Loud Thinking

Question:

“Pakistan’s IPP Crisis: Are Allegedly Excessive and Economically Killing Power Contracts Sustainable—and Could Renegotiation, Contract Termination or NATIONALISATION of IPPs Save Pakistan from a Deepening Financial Meltdown?”

Reply of AI:

Your concern goes to the heart of Pakistan’s energy-sector crisis. My short answer is: Pakistan could potentially nationalise or compulsorily acquire IPP assets, but simply declaring all IPP contracts “odious” and confiscating the companies without compensation would be legally and financially extremely risky.  A much stronger approach would be contract-by-contract investigation, renegotiation, cancellation where illegality or fraud is proven, and selective compulsory acquisition where economically justified.

First: the factual claim needs careful verification

The figure of US$12 billion paid to IPPs in 11 months, and the assertion that all such payments represent subsidies or unjustified benefits, should be carefully broken down before drawing conclusions.

IPP-related payments can include very different things:

• Capacity payments;
• Electricity actually generated and supplied;
• Fuel costs passed through under contractual arrangements;
• Interest and debt servicing;
• Delayed-payment charges;
• Taxes and duties;
• Payments of old circular debt arrears.

These are not economically equivalent. A payment for actual electricity delivered is different from a capacity payment for unused capacity, and both are different from a government subsidy or tax concession.

Your comparison with IMF financing is nevertheless useful in illustrating the scale of Pakistan’s fiscal and energy-sector burden. Pakistan received about US$3 billion under the 2023 Stand-By Arrangement, while subsequent EFF/RSF arrangements have added further IMF financing. By May 2026, the IMF stated that cumulative disbursements under the current EFF and RSF arrangements had reached approximately US$4.8 billion.

So, the broader point is valid: Pakistan’s power-sector financial obligations can be enormous compared with external financing received from institutions such as the IMF.

Could Pakistan nationalise all IPPs?

Yes, as a matter of sovereign power—but not necessarily without a huge cost.

A sovereign state generally has the power to:

1. Nationalise or compulsorily acquire assets;

2. Terminate contracts under lawful grounds;

3. Regulate private utilities;

4. Investigate corruption, fraud and illegality;

5. Change future policy and taxation.

However, exercising that power does not automatically extinguish contractual and property rights.

If Pakistan simply announced:

> “All IPPs are nationalised. No compensation will be paid because their contracts were against the national interest.”

the likely consequences could include:

• International arbitration;
• Claims under bilateral investment treaties;
• Enforcement proceedings against Pakistani state assets abroad;
• Damage to Pakistan’s sovereign creditworthiness;
• Further reluctance of foreign investors and lenders;
• Pressure on the rupee and external financing;
• Increased difficulty financing future infrastructure.

Therefore, nationalisation is possible; uncompensated mass confiscation is the dangerous part.

Could the contracts be declared “odious”?

This is where an important legal distinction must be made.

The doctrine of “odious debt” is not a simple weapon for cancelling IPP contracts

The concept of odious debt is primarily discussed in relation to sovereign borrowing: debts incurred by illegitimate regimes or rulers without benefiting the population.

Applying the same label to private power contracts would be legally difficult.

Calling a contract:

Unfair,

Expensive,

Badly negotiated,

Politically motivated,

does not automatically make it legally void.

To invalidate an IPP agreement, Pakistan would need stronger legal grounds, such as:

1. Corruption or bribery

If an IPP contract was obtained through:

Bribery;

Kickbacks;

Corruption of public officials;

Fraudulent inducement;

that could provide a much stronger basis for challenging the contract.

2. Fraud or misrepresentation

For example:

False project costs;

Manipulated financial information;

Fraudulent fuel arrangements;

Concealed beneficial ownership.

3. Lack of legal authority

If government officials signed commitments beyond their lawful authority, constitutional or statutory requirements were violated, or mandatory approvals were absent, there might be grounds for challenge.

4. Collusion

If private parties and public officials deliberately structured contracts to produce unlawful private enrichment at public expense, that could potentially create both civil and criminal consequences.

5. Fundamental contractual breach

If an IPP failed to meet contractual obligations, Pakistan could potentially terminate or seek damages under the relevant agreement.

The strongest strategy would therefore not be “all IPPs are odious.” It would be: investigate every contract and prosecute or cancel those proven to be illegal, fraudulent or corrupt.

The real economic problem: Pakistan may have socialised risk and privatised returns.

This is, in my view, the most serious policy criticism of many power-sector arrangements.

A badly designed IPP system can create a situation where:

Private investors receive:

Guaranteed returns;

Capacity payments;

Exchange-rate protection;

Sovereign guarantees;

Protection against demand risk.

While Pakistani citizens bear:

Currency depreciation;

Rising tariffs;

Circular debt;

Taxation;

Government guarantees;

Reduced industrial competitiveness.

That structure can become economically disastrous.

The fundamental question is:

> Who bears the commercial risk?

In a normal competitive market, an investor who builds unnecessary capacity should bear some consequences of poor investment decisions.

But if contracts guarantee returns regardless of whether electricity is required, then the consumer and taxpayer can become the insurer of the investor’s business risk.

That is the structural problem Pakistan should address.

Would nationalisation actually solve the problem?

Not automatically.

Suppose Pakistan acquires an IPP.

The government would then inherit:

The power plant;

 Its employees;

Maintenance obligations;

Fuel requirements;

Outstanding bank debt;

Foreign exchange liabilities;

Operational risks.

If the acquisition price is too high, Pakistan may simply convert:

> Expensive private obligations into expensive public obligations.

Therefore, the question should not be:

> “Private IPP or government ownership?”

The better question is:

> “What arrangement produces electricity at the lowest sustainable cost for Pakistan?”

What I believe would be a stronger national strategy

1. Establish a Supreme-Level IPP Contract Commission

Pakistan should conduct a comprehensive forensic audit of every major IPP contract.

The investigation should examine:

Original capital cost;

Actual capital cost;

Financing structure;

Equity returns;

Debt interest rates;

Related-party transactions;

Fuel contracts;

Sovereign guarantees;

Tax exemptions;

Capacity-payment formulas;

Foreign exchange indexation;

Beneficial ownership.

The results should be made public, subject only to legitimate commercial confidentiality.

Sunlight is essential.

2. Separate IPPs into categories

Not all IPPs should be treated identically.

Category A: Fraudulent or corrupt contracts

Where corruption or illegality is proven:

Prosecute responsible persons;

Seek rescission or cancellation;

Recover unlawful gains;

Challenge compensation claims.

Category B: Excessively expensive but legally valid contracts

These should primarily be:

Renegotiated;

Refinanced;

Bought out where economically advantageous.

Category C: Efficient and necessary plants

These should continue operating under revised arrangements where possible.

Category D: Old or inefficient plants

Pakistan should consider:

Retirement;

Conversion;

Acquisition and closure;

Negotiated termination.

This approach is much stronger than indiscriminate nationalisation.

3. Use compulsory acquisition selectively

Pakistan could consider a buyout programme.

For example:

> If an IPP has already recovered most of its investment and is receiving very large future capacity payments, the government could calculate whether purchasing the plant now is cheaper than continuing payments for another 10–15 years.

This requires a strict calculation:

Present value of future contractual payments

versus

Cost of acquisition + remaining debt + operating costs

If acquisition is cheaper, it could make economic sense.

This is essentially a financial restructuring exercise, not ideological nationalisation.

4. Convert guaranteed returns into competitive market arrangements

Pakistan should gradually move away from a system where investors are guaranteed returns regardless of utilisation.

Future power contracts should emphasise:

Competitive bidding;

Transparent auctions;

Realistic demand forecasting;

Reduced sovereign guarantees;

Local-currency financing where feasible;

Limited foreign exchange indexation;

Risk sharing between investors and consumers.

5. Investigate the tax issue separately

If particular IPPs are receiving:

Inappropriate tax exemptions;

Preferential treatment;

Special exemptions not justified by law,

those arrangements should be reviewed.

But again, a distinction is important:

A lawful tax exemption may be politically unwise but legally valid.

Pakistan can change tax policy prospectively, subject to contractual and constitutional constraints.

My strongest recommendation: don’t use the word “nationalisation” as the first weapon

I would recommend a policy called something like:

Pakistan Power Sector Sovereignty and Public Interest Recovery Programme

Its objectives would be:

 Phase 1 — Transparency

Publish every major IPP contract and amendment.

Phase 2 — Forensic audit

Determine actual costs and profits.

Phase 3 — Legal review

Identify corruption, fraud, illegality and contractual breaches.

Phase 4 — Renegotiation

Reduce excessive returns and capacity charges.

Phase 5 — Selective buyouts

Acquire plants where the financial mathematics clearly favour Pakistan.

Phase 6 — Prosecution and recovery

Where corruption is proven, pursue individuals and recover assets.

Phase 7 — Market reform

Ensure Pakistan never again signs contracts that create unlimited public liabilities.

My overall conclusion

Yes, Pakistan has the sovereign capacity to nationalise IPPs.

But nationalising all IPPs on the blanket theory of “odious contracts” would probably expose Pakistan to enormous legal and financial risks unless illegality, corruption or other recognised grounds could be established for particular contracts.

The more powerful—and legally defensible—strategy would be:

> Audit everything. Publish everything. Prosecute corruption. Challenge illegal contracts. Renegotiate unfair but valid contracts. Buy out plants where economically cheaper. Retire inefficient capacity.

The tragedy, if the underlying allegations are substantiated, is not merely that Pakistan signed expensive power contracts. It is that a state facing chronic fiscal weakness may have committed future taxpayers and consumers to long-term obligations without adequately protecting the public interest.

That is precisely why the solution should be forensic, legal, economic and evidence-based—not merely political.

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