Why Were the 1994 IPP Contracts Signed in US Dollars?
The single decision in 1994 that has multiplied your electricity bill nine-fold purely from currency depreciation
By Asad Baig · Lahore · April 2026 · Approx. 5-min read
The simple answer
The 1994 Power Policy contracts were denominated in US dollars because the foreign investors who funded the early IPPs demanded it. They argued that without dollar denomination they would not put up the capital. The Bhutto government, desperate for power generation capacity to end the load shedding crisis, agreed.
That single decision is the reason your electricity bill rises every year even when nothing else changes.
In 1994, the rupee traded at approximately 30 to the US dollar. Today it trades at approximately 280. The rupee value of the original capacity payment obligations has multiplied roughly nine-fold purely from currency depreciation. Not because demand rose. Not because plants did more work. Purely because the rupee fell.
This article explains why dollar denomination was accepted, what the alternative would have looked like, and why the same mistake should never be repeated.
What dollar indexation actually does
The contracts say the IPP shall receive a guaranteed return on equity of 15 to 18 percent in US dollars. When the rupee falls against the dollar, the Pakistani government must pay more rupees per dollar of obligation.
If the rupee falls 10 percent in a year, the rupee amount the government must pay rises 10 percent. The investor takes no currency risk. The Pakistani consumer takes all of it.
Cumulatively, since 1994, the Pakistani rupee has lost approximately 90 percent of its value against the US dollar. The same dollar obligation that was Rs. 30 in 1994 is approximately Rs. 280 today. Your share of those payments, on every electricity bill, has scaled accordingly.
Why was it agreed to
The argument from foreign investors in 1994 was that they faced "country risk" investing in Pakistan. The rupee could collapse. The Pakistani government could become unable to pay. The political situation could destabilise. To compensate for these risks, they needed dollar denomination.
This argument has some validity. Foreign investment in developing economies often involves currency-protection clauses. International project finance commonly uses USD-denominated structures.
What was unusual about Pakistan's 1994 contracts was the combination. Dollar denomination, plus take-or-pay obligations (which I cover at What Is a Take-or-Pay Contract?), plus capital cost pass-through (which I cover at The Capital Cost Trick), plus 25-30 year contract terms, plus sovereign guarantee. Each provision in isolation is defensible. The combination produced a structure where the investor took essentially no risk and the Pakistani consumer absorbed all of it.
What the alternative would have looked like
Other developing countries have negotiated power purchase agreements with foreign investors using different currency structures.
Partial rupee denomination: A portion of the tariff in rupees, a portion in dollars, with the dollar portion limited to actual dollar costs (imported fuel, imported equipment maintenance). India has used variations of this approach.
Capped dollar exposure: A ceiling on the total dollar component, beyond which currency risk reverts to the investor. Bangladesh has used this in some PPAs.
Time-limited dollar indexation: Dollar denomination for the first 10 years (the period of debt repayment) followed by rupee denomination for the remaining contract life.
Hedging mechanisms: Government-funded currency hedges that protect investors against extreme currency moves while limiting consumer exposure.
Any of these alternatives would have substantially reduced the Pakistani consumer's currency risk. Pakistan in 1994 chose the most generous structure for the investor and the most exposed structure for the consumer. The reasons for this choice have never been adequately explained in public.
WHAT THIS MEANS IN PRACTICE
Every time the rupee falls against the dollar, your electricity bill rises automatically through the dollar-indexed component of capacity payments. This is the largest non-fuel driver of bill inflation. It is a contractual feature, not a market force, and it could have been negotiated differently in 1994.
Why this matters going forward
The dollar indexation in existing contracts cannot be removed without renegotiation. It is locked into the Power Purchase Agreements until the contracts expire (2024-2030 for 1994 plants, into the 2030s for 2002 plants, until 2040-2045 for CPEC plants).
What can change is future contracts. The 2020 Power Sector Inquiry Report recommended that future power purchase agreements eliminate dollar indexation, with currency risk borne by foreign investors who voluntarily enter the Pakistani market. This is step seven of the ten-step reform roadmap I describe in my pillar on the IPP system.
Whether this recommendation is implemented in future contracts will depend on political will. The same political will that has been absent for thirty years.
For the broader story of how the 1994 contracts were negotiated and what was decided, see The 1994 Power Policy: How One Year Locked Pakistan Into Thirty.
What you should take away
Two things.
Dollar indexation is a contract choice, not a fact of nature. It was negotiated in 1994. It could have been negotiated differently. Other countries have negotiated power purchase agreements with different currency structures. Pakistan chose the most exposed structure.
Future contracts can be different. The existing dollar-indexed contracts cannot be unilaterally changed. But future contracts can be denominated in rupees, with currency risk borne by investors. This is a policy choice that any future Pakistani government can make.
Now you know why your bill rises when the rupee falls. Pass it on.
Thank you for reading.
, Asad Baig, Lahore, April 2026
Frequently asked questions
Why are Pakistani IPP capacity payments in US dollars? Because the 1994 Power Policy contracts were negotiated with foreign investors who demanded dollar denomination as a condition of investment. The Bhutto government, desperate for power generation, agreed. The provision was preserved in subsequent power policies (2002, 2006, CPEC).
How much has dollar indexation increased Pakistani electricity bills? Cumulatively, since 1994, the rupee has lost approximately 90 percent of its value against the US dollar. The rupee value of the original dollar obligations has multiplied roughly nine-fold purely from currency depreciation. This is the largest non-fuel driver of bill inflation in Pakistan.
Could the dollar indexation be removed? Not unilaterally for existing contracts without triggering international arbitration. Future contracts can be denominated in rupees. The 2020 Power Sector Inquiry Report recommended this as a reform.
Sources and notes
- Power Sector Inquiry Report 2020 (ARY News mirror)
- IEEFA Reports on Pakistan Power Sector by Haneea Isaad (2024-2025)
- World Bank PPP Knowledge Hub, Lessons from the Independent Private Power Experience in Pakistan
- State Bank of Pakistan exchange rate historical data
Related reading from Asad Baig
The cluster post this answers under
The pillar
Sibling long-tail explainers
- What Is Circular Debt in Pakistan's Power Sector?
- Did the IMF Force Pakistan to Sign the 1994 Contracts?
- Who Is Muhammad Ali, the Man Behind the 2020 Inquiry?
Asad Baig