An ELI5 for the most material achievement of this gov. yet.

a) ROE for local equity fixed at 17% at PKR-USD parity of 148

Lets say someone sets up a power plant w/ $100m in equity. The elec. generated will be sold at a tariff in PKR. The tariff assumes a fixed ROE at 17%

1/n https://twitter.com/ImranKhanPTI/status/1294197872142028800

The problem here is that ROE is fixed in USD. So as PKR depreciates against USD, the ROE increases. So in 1 year, if PKR depreciates by 10% ROE is actually 27% - which increases the tariff, and cost of electricity, making it expensive for everyone out there

2/n

The gov. renegotiated these contracts, such that no benefit of PKR depreciation is passed on, and fixed ROE at 17% at parity of 148, which is effective ROE of 15% in PKR terms. As per today's rates, this is still a good return for projects which are close to their half life

3/n

This will ensure that any PKR depreciation does not result in any major increase in electricity tariffs, as ROE will be fixed at 15%.

b) Fixing ROE of foreign equity at 12%
Lets say some foreign investor invested $100m for a power plant. They were getting $ based returns

4/n

Now returns for these investors were at 17% in $ terms because risk premium for Pakistan was very high at the time projects were conceived. Risk now has reduced, and so has the premium. It is only fair to renegotiate these to 12%, which will also reduce impact on tariff

5/n

Lower ROE for both local and foreign investors means 'slower' increase in tariffs going forward. Renegotiations done by government on fair market principles must be appreciated. Next big challenge is similar terms for CPEC projects, where ROE is 19%+ in USD terms.

6/6