Power Sector Writeup

8/7/2019 Power Sector Writeup

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PPP Experience Pakistan

Power Sector

[Type the author name]

2/20/2011


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Table of Contents

2.1. Power Sector - Overview.................................................................................................. 3

2.2. Policy Frame Work.......................................................................................................... 6

2.2.1. Power Policy 1994 ..................................................................................................... 6

2.2.2. Power Policy 2002 ..................................................................................................... 7

2.3. Institutional Frame Work................................................................................................. 8

2.3.1. Creation of Private Power and Infrastructure Board (PPIB)........................................ 9

2.3.2. Creation of National Power Regulatory Authority (NEPRA).................................... 10

2.3.2. Alternate Energy Development Board (AEDB)........................................................ 10

2.3.2. Punjab Power Development Board (PPDB) ............................................................. 10

2.3.2. Sarhad Hydel Development Organization (SHYDO) ............................................... 11

2.6. Initial Response to PPP Implementation ......................................................................... 11

2.7. Major Impediments in Attracting PPI ............................................................................. 12

2.7.1 Institutional frame work............................................................................................ 12

2.7.2 One Window Operations or Front Offices ............................................................. 122.7.3 Project Consents ....................................................................................................... 13

2.7.4 Land Acquisition ...................................................................................................... 13

2.7.5 Sovereign Guarantees ............................................................................................... 13

2.7.6 Fuel Supplier Performance Guarantee....................................................................... 13

2.7.7. Cost Escalation Risk for Civil Works....................................................................... 13

2.7.8 NEPRAs Jurisdiction in AJK................................................................................... 14

2.7.9 Hydel Tariff.............................................................................................................. 14

2.7.10 Legal Disputes IPP ................................................................................................. 14

2.7.11 Government Subsidies (consumer tarriffs) .............................................................. 142.7.12 Circular Debt (cross defaults) ................................................................................. 15

2.7. Suggestions for improved methodology on PPP implementation .................................... 15


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2.1.POWERSECTOR-OVERVIEW

It is essential to provide adequate energy to industry to drive economic growth and createemployment opportunities. Historically, electricity supplies were significantly and consistentlybehind demand, which have resulted in frequent and unscheduled blackouts, causing anger andrestlessness among public. Consequently, the country suffered heavy load shedding in the recent

past which is estimated to be of the order of over 25% of the system demand. The current powergeneration gap is in the tune of 4,000 MW to 4000 (demand: 24,000 MW and supply: 19,478

MW). These outages have aggravated the socio-political situation and are costly to the national

economy. In contrast, according to an estimate1, Pakistans hydel potential alone is 100,000 MWwith identified sites of 55,000 MW.This demand is expected to grow by 8.8%2 from 2010 onwards and expected to reach 36,000MW by 2015 and 114,000 MW by 2030. Presently, only 65% to 70% of the total countryspopulation has access to electricity. To bridge this, Government has envisioned a plan; Vision2030, an investment in the tune of USD 32 billion to add another 20,000 MW by 2020. Anannual average USD 3.2 billion is required to finance this infrastructural initiative and privatesector investment is expected to be 45% or USD 15 billion within this period.

PEPCO System Historical Data/Forecast

Years

Historical

Peak

PMS

Peak

Difference

(MW) (MW) (%)

1999-00 9289 9311 0.24

2000-01 9718 9736 0.18

2001-02 10922 10243 -6.21

2002-03 10484 10799 3.002003-04 11078 11398 2.80

2004-05 12035 12087 0.43

2005-06 13212 12916 -2.20

2006-07 15138 15213 0.50

2007-08 16838 16480 -2.10

2008-09 17252 17867 3.50

2009-10 17847 19451 8.90

The past 20 years have been a period of significant change in Pakistans power sector.Significant change began in 1994 when a new power policy permitted the development of private

independent power producers (IPPs), selling electricity to both WAPDA and KESC under powerpurchasing agreements (PPAs).As a result, a total 23 plants are now working under various IPP policies generating 5,977 MWof the total current power generation and with total investment of over 8 billion. A total of 119 of

1

WAPDA: Vision 2025 published in Jan 2011.2

Planning Commission: Vision 2030


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licenses have been issued under various IPP policies and as a result 30% of the total instatedcapacity is being produced by the IPPs i.e. the private sector.

Year Generation Transmission Distribution

TotalPublic

Sector

Private

Sector

NTDC KESC Ex-

WAPDADISCOs

KESC SPP

(Dist.)

CPP

2001 - 9 - - 1 - - - 10

2002 4 5 1 - 7 - - - 17

2003 1 11 - - - 1 - - 13

2004 1 16 - - - - - - 17

2005 2 9 - - - - - - 11

2006 1 10 - - - - 7 - 18

2007 - 10 - - - - - - 10

2008 - 17 - - - - 2 - 19

2009 - 15 - - - - - 1 16

2010 - 15 - 1 - - - - 16

Grand

Total

9 117 1 1 8 1 9 1 147

Overall, there has been a mild success in attracting the investment from the private sector whichis evident from the fact that the power sector was able to attract only 4% (USD 750 M) of thetotal foreign direct investment (FDI) of USD 18 Billion that came into the country for the periodfrom 2000-2008. This indicates that although foreign investors were willing to take Pakistanssovereign risk and invest in riskier sectors like banking, telecom and IT etc. but shied away fromthe power sector due to sector specific policy, regulatory, liquidity and operational issues.

Future Required Generation Capacity

Year Peak Demand

(MW)

Gen Capacity Required

(MW)

Gen Capacity Planned

(MW)

2010 20101 25126 21388

2011 21705 27131 22697

2012 23441 29301 23788

2013 25306 31633 26279

2014 27438 34298 29405

2015 29463 36829 33630

2016 31672 39950 42530

2017 33154 41443 45338

2018 35568 44460 50034

2019 38557 48196 53284

2020 41783 52229 57470

The new IPP policy emphasis on hydel electricity especially small dams all across Pakistan is inresponse to the increasing reliance on the oil to produce electricity. The ratio of oil/gas in the


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generation mix which stood at 24:74 back in FY05 has turned into a 47:52 ratio in FY09. Highershare of oil in the overall generation mix coupled with institutional in efficiencies (according to

an estimate, the power sector is losing 250 billion a year alone, from line losses) has invariablyresulted in higher costs per KWh. Pakistans total energy requirements by 2030 will reach 361

Million Tons Oil Equivalent (MTOE) compared to 62.5 MTOE in FY 2008-09.

Existing Generating Capacity (As on Oct, 2010)

Type of

Generation

Nameplate/Installed

Capacity

(MW)

Derated/

Dependable

Capacity

(MW)

Availability (MW)

Summer Winter

WAPDA Hydro 6444 6444 6250 2300*

GENCOs 4829 3580 2780 3222**

IPPs (incl Nuclear) 7911 7695 5750 6900**

Rental 62 60 60 60**

Total 19246 17779 14840 12482*Hydro availability based on last 5 years average

**Excludes 10% Forced Outages for GENCOs & 6.0% for IPPs & Rental

Pakistan power sector has historically been dominatedby public sector utilities; WAPDA and KESCgenerating a total of 11,327 MW and 1,756 MW, puttogether which is 67% of the total installed capacityand are enjoying monopoly in the Power Sector. Overthe years, these institutions emerged as largemonolithic, vertically integrated utilities with

overstaffing, declining skills, deterioratingmaintenance of Infrastructure, financial and technicalinefficiencies, poor governance, and excessivedependence on public sector development resources,neglect of customers and lack of competitive spirit.Pakistan has per capita gross domestic product

(GDP) 2009 of $2,6094. It has one of the least developed power sectors compared to othercountries. Electricity consumption per head in Pakistan is below the level of countries such asIndia and Indonesia, Vietnam but ahead of and Sri Lanka and Bangladesh, Cambodia, and Nepal,which are not included in the table). The level of household electrification, at 55%, is below thatin Sri Lanka and Vietnam.

The power sector reforms are critical for the long-term and short macro economics stability andare going the major theme of government policy in the recently concluded MTDF 2005 -10,Annual Plan 2010-11 and the Vision 2030. These reforms consist of developing a power market,

3www.adb.org/statistics, figures for 2007

4The World Bank: World development Indicator Database, GDP per capita adjusted for Purchase Price Parity

(current international $): 2009

Country3Consumption (Per

Capita) KWH

Australia 11,249

India 542

Indonesia 566

Japan 8,474

Malaysia 3,667

Sri Lanka 417

Pakistan 474

Bangladesh 144

Cambodia 94

Nepal 80


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better regulation, improved governance and up-gradation of technology and the machinery of thepower sector.

Analysis ofConsumptionMix (July-Sept.)

Category Units-MkWh Sale %age2010 2011 2010 2011

Domestic 9,359 10,001 50.2% 52.4%

Commercial 1,343 1,386 7.2% 7.3%

Industrial 4,011 4,192 21.5% 21.9%

Bulk 649 662 3.5% 3.5%

Agriculture 2,872 2,407 15.2% 12.6%

Others 437 456 2.3% 2.4%

Total 18,626 19,104 100% 100%

2.2.POLICY FRAME WORK

Historically, the first major initiative towards the private sector participation can be traced backto 1985 when the Government in view of the electricity demand patterns and lack of funds in thepublic sector, decided to mobilize private sector resources by inducting it into power generation.These initiatives were followed by the Power Policy5 in Pakistan firstly turned up in 1994. Thepower policy, currently in vogue in Pakistan, is the Policy for Power Generation 2002.After the first successful policy being the 1994 Power Policy, came the 1995 Hydel Policy, the1995 Transmission Line Policy, the 1998 Power Policy, and finally the Power Policy 2002 whichis currently in place in the country. The Government targeted to formulate a comprehensivepolicy framework concerning incentives, fiscal treatment, repatriation of profits and capital,availability of foreign exchange, and pricing.

In 2005, the Energy Security Action Plan (2005-2030) was approved to meet the requirements ofPakistans Vision 2030 for reliable and quality energy supplies. The main objective of the plan isto enhance energy supply through an optimal mix of all resources including hydropower, oil, gas,coal, nuclear and renewable energy such as wind and solar. It is planned to optimize theutilization of the countrys indigenous resource to reduce dependence on imported fuel. In viewof the public sector resource constraints, an important focus is also creating an environmentconducive to the participation of the private sector, both international and domestic.

2.2.1.POWERPOLICY 1994

The IPP policy was originally designed to address a shortfall of about 1,500 megawatt (MW) ingeneration capacity at a time of tight constraints on public expenditure. It succeeded in attractingboth foreign and local investors into the sector.

5Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan), promulgated in March1994.


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Salient Features:

y "Bulk tariff of US cents 6.5/kWh (to be paid in Pakistan Rupees) for the sale of electricity to

WAPDA/KESC with indexation mechanism for fuel prices, US and Pakistani inflation, exchangerate fluctuations, O&M costs, etc.

y Fiscal incentives consisting of exemption from corporate income tax, customs duties, sales tax,Iqra, and other surcharges on imported equipment.

y Standardized security package which includes a model Implementation Agreement, PowerPurchase Agreement and Fuel Supply Agreement.

y Creation of a Private Power and Infrastructure Board, so as to facilitate a one-window operation.y Fiscal incentive to facilitate the creation of a corporate securities market in the country, including

permission for power generation companies to issue corporate bonds and shares at discountedprices, and establishment of an independent rating agency." The government subsequently addedfurther incentives in March 1995 which led to a flurry of foreign investment petitions.

y The new guaranteed revenue return rate was extremely attractive to investors; as well as the "one-window" operation. Investors were reassured that WAPDA and KESC would purchase electricityfor a very reasonable 6.5 cents/kwh. This guaranteed the foreign producer that regardless of apotential drop in demand for electricity, the government would purchase the supply of electricityat a favorable prices. Moreover, the "one-window" interface with the government helps to

minimize the time spent in the Pakistani bureaucracy, thereby reducing the cost of submitting aproposal.

However, the authorities continued to contract further IPP capacity beyond the required level andas a result capacity outran demand. Over 3,000 MW of private IPP capacity came on stream in1997 alone. Maximum demand fell from 84% of capacity in 1994 to 64% in 1998. Somereduction in this ratio was desirable in order to enhance system reliability and reduce theincidence of power cuts. However, power demand growth stalled following the Asian financialcrisis, exacerbating the excess capacity problem. Under the payment mechanism of the PPAs,monthly capacity payments consisting of debt service, fixed operations and maintenance (O&M)costs, insurance and return on equity on an internal rate of return basis were assured even if no

electricity was purchased. In addition IPPs received payments for energy purchased on a per unitenergy charge basis. Payments were guaranteed by the Government. There were a number ofdisputes with IPPs in the late 1990s when government tried to reduce costs through tariffreductions.

The term independent power producer (IPP) is the outcome of the 1994 power policy. IPP is anentity, which is not a public utility, but which owns facilities to generate electric power for saleto utilities and end users. The policy allowed full flexibility to IPPs to bring capacity on line asquickly as possible at predetermined power purchase prices. The Government guaranteedimplementation, fuel supply, and power purchase.

2.2.2.POWERPOLICY 2002

A new power policy was formulated in 2002, which is currently in place. The main objectives ofthe Power Policy 2002 were to, inter alia, provide sufficient capacity for power generation at theleast cost, and to avoid capacity shortfalls; to encourage and ensure exploitation of indigenousresources, which include renewable energy resources, human resources, participation of localengineering and manufacturing capabilities; to ensure that all stakeholders are looked after in theprocess; and to be attuned to safeguarding the environment.


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The scope of the Power Policy 2002 covers private sector projects, public sector projects, public-private partnership projects; and projects developed by the public sector and then divested.Salient features of the Power Policy 2002 include the following:

Salient Features:

y Invitation of bids on tariff through International Competitive Bidding (ICB);y Encourage exploitation of indigenous resources including hydel, coal, gas and renewable

resources through active involvement of the local engineering, design and manufacturingcapabilities.

y Customs duty at the rate of 5% on the import of plant and equipment not manufactured locally.y To enhance share of Renewable Energy Sources, hydel and fuels other then oil-based fuels, full

levy of income tax on oil-fired power projects.

y For projects above 50 MW, One-Window support to be provided at the Federal level. For projectsbelow and up to 50 MW, One-Window support to be provided at the respective Provincial/AzadJammu and Kashmir level.

y Ministry of Water and Power (through PPIB) to remain the focal point at Federal level.y

To develop raw sites whose feasibility studies are not available, unsolicited bids would bewelcomed. The sponsors of feasibility studies on raw sites will have first right of refusal.y Two-part tariff structure consisting of fixed capacity and variable energy component is

recommended with the proviso that fixed capacity payment for Hydel projects would fall between60% to 66% of the total tariff.

y Hydrological risk to be borne by power purchaser (WAPDA/NTDC/KESC).y Exemption from income tax, including turnover rate tax and withholding tax on imports, is now

available to dual-fuel (gas and liquid fuel; in case of limited gas availability), as well asexclusively oil-fired power plants.

y Guarantee by Government for the performance obligations of its entities such as the powerpurchaser, and the provinces. Protection to sponsors and lenders in case of termination of theproject.

y Contracting a long-term tariff of 25 30 years with the power purchaser in order to obviate the

IPPs from market risk for their output. The projects are expected to earn an attractive/competitiveand stable return on investment.

y Standardized and tested agreements namely, the Implementation Agreement (IA), the PowerPurchase Agreement (PPA), the Fuel Supply Agreement (FSA), available upfront.

y Any variation in price of fuel to be passed on to the power purchaser. Similarly, any additionaltaxation over and above the tariff assumptions liable to be passed on to the power purchaser.

y Various tariff components to be indexed for variation in the Pakistani Rupee and US$ exchangerates to cover the exchange rate variations risk.

y Availability of Government guarantees for protection against any change in duties and taxes, andagainst specified political risks.

2.3.INSTITUTIONAL FRAME WORK

The power sector in Pakistan has pre-dominantly been controlled by the public sector sinceindependence. In the decade of the 1990s, the severe constraints of availability of capital led toinadequate generation capacity and transmission infrastructure which resulted in excessiveshortage of electricity in the country. Massive deterioration in governance and heavy losses inthe systems of the Water and Power Development Authority (WAPDA) and the Karachi ElectricSupply Company (KESC) actuated the need for restructuring of the power sector. Realizing theneed for involvement of the private sector for expansion of generation capacity, the Governmentembarked upon a strategic plan for restructuring of the power sector which included creation of


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PPIB also provides support to the power purchaser and fuel supplier while negotiating the PowerPurchase Agreement (PPA), Fuel Supply Agreement (FSA)/Gas Supply Agreement (GSA), otherrelated agreements, and liaison with the concerned local and international agencies forfacilitating and expediting progress of private sector power projects. PPIB is working to attractand facilitate Foreign Direct Investment (FDI) in Pakistans power sector.

2.3.2.CREATION OF NATIONAL POWERREGULATORY AUTHORITY (NEPRA)

The 16 December 1997, issue of the Gazette of Pakistan proclaimed the enactment of theRegulation of Generation, Transmission and Distribution of Electric Power Act, 1997, which hadbecome effective on 13 December 1997. Under this Act, the National Electric Power RegulatoryAuthority (NEPRA) performs three main regulatory functions i.e., licensing of generation, 23transmission and distribution of electric power, tariff determination and prescription of standardsand rules for conduct of business.NEPRA has been created to in order to promote fair competition in the electricity industry and to

protect the rights of consumers as well as producers and sellers of electricity.

2.3.2.ALTERNATE ENERGY DEVELOPMENT BOARD (AEDB)

AEDB Act was passed in May 2010 after many years of operations through presidentialordinances. AEDB mandate is to develop national strategy, policies and plans for utilization ofalternative and renewable energy resources facilitate power generation through alternative orrenewable energy resources, evaluating, monitoring and certification of alternative or renewableenergy projects and products. AEDB is in the process of developing a mid-term policy which is alogical progression from the short term policy established in 2006 which meant to be a LenientPhase for rapid growth. The Medium Term is the Consolidation Phase for sustainable growth(2010 Dec 2014) and the Long Term policy will be the Maturity Phase for competitive growth(Jan 2015 onwards.

Currently, 66 licenses accumulating 500 MW for renewable energy category (REN) have beenissued by NEPRA.

2.3.2.PUNJAB POWERDEVELOPMENT BOARD (PPDB)

At the provincial level, PPDB role is to enable private sector investment in power generation inthe Punjab province. The provinces can develop and implement power generation units havingnot more than 50MW of generation capacity.

It was set up in 1995 and announced its Generation Policy in 2006. The policy offers fiscalconcessions similar to Federal Governments Power Policy of 2002. PPDB focus is o on smallpower production facilities of less than 50 MW.

6

NTRC official website: http://www.nepra.org.pk/lic_rew.htm accessed on Feb 20, 2011


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2.3.2.SARHAD HYDEL DEVELOPMENT ORGANIZATION (SHYDO)

SHYDO is a statutory body corporate established under the Sarhad Hydel Development OrganizationOrdinance, 1993. NWFP Government through I&P Department give directions on all matters toSHYDO. SHYDO can be termed as the only statutory project development organization for thepower sector.

SHYDO is managed by a board with majority comprising of ex-officio office bearers of the NWFPGovernment. SHYDO has the mandate to enter into arrangements with private companies or evenincorporate companies for generation, transmission and distribution of electric power. However,Projects and facilities that are owned by the Federal Government or WAPDA are excluded from thepurview of SHYDO.

SHYDO has introduced a brief policy titled 'Provincial Hydel Power Policy' In brief, the policy islimited to projects up to 20 MW and caters for captive projects, as opposed to IPPs, and forbids gridor utility sales. SHYDO had constructed 4 projects of 105 MW to date.

2.6.INITIAL RESPONSE TO PPPIMPLEMENTATIONThe power sector has gone through numerous reforms which are still continuing two decadesafter its inception in 1985. The overall experience in the power sector of PPI can at best betermed as modest.

Type ofProjects Number of

Projects

Capacity

(MW)

Investment

(Million US$)

Project prior to 1994 Power Policy 1 1,292 1,608

Projects under 1994 Power Policy 14 3,048 3,479

Project privatized from public sector 1 1,638 1,583

Projects under 2002 Power Policy 7 1,475 1,391

Total 23 7,453 8,061

The 1292 MW, $1.6 billion Hub Power Project was hailed as a landmark in the field ofinfrastructure finance at the time of financial close in 1995. HUBCO is the first private sectorand largest power plant commissioned under BOO arrangement (Build Own Operate), before the1994 policy was announced. It took HUBCO six years to achieve financial close. HUBCO setthe bench mark for IPP policy 1994 and precedence for the future of the IPPs in the Pakistanspower sector.Euromoney Institutional Investor named the project the HUBCO Deal of the Year 7.Subsequently, the 1994 power policy was announced, which was hailed by the internationalcommunity as one of the best power policy of its time. It attracted 34 projects 8 for more than9,000 MW. Including HUBCO, 20 IPPs with a total installed capacity of about 4,500 MWreached financial close, of which four totaling 435 MW were later terminated.

7The Hub financing package included seven senior debt facilities, most of which had a syndicate of commercial banks. There weremore than 70 financial institutions represented in the financing structure (including 43 international commercial banks, 9 local banks,several export credit agencies, etc.) This was in addition to the sponsor group and contractors8

Letter of Support (LOS) were issued to 34 projects


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By 1998 the government had issued notices for its intent to terminate the contracts of 11 IPPs onalleged corruption in tariff negotiations and/or technical grounds. Two third of the IPPs were indirect collision course with PPIB faced coercion, harassment and stiff legal proceedings againstthem. The investor confidence was shattered for the prospective private sector investment.Negotiations started with the IPPs which coincided with the Pakistans worst financial crisis9 of1998.Government issued the 2002 power policy, which is a slight modification of the 1994 policy. Ithas only attracted a total investment of USD 1.4 billion with 7 projects commissioned so far,which is exactly half of the transactions closed under 1994 power policy.In totality, the power sector reforms have attracted a an investment of over USD 8 billion, bycommissioning 23 IPPs which are generating 30% of the installed capacity. The first powerpolicy was able to attract PPI to the tune of USD 3.47 billion by commissioning 14 projectsunder this policy with combined generation capacity of 3,048 MW. This represents 60% of thetotal commissioned IPPs to date and 43% of the total private investment in the power sector.

2.7.MAJORIMPEDIMENTS IN ATTRACTING PPI

The lack of interest by the private investor needs to be looked in light of the followingimpediments that exists and confronting power sector: -

2.7.1INSTITUTIONAL FRAME WORK

WAPDA continued recognition as an integrated power sector utility is the single mostimportant constraint in attracting PPI in this sector. In spite of the theoretical unbundlingof WAPDA into GENCOs, DISCOs, WAPDA Hydel and NTDC, these in realityremain an administrative extension of the all mighty legally integrated WAPDA. Though

the contractual frame work under the PPA identifies CPPA with in NTDC as the buyer, inpractice these have been reduced to notional entities and become administrativeextensions of WAPDA. Private investors shy away from PPI due to the fact that they willbe dealing with the bureaucracy within WAPDA a scare which was reinforced by thenumerous litigation cases between WAPDA and IPPs that are still pending in variouscourts. Role PEPCO was to oversee the restructuring process of WAPDA and also as theholding company of the successor entities. Ironically PEPCO proved to be a toothlessentity and WAPDA still remained an empowering entity. Interestingly PECO Chairmanis also the Member of the WAPDAs board.

2.7.2ONE WINDOW OPERATIONS ORFRONT OFFICES

All the institutions looking after the PPI (PPIB, AEDB, SHUDO, PPDB, NEPRA) in thepower sector are in one way or the other have limited decision making authority. Due to

9Following Pakistans nuclear tests and the subsequent imposition of economic sanctions in May 1998, Pakistans economic andbalance of payment situation deteriorated rapidly and foreign investment slowed to almost nothing. Within just a few weeks, thestock market declined by 40%, the free market rupee depreciated by more than 25% against the US dollar, and official reservesdeclined to less than 2 weeks of imports. In early 1999, Pakistan signed an agreement with the Paris Club for rescheduling of $3.3billion of public and publicly guaranteeddebt repayments.


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the horizontal alignment with the Ministries (common Board Members), the decisionmaking for important projects and specially were sovereign guarantee is required needs tobe taken at the highest level i.e ECC. Such broad level governmental intervention slowsdown the decision making. Governmental role in facilitating the private sector in gettingwide number of consents is desirable but its involvement in specialized areas such as

contract negotiations which require specialist expertise hampers the project progress.2.7.3PROJECT CONSENTS

Approximately 70 consents are required from which fair numbers are to be obtained priorto the financial close. The investor needs to go from pillar to post at the federal,provincial level to get these consents with very little or no support from either PPIB orthe Government.2.7.4LAND ACQUISITION

Power projects are usually located in rural areas where the land records are not properly

maintained and mainly costs of small family holdings. Currently, the project developer(private investor) is required to acquire the land on its own. This results in priceescalation of land, elongated time for project closures and most importantly since landneeds to be acquired before the work on the projects documents (PPA, IP etc.) starts, itbecomes risky for the project developer to incur such significant costs before thefeasibility, tariff negotiations and even the license is issued by NEPRA.

2.7.5SOVEREIGN GUARANTEES

There are no market based instruments to substitute government sovereign guarantees.The sovereign guarantees issued by the government allow the government to intervene in

the project development. The project developers dont take it as a risk mitigation visa-vizdecreasing cost of capital (not more than few basis points) but sees them as a tool tofacilitate the pre and post commissioning project bottle necks, both in contractcompliances and project implementation.

2.7.6FUEL SUPPLIERPERFORMANCE GUARANTEE

The Power Policy 2002 provides the fuel supply guarantees by GoP. With thediminishing gas reserves of the country the GoP has withdrawn its guarantee which nowhas been seen as a major constraint in developing gas based thermal projects.

2.7.7.COST ESCALATION RISK FORCIVIL WORKS

There has not been much success in developing the hydro power projects in PPPmodality. The existing power policy does not provide for pass through of cost escalationin civil works. The allocation of the Cost Escalation Risk is the primary constraint indeveloping hydro power projects which have long construction periods. Carrying the riskof cost escalation for elongated periods makes it financially not sustainable for the privateinvestors or prospective lenders.


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The first hydro power project in PPP (BOOT) modality is the 84 MW Laraib Powerwhich achieved its financial close recently on Dec 4th, 2010. But this is run of the riverhydro electric power projects where the construction period is short and the civil works toother works parity is also not skewed towards civil works. It is interesting to note that theproject still took 15 long years to achieve financial close and it will take only two years to

complete the project.2.7.8NEPRAS JURISDICTION IN AJK

AJK has huge potential for the development of hydro power projects (run of the roverand/or small dams). This potential can be explored as there is an ongoing debate on theNERPA jurisdiction on AJK. Two run of the river projects of 100 MW each at Kotli andGulpur in AJK with a total investment of USD 100M are pending development becauseof this unsettled dispute. PPIB has already issued LOI but NEPRA is refusing tonegotiate the tarrif or issue the license as NEPRA refuse to exercise its jurisdiction inAJK.

2.7.9HYDEL TARIFF

The only hydel tarrif allowed by NERPA is of LARIAB Energy that is an endorsement ofthe ECC decision to allow the hydel tariff based on 1995 hydel policy. There is howeverno formal framework for the hydel tarriff. This is seen as a major constraint in itself forpromoting PPI in hydel power generation.

2.7.10LEGAL DISPUTES IPP

Under the payment mechanism of the PPAs, monthly capacity payments consisting ofdebt service, fixed operations and maintenance (O&M) costs, insurance and return on

equity on an internal rate of return basis were assured even if no electricity waspurchased. In addition IPPs received payments for energy purchased on a per unit energycharge basis. Payments were guaranteed by the Government. There were a number ofdisputes with IPPs in the late 1990s when government tried to reduce costs through tariffreductions. A more detailed description of government policy is in Appendix 3.

2.7.11GOVERNMENT SUBSIDIES (CONSUMER TARRIFFS)

The power sector of the country suffered from serious cash shortfalls mainly due to themismatch in the cost of generation and selling the power. The IPPs sell electricity at ahigher rate to the power purchaser whereas the power purchaser is bound to sell at lowerrates owing to reduced tariffs. The cost differential is supposedly to be recovered

through governmental subsidies which are not acceptable to the internationaldevelopment agencies. The Government was of the view that further increases inconsumer tariffs would be politically difficult if there was no accommodation by IPPs toreduce their price to WAPDA for power purchased.


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2.7.12CIRCULARDEBT (CROSS DEFAULTS)

The Power Purchaser is always in difficult to discharge its payment obligation due to theaforesaid mismatch in the tariff structure. The problem aggravates due to front-loadedIPP tariffs which are indexed to the US Dollar, combined with a devaluation of the Rupeeand poor collection rates from government customers which account for 30 percent of

WAPDA's sales. As a result thereof, the IPPs make cross default towards their lenderswhich have provided working capital lines and are not able to pay the fuel suppliers.Currently WAPDA owes XXX to the IPPs on account of the power purchases and inturn IPP owes Rs 158.410 billion to PSO for the fuel supplies. In turn PSO owes RS 85billion to refineries and RS 40 billion to international fuel oil suppliers.

Future Generation Projects System

(Up to Year 2020)

S.No. Type Public Sector Private Sector Total

1 Hydel 8127 5158 13285

2 Wind - 1050 1050

3 Nuclear 3020 - 30204 Thermal (Coal Fired) 4150 5385 9535

5 Thermal (Gas/RFO) 6160 2725 8885

6 Cross Border 2000 - 2000

Total 23457 14318 37775Table 2: Future Generation Projects System

Last year the Government took some radical measures to address this issue of (or circular debt)by way of issuing term finance certificates to the selected banks against the amounts which theIPPs owed to them and were not being able to pay due to the payment defaults of the powerpurchaser. This provided some relief but has exposed the banks which are now very reluctant to

provide short term or long term financing to the IPP in particular which is to operate onexpensive fuel (such as RFO).

2.7. SUGGESTIONS FOR IMPROVED METHODOLOGY ON PPP

IMPLEMENTATION

5.1 All the Governmental entities working as facilitators of the power projects need towork in a harmonized manner, whereby owing to the widespread developmentalimplications of any power project, it is imperative that all efforts towards the

development of such power projects are made in a coordinated manner withoutcompromising their respective limitations and or the broader objectives.

5.2 All the stakeholders involved in the development of the power projects need to beopen to the new ideas and show willingness to adopt the best practices being followedworldwide for the development of power projects.

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5.3 The function of the electricity regulator (NEPRA) plays an important role inprotecting the interests of all the stakeholders. It needs to be ensured by NEPRA thatthe development of the power projects should not be compromised at the costs of in-

genuine demands of any one, rather, a balance needs to be maintained whileaddressing the developmental issues which inevitably arise while setting up anypower project.

5.4 The Governmental agencies should take lead in absorbing all such risk which anyprivate entity would not be in a position to assume owing to lack of its control onsuch issues.

5.5 The legal framework enabling the public-private entities to team-up for developmentof the power projects need to be strengthened more providing the requisite comfortsto the financing institutions in-particular the multilaterals through which funding canbe procured by way of offering bankable securities arising from the assets of the

projects.

5.6 The Governmental institutions need to take a long term approach while facilitatingthe development of power projects through public-private partnerships. Certainprojects such as hydropower and coal based projects invites displacement and otherenvironmental issues for which long term strategic decisions are required. Further,certain locations in relation to hydro and wind power projects require intervention ofother departments of the Government, particularly, with respect to acquiring landhaving clean title acceptable to the banks for security purposes and the matters inrelation thereto.

5.7 In addition, the overall tariff increases is required to be made not only to bring theprices up to par with the marketplace, but to also generate enough cash flow inWAPDA and KESC to enable the organizations to qualify for additional debt.

5.8 The Government is however committed to resolve the tariff related issues. NEPRA isactively working to identify all the disparities and formulate the most appropriatelong term solution after taking into account the interests of all the stakeholders of thepower projects. Currently, NEPRA carries out a detailed scrutiny of any of the powerproject from all aspects before announcing the tariff of any particular project.

Documents

Power Sector Writeup