What Is a Take-or-Pay Contract? A Plain-English Guide for Pakistanis
The single contractual provision that put Rs. 2 trillion a year on your electricity bill
By Asad Baig · Lahore · April 2026 · Approx. 7-min read
Why this one phrase matters
If you read any Pakistani newspaper article about the electricity crisis, you will see the phrase "take-or-pay" sooner or later. Most readers do not know what it means. Most journalists do not explain it.
That phrase is the single most important contractual idea in Pakistan's power sector. It is the reason your bill is high. It is the reason factories are closing. It is the reason the government cannot simply cancel its way out of the crisis.
This article explains it, in plain English, in about seven minutes.
If you understand this one concept, the rest of the IPP story makes sense. Read on, then come back to my pillar on capacity payments and the rest will fall into place.
What does take-or-pay actually mean
Take-or-pay is a contract clause that says one party must take the goods or service from the other, or pay for them anyway.
In Pakistan's IPP context, the goods are electricity. The buyer is the Pakistani government, acting through the Central Power Purchasing Agency. The seller is the independent power producer, owned by foreign investors, Pakistani business families, or Chinese state-owned enterprises.
The contract says: the government must take the electricity the plant produces, or pay the capacity charge if it does not. The plant gets paid in either case.
There is no version of the contract in which the plant produces nothing and the government pays nothing.
Read that line again. There is no version of the contract in which the plant produces nothing and the government pays nothing. The plant always gets paid.
Most commercial contracts in the world do not work this way. Most contracts say: if I produce, you pay. If I do not produce, I do not get paid. That is the natural risk of running a business. You make something useful, you sell it. You make nothing, you earn nothing.
Take-or-pay removes that risk for one side and puts it entirely on the other side.
The taxi-driver analogy
I find the cleanest way to explain take-or-pay is the taxi-driver story I use in my book The People's Bill. Let me share it here.
Imagine you sign a contract with a taxi driver. The contract says: you must pay him Rs. 5,000 a day, every day, for the next thirty years, whether you take a ride or not. If you call him for a ride, you pay extra for the petrol. But the Rs. 5,000 a day is fixed. It is for "being available."
Now imagine you signed this contract when you owned three businesses and travelled a lot. Then your businesses closed. You are now sitting at home. You do not need a taxi. The driver does not drive anywhere. He just sits in his car. You still pay him Rs. 5,000 a day. Every day. For thirty years. Because the contract said so.
That is a capacity payment, structured under a take-or-pay agreement.
Pakistan has signed about a hundred such contracts. Together, they cost us roughly Rs. 2 trillion a year. That is more than our entire defence budget. It is paid whether the country uses the electricity or not.
WHAT THIS LOOKS LIKE IN FY2023-24
Two specific power plants, HUBCO and KAPCO, received approximately Rs. 46 billion from the Pakistani government. In that same year, those two plants produced exactly zero units of electricity. Not low production. Zero. They sat there. We paid them. The figure was confirmed publicly by Gohar Ejaz, the former federal minister, in July 2024. Forty-one other plants operated at four to twenty-five percent of nominal capacity. They received their full capacity payments anyway.
Why was take-or-pay agreed to in 1994
Take-or-pay was not invented in Pakistan. It is a standard clause in international independent power producer contracts going back to the 1980s. It was developed because private power investors said they would not put up capital unless they were guaranteed a return regardless of demand.
The argument went like this. A power plant costs hundreds of millions of dollars to build. The investor borrows most of that money from international banks. The bank wants to be sure of being repaid. The bank will not lend unless the investor can show a guaranteed cash flow. The investor cannot show a guaranteed cash flow unless the buyer commits to paying regardless of how much electricity is actually used.
The government in 1994 accepted this logic. So did the World Bank and Asian Development Bank advisers who pushed the BOO/BOT model on Pakistan and other developing countries.
What was not made public, in 1994 or in any year since, was that take-or-pay combined with three other provisions, namely dollar indexation, capital cost pass-through, and a thirty-year contract duration, would lock Pakistan into paying for capacity it did not need for an entire generation. I have written about all four mechanisms in my pillar on the 1994 Power Policy.
Why you cannot just cancel a take-or-pay contract
If take-or-pay is the problem, why does the government not just cancel it?
This is the question every Pakistani citizen asks when they first understand how the system works. The answer involves three layers.
The first layer is legal. The contracts include international arbitration clauses. If Pakistan unilaterally tears them up, the IPPs sue in international tribunals, win, and Pakistan has to pay damages plus interest. The damages can be larger than the capacity payments would have been. Pakistan has been threatened with this several times.
The second layer is political. The forty Pakistani business families who own most of the private IPPs are also the families who fund political parties, sit on policy advisory boards, employ thousands of people, and hold political networks across PML-N, PPP, PTI, and other affiliations. Cancelling their contracts means a confrontation no Pakistani government in thirty years has been willing to undertake.
The third layer is foreign. The CPEC IPPs are owned by Chinese state-owned enterprises. Cancelling those contracts means confronting the Chinese state. Pakistan owes China billions in unpaid CPEC arrears already. China provides political support at the United Nations, the FATF, and other forums. No Pakistani government has been willing to put any of that at risk.
So take-or-pay survives. The bills keep rising. The textile factories keep closing. The middle-class family keeps paying twenty-five percent of household income on electricity. And the same questions keep being asked. Why?
Now you know why.
The way to fix take-or-pay
The way out is not to cancel the contracts unilaterally. The way out is to convert them.
There is a legal alternative to take-or-pay. It is called take-and-pay. Under take-and-pay, the buyer pays only for electricity actually delivered. The plant has the right to operate. The plant has the right to be dispatched on the same terms as before. But the plant earns money only when it produces and delivers electricity that the grid uses.
Take-and-pay is the standard arrangement in most competitive electricity markets around the world. It is what Bangladesh moved toward. It is what India moved toward. It is what every honest reformer of Pakistan's power sector has recommended for at least fifteen years, including the 2020 Power Sector Inquiry Report.
Conversion from take-or-pay to take-and-pay can be done bilaterally. It does not require unilateral cancellation. It requires the IPP owner to accept a different contract structure in exchange for something they value, such as accelerated payment of outstanding receivables, or extended operating life, or modest capital recovery on top of the agreed dispatch revenue.
The current PML-N government has done this with five domestic IPPs since October 2024. Fourteen others have had their terms revised. Estimated annual saving is about Rs. 60 billion.
Real progress, but real only at the margin. The remaining ninety-six IPPs, including all twenty-one CPEC plants, continue to operate on take-or-pay. The two trillion rupees a year continues to flow.
If all IPPs were converted to take-and-pay, the average household electricity bill would fall by approximately 60 percent. From around Rs. 48 per unit to about Rs. 19. This is the conclusion of the International Growth Centre's June 2025 work, consistent with the 2020 inquiry's projections.
Sixty percent. That is what take-or-pay costs you, every month, on every bill.
WHAT THIS MEANS IN PRACTICE
If your monthly bill is Rs. 50,000 today, it would be approximately Rs. 20,000 if all IPPs were converted from take-or-pay to take-and-pay. The difference is what take-or-pay costs your household. Multiply that by forty million households. That is the scale of the wealth transfer this single contract clause produces.
What you can do
You cannot cancel a take-or-pay contract from your kitchen table. But you can do four things tonight.
Read your bill, find the capacity charge. Most Pakistani bills now show fixed and variable charges separately. The fixed component, plus a portion loaded into the per-unit rate, is your share of capacity payments under take-or-pay contracts. Calculate what your bill would be at Rs. 19 per unit instead of Rs. 48. The difference is what take-or-pay costs your household.
Share what you now know. When friends or family complain about their bill, do not let the conversation stay at "the government is corrupt." Bring up take-or-pay. Mention the Rs. 46 billion HUBCO and KAPCO received in FY2023-24 for zero electricity. Mention the 60 percent reduction that conversion would deliver.
Ask your political representatives the specific question. "Will you commit, in writing, to converting all remaining IPP contracts from take-or-pay to take-and-pay within the first eighteen months of taking office?" Make support conditional on a specific answer with a specific timeline.
Read the rest of the explainer cluster. Take-or-pay is one of four mechanisms that produce your bill. The others are the capital cost trick, the working capital scam, and the role of NEPRA. Each is explained in its own short post. Together they tell the full story.
In closing
Take-or-pay is a single phrase. It sounds technical. It is, in substance, the most important phrase in Pakistani public life that most Pakistanis have never heard explained.
It is a phrase that appears in contracts signed thirty years ago by people you did not elect, in negotiations you were not party to. It is a phrase that, every month, transfers approximately Rs. 175 billion from ordinary Pakistanis to a small number of business families and Chinese state-owned enterprises.
Now you know what it means. Pass it on.
Thank you for reading.
, Asad Baig, Lahore, April 2026
Frequently asked questions
What does take-or-pay mean in simple words? Take-or-pay is a contract clause that requires the buyer to take the goods or service, or pay for them anyway. In Pakistan's IPP contracts, it means the government must pay the power plant whether the plant produces electricity or not.
How much does take-or-pay cost Pakistan per year? Approximately Rs. 2 trillion in capacity payments per year as of FY2025, more than the federal defence budget. The figure is documented by IEEFA, the 2020 Power Sector Inquiry Report, and the International Growth Centre.
What is the difference between take-or-pay and take-and-pay? Under take-or-pay, the buyer must pay regardless of whether electricity is delivered. Under take-and-pay, the buyer pays only for electricity actually delivered to the grid. Take-and-pay is the standard in most competitive electricity markets globally, including Bangladesh and India.
Can the Pakistani government just cancel take-or-pay contracts? Not unilaterally without consequences. The contracts include international arbitration clauses, the IPP owners include politically powerful Pakistani families, and twenty-one of the contracts are with Chinese state-owned enterprises under CPEC. Cancellation would trigger arbitration cases, political resistance, and diplomatic friction. The cleaner path is bilateral conversion to take-and-pay.
How much would my electricity bill fall if all IPPs were converted to take-and-pay? By approximately 60 percent, from around Rs. 48 per unit to Rs. 19, according to International Growth Centre estimates (June 2025). A household paying Rs. 50,000 a month would pay approximately Rs. 20,000.
Sources and notes
- Power Sector Inquiry Report 2020, Government of Pakistan, headed by Muhammad Ali, former SECP Chairman (ARY News mirror)
- IEEFA Reports on Pakistan Power Sector by Haneea Isaad (2024-2025)
- International Growth Centre, Sustainable Pakistan Growth Brief (June 2025)
- NEPRA State of Industry Reports 2015-2024 (nepra.org.pk)
- CPPA-G Annual Reports (cppa.gov.pk)
- Gohar Ejaz public data release on IPP capacity payments (July 2024)
- World Bank PPP Knowledge Hub, Lessons from the Independent Private Power Experience in Pakistan
Related reading from Asad Baig
The pillar this explainer supports
- Capacity Payments in Pakistan: Why Your Bill Is So High, the full mechanism
Sibling explainers in this cluster
- The Capital Cost Trick: How Inflated Costs Locked In Inflated Tariffs
- The Working Capital Scam: NEPRA's Quietest Subsidy to IPPs
- NEPRA: The Regulator That Did Not Regulate
Asad Baig