy penalties and potential international repercussions. This reflects a modern form of neo colonialism where legal contracts, rather than military force, are used to bind states.
If agreements with IPPs lacked robust exit clauses, renegotiation rights, and flexibility to adapt to changing economic realities, they inevitably became long term constraints on future generations. Whether it was Plassey in 1757 or energy agreements in 1994, 2002, and 2015, the lesson remains the same.
Pakistan’s power sector has long been plagued by mismanagement, circular debt, and complex relationships with private power producers. Under the 1994 Power Policy, the government invited private investment in electricity generation, offering highly attractive terms. These companies generated electricity and supplied it to the National Transmission and Dispatch Company.
However, when the government failed to make timely payments, the issue escalated from a commercial dispute into an international legal confrontation, with the LCIA becoming the battleground.
Under these agreements, companies were guaranteed dollar linked returns, an 18 percent return on equity later revised to 12 percent, and Take or Pay arrangements. This meant the government was obligated to pay capacity charges regardless of whether electricity was actually consumed.
Between 2006 and 2008, nine IPPs signed Power Purchase Agreements with NTDC. While governed by Pakistani law, these agreements included arbitration clauses specifying that disputes exceeding four million dollars would be resolved in London.
In January 2011, a major conflict emerged. Due to severe fuel shortages, power plants could not operate at full capacity. NTDC responded by reducing capacity payments. The IPPs argued that the shortage itself resulted from NTDC’s failure to clear outstanding dues, leaving them unable to procure fuel.
A destructive cycle followed: no payments, no fuel, no electricity, reduced payments, and further financial stress.
Under the agreements, disputes were first to be referred to a Pakistani legal expert. The matter went to retired Justice Syed Sajjad Ali Shah, who ruled that NTDC’s conditionality tying payments to fuel stock requirements was unlawful, and that the reductions in capacity payments were unauthorized. NTDC was directed to settle the outstanding amounts.
However, the Government of Pakistan obtained orders from local courts suspending this decision, preventing its enforcement.
In 2011, as tensions escalated and the expert determination remained unenforced, the nine IPPs approached the LCIA, signaling a profound lack of confidence in the domestic judicial process.
This move was not merely legal action. It represented a direct challenge to state authority and national dignity, placing capital and the state in confrontation. Although legally permissible under the agreements signed by the state itself, the action raised serious ethical questions at the national level.
The insistence of these domestic companies on pursuing foreign arbitration rather than local remedies exposed a deeper reality: financial interests had taken precedence over national considerations.
As arbitration began, a critical question arose: where was the seat, Lahore or London? This question was decisive because it determined which courts would have supervisory authority. NTDC argued for Lahore and obtained stay orders from the Lahore High Court. IPPs argued that the dispute exceeded four million dollars and must therefore proceed in London under the agreement.
In London, the government argued that no payment should be made without electricity generation, while the IPPs maintained that generation was impossible due to non payment for fuel. The tribunal ruled that the government could not rely on its own failure as justification to withhold capacity payments.
The LCIA confirmed London as the seat of arbitration. A sole arbitrator was appointed, and all nine cases were consolidated.
On 8 June 2017, a partial final award upheld the expert determination as binding, while reserving quantification of dues for later. NTDC was also directed to provide security for the claims.
On 29 October 2017, the final award required NTDC to pay 10.977 billion rupees in principal, 2.547 billion rupees in pre award interest, 82.82 million rupees in damages, 15.16 million rupees in legal costs, 5.51 million US dollars, 271417 British pounds in arbitration costs, along with additional interest calculated at KIBOR plus 4.5 percent annually.
At the October 2017 exchange rate, the total liability amounted to approximately 134.97 million US dollars, or around 14.24 billion rupees, excluding subsequent interest.
The Government of Pakistan initially claimed the award was not binding due to ongoing domestic proceedings. NTDC filed a challenge in Pakistani courts.
The IPPs obtained an anti suit injunction from English courts, restraining NTDC from pursuing parallel proceedings. On 4 May 2018, the court ruled that since the arbitration seat was London, NTDC was permanently barred from challenging the award outside England and Wales.
NTDC appealed, but on 4 October 2018 the Court of Appeal dismissed the case, reaffirming that once the seat of arbitration is fixed, the jurisdiction of English courts is definitive.
Dear readers, the case of these nine companies was only one part of a much larger story. At the time, Pakistan faced more than forty international cases, most filed by IPPs seeking recovery of outstanding payments. Total claims exceeded one trillion rupees.
Several IPPs were later renegotiated or terminated, including Saba Power, Lalpir Power, Atlas Power, Rousch Power, Hub Power, Orient Power, Nishat Power, Nishat Chunian Power, Saif Power, Sapphire Electric, Halmore Power, Liberty Power, and multiple Chinese IPPs. However, a complete public list of more than twenty IPPs that approached the LCIA has never been fully disclosed, as many proceedings were filed separately and details remained confidential.
(To be continued in the next episode)
