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Biggest-ever power project in private sector.

I feel pleased to announce the approval of the country's first-ever and the biggest thermal power project in the private sector by the Board of Investment. A historical initiation has been made in the area of power generation and the industrialisation policy of the popular elected Government of Pakistan, of Prime Minister Mohtarama Benazir Bhutto. The installed capacity of this project, namely Xenil-Hawker Sidley Hub Riber Project, in Balochistan Province, near Hub Chowki will be 1292 MWs, to be executed with an international private sector investment of US dollars 1.072 billion. The Pakistan rupee equivalent of this big investment comes to about Rs. 22.8 billion.

Importance of the Project

This project has a multi-fold importance as is evident from its features: Firstly, this is, beyond doubt, the biggest project being undertaken in the private sector in the history of Pakistan. Secondly, this project will enhance the installed capacity of the power system by 20 per cent and taking into account the present situation, the project will increase the total generating capability by 25 per cent. Thirdly, the Hub River thermal project will produce nearly 6791 GWHs (Million Kilowatt Hours) annually for the power system at 60 per cent plant factor. And, as per negotiations with the project executing group, they would provide on demand 70-73 per cent power of the installed capacity in which case the total power available to the Power System from this plant will be on the higher side.

Fourthly, this is the foremost project being executed in a third world country (Pakistan) under the limited resource financing, in the history of the world. Fifthly, this project, being confinanced by the international agencies like the World Bank, USAID, Eximp Bank of Japan, CIDA and a few other small investment agencies, is a big achievement seen from the angle that such a big investment (nearly Rs. 23 billion)] is being done by the international investors in a third world country where sovereign guarantees from the Government have not been made available. Under these conditions, this is an ample proof of the International Private Sector's confidence in the stability and the future of Pakistan.

Sixthly, the 'Modaraba' finances will be mobilised for the local resources mobilisation for this project, the under writing of which is being done outside Pakistan and not by the Pakistani Banks. The fact that the foreign financial institutions are doing this under-writing also reposes their full confidence in the economy and stability of Pakistan. The Power Projects like Hub Rivert thermal, the first-ever project in a Third World country, were so far being developed in the United States of America and even there the co-financing was not of this kind as being done here in Pakistan. Turkey has been trying since long to develop such build operate projects, but, Pakistan has proved to be fortunate and, taken lead to convince the international private sector to practically step into this area in the third world.

The Hub River Project is, in fact, the beginning of a beginning as there are a number of other private sector power project in the pipeline, as the parties interested in executing the projects were waiting for the finalisation of the agreements between the Hub River Power Project Group and the Government of Pakistan, to conclude their agreements with the Government, with Wapda and other associate organisations.

Agreements with Hub River Project

Group

There will be three Major agreements in connection with the execution of the Hub River Thermal Power Project: (a) Implementation Agreement, (B) Purchase Agreement, and (c) Fuel Supply Agreement.

A) Implementation Agreement: This agreement between the Government of Pakistan i.e. Federal Ministry of Water and Power and the Hub River Power Group (HRPG), which comprise a Saudi Arabia based company, namely, Xenil, a British firm, Messrs Hawker-Sidley, Mitsui of Japan and other small companies including the Canadian utilities, covers initialing of the project and the financial closure by 31st March 1990. Initiating has already been done with the approval of the Board of Investments.

Besides, the Agreement also covers salient featuresof the Hub River Project, such as, its completion period of 42 months, location of the power plant site and 500 KV switchyard, quantum of power production, type of insurance, fixation of penalties in case the Group is unable to provide full agreed quantum of energy, safeguards for the Government, force majeure etc. In fact, this is a very big agreement and, perhaps, the world's first agreement of its nature, signed between a Government and the international private sector group in which the Government has given no sovereign guarantees.

B) Power Purchase Agreement: This agreement between Wapda and the Hub River Power Group will cover all the details vis-a-vis, power requirement, mode of getting power from it, as and when demanded, quantum of power Wapda guarantees to buy annually and the terms if Wapda wants to have more power. The tariff and its breakdown, indexation clauses, the effects of any devaluation of Pakistani rupee vis-a-vis the international basket of currenciew will also be covered under this agreement. In fact, the agreements with the HRPG have been concluded after thoroughly studying the project from all the aspects, by the World Bank as well as the Government of Pakistan.

C) Fuel Supply Agreement: The Fuel Supply Agreement will be between the Pakistan State Oil and the HRPG, under which the PSO will be responsible for providing a guaranteed supply of oil of the required standard, specific heat and calorific value for the power generation at the plant site. A pipeline from Port Bin Qasim to the Khalifa Point, the location of the plant in Balochistan Province on the mouth of Hub River, near Hub Chowki, in the west of Karachi, is to be laid for this purpose.

Tariff

The tariff agreed with the HRPG for the purchase of Hub River Plant after thorough discussions and deliberations by a number of committees constituted

for this purpose is, in fact, manifest of Wapda, the Ministry of Water and Power and the Government of Pakistan's firm stand point that whatever be the tariff it must be in the country's interest and a most formidable deal. Therefore, all its elements and pros and cons were thoroughly pondered over before taking the step towards encouraging the private sector to invest in Pakistan. There is always an internal rate of return in a tariff charged by the private sector for which it obtains a guarantee, which Wapda or any other public utility company in Pakistan is not obtaining. For example, Wapda is not having any return on equity for any one of its projects. But the private sector will never bring its capital into Pakistan without ensuring its profits on the equity.

Before encouraging international private sector to invest in the area of power generation in Pakistan under the conditions, there were two options before the government. One was the preparation of Five Year Plans which remained the practice i.e. estimation of power requirements and the financial requirements for developing adequate generation, transmission and distribution facilities to augment the system to meet the fast growing demand for power of various consumption groups. But, keeping in view the ultimate fate of allocation of resources to develop the facilities in the public sector, in the 5th, 6th and the first two years of the 7th Five Year Plan, we find that there existed 25 to 30 per cent shortfall in the allocations. It is a fact that Wapda, if given more funds, has all the means and tools to build more power projects, at a cost less than the private sector. Cheaper, firstly for the reason that there is nothing of the kind of 'rate of return' on the equity in its case. Secondly, the government to government loans are negotiated on soft terms whereas the same soft terms may not be available on loans to the private sector. Keeping other things in view, ignoring the aspect as to who is more efficient, Wapda or the private sector, it is a fact that despite the difficulties. Wapda is running its plants efficiently. Still considering the private sector and Wapda at par in the areas of maintenance and the efficiency, even then with the availability of resources. Wapda will be cheaper. But the problem is that there is dire scarcity of the resources.

Therefore, after thorough analysis and complete understanding of the philosophy, the present elected government has risen to the occasion and has taken the conscious decision of large scale private sector induction into power generation.

In other parts of the world like East Europe and USA the demand for private sector induction into power generation has suddenly increased and these are the investors who are keenly interested in investing in this area here in Pakistan, despite the fact that it is more safe in the USA where the cost on electricity generation is also competitive as compard to here in our country. The cost without exercising our option of increasing the plant factor from 60 to 73 per cent comes around 5 cents (in US dollars) per KWH, or about one rupee and 3.4 paisas per KWH on a declining tariff. And with the increased plant factor, the cost would come down to less than a rupee or equal to 0.47 or 0.48 cents per KWH. In the United States of America, as at present, the cost of generation ranges between 5-10 cents per KWH, and where the opportunity costs are higher, the public utilities are buying power from the private sector. There are many opportunities of private sector investment in the power generation in Thailand, Philippines and the countries in rim of the Pacific Ocean and even in the USA. Keeping in view the changes taking place in the East Europe, there also exists a big potential, of this kin of investment and it is felt that, in future, most of the private sector resources of the West will funnel in the East Europe. Therefore, at this juncture of the history, Pakistan's success in getting through the over one billion dollar private sector project is a God sent opportunity for the economy of the country. This opening is certainly going to attract more private sector capital.

Exploitation of Coal Reserves

The elected government also attaches a big importance to the exploitation of the country's coal reserves particularly available in the South of Pakistan, at Lakhnar and Thatta and to generate power based on these resources. Many private sector companies of the world are keenly interested in it, which were, in fact, waiting for the conclusion of the Hub River Project agreement with the investor's group.

Boost to Pakistan Industry

Wapda has already taken an initiative to set up in public sector a 3x50 MW coal power plant based on Fluidised Bed Combustion technology with the Chinese assistance. Most of the machinery for this plant as per the agreement will be fabricated in Pakistan. The private sector companies have also been asked to frabricate the FBC plant boilers in Pakistan and the other machinery and equipment which can be manufactured in the country for which the concessions in the credit have been offered to make this scheme more attractive. It is happy omen that a very important company, Mssrs Bactel Corporation of Piropar has agreed to it and they are also tieing up the World Bank to manufacture most of their machinery in Pakistan. This pleasant development will go a logn way in giving a big boost to the country's engineering industry. And it is a fact that Pakistan's engineering industry would not have so far got such a big order and boost as is available to it due the private sector and FBC power projects. Even the public sector engineering industry is going to upgrade its plant and machinery for this purpose. Therefore, thermal power generation programme will have a great spill over effect. There is also a condition in the agreement of the Hub River Project that the equipment worth 60 million dollars of this project will be manufactured in Pakistan.

The country's public sector has also to play an important role for which all out efforts are being made to increase the resource mobilisation, and there will be no diversion from public to private sector. In the public sector emphasis will be on the hydel power development. In fact special attention needs to be given to the areas in which the private sector cannot go. It does not mean that the public sector will not take up thermal power projects. Surely, wherever necessary it will take up thermal projects too. But the fact is that the hydel power has remained neglected for a long time and the hydel potential could not have been properly realised. Therefore, it is desired to mobilise most of the resources to this area. In the private sector, besides Fauji Foundation, the Army Welfare Trust has submitted a proposal to the government for a 10-12 MW power plant on Balloki-Sulemanki link canal. Now, as the Hub River Power Project has been finalized the government is able to step forward within its parameters. A feasibility from a Saudi national's, company for 80 MW coal power station to be based in Punjab has also been approved on L.O.I. issued.

As there are big coal reserves available in Lakhra and Thatta, the government considers that major part of the future power programme should be based on the coal. Also there is a very big imported coal based power project of 3,000 MW capacity to be located in the west of the Hub River Project, in the Balochistan coast area. The feasibility studies for this project, being done under the auspices of the World Bank are expected to be ready in about two months period. This project, too, can be executed in the private sector. The total coal for this project can either be imported of fifty per cent of its requirement can be met from the Thatta mines etc. However, it depends on further studies, coal mining and the local potential as to when we will be able to accomplish it.

Hydel Generation

On hydel side, special attention is being paid to double the Tarbela's power generation capacity, from the present 1750 MW to about 3400 MW, for which four new turbines, each of 432 MW are currently being installed. Similarly, two more units of 100 MW each are being added at Mangla hydel power station to raise its installed capacity to 1000 MW. The most important hydel project is, Ghazi Ghariala, downstream of Tarbela. Under this project, a canal will off-take from village Ghazi, near Tarbela for which a barrage will be constructed. The water of this canal will fall from a height at Ghariala, near Attock, to generate 1000 MW offirm power as there will be no effects of seasonal or otherwise variations in the Indus river flows on it. This scheme has been upgraded in the power planning programme and the funds for it have also been allocated. The Chairman Wapda during his recent visit negotiated this scheme with the World Bank and the consultants, and they have been asked to complete the detailed studies and survey works of this scheme in 24 months time instead of their scheduled 36 months period.

Similarly, special allocations have been made for the studies on the Basha Dam. The aim is that all te spade work should be ready the the time, the government decides to implement it. However, it needs 4-5 years period to take up its construction at the earliest. As far as Kalabagh dam is concerned, as well known, all the studies and investigations have already been completed. Its taking up for construction, in fact, needs a political decision and 'consensus' amongst all the four provinces. Efforts are underway to have this consensus.

Another vital hydel power project is of Kohala. The Neelum-Jhelum diversion and Kohala, combined together, can provide 1,000 MW power, for which the work in connection with feasibilities studies etc. has already been started.

Augmentation of Transmission

System

The World Bank has very recently advanced two big loans, one of 162 million dollars loan for the 500 KV transmission lines system, to interconnect our new power units, now under construction at Jamshoro, Guddu, Muzaffargarh, Kot Addu, Tarbela and the recently finalised Hub River Thermal Power project in the private sector, to transport power over long distances with the least technical losses and least cost. This loan would be greatly helpful to achieve the target of adding more extra high voltage transmission circuits to the system for the purpose. The second loan of 160 million dollars given by the World Bank is for the village electrification which is the biggest ever assistance to any country in the history of the Bank in the area of rural electrification. These two loans totalling 322 million dollars for the power sector also are, by all means, an expression of World Bank's confidence in the present democratic Government and Wapda and their ability of executing the power programme.

Village Electrification

Wapda deserves congratulations for supplying power to 3,000 village in 12 months period (from 2nd December 1988 to 1st December 1989), of the First year of the democratically elected government. This is more commendable from the point of view that this achievement has been made in a short period of time and with so late a planning. "In fact, this is record about which we are justly proud."

Problem

With hydel power there is one major problem. For example, Tarbela produces magic quantum of 2000 MWs from its installed capacity of 1750 MWs in the months of July through September when the lake behind the dam is full, but its production falls down to 540 MWs (giving a shortage of 1460 MWs from this one source only) in the months of May and June, due to the reason that in these months lake levels falls down (due to the fact that the water stored here has already been released for irrigation purposes for which this dam was built under the Indus Basin Replacement Works). Consequently the head behind the machines is reduced on which the generation depends. Therefore, keeping this state of affairs in view, we are trying to build as many reservoirs on the Indus river as possible. It makes economic sense to create maximum reservoirs on it and produce cheap hydel power, so as to harness the estimated 30,000 MW potential. For this purpose the agencies concerned have already been instructed that the ranking studies done before should be redone keeping the future power needs in view.

Environmental Effects

The environmental standards for Hub River Thermal Power project are in accorandance with the approved guidelines of the World Bank. Our Lakhra coal power project is also based on the latest Fluidised Bed Combustion technology which is environmentally pollution free. All of the power programme is based on taking care of adverse environmental hazards of the power projects (thermal or hydel) including at Jamshoro, Muzaffargarh, Kot Addu, Guddu etc. In the power generation projects programme, always the emphasis is on locating the thermal schemes close to the load centres and near to the fuel supply lines in accordance with the rationalisation of the system.

Thermal Projects

In the ongoing programme, big 630 MW thermal power complex is being constructed at Muzaffargarh with the assistance of the Soviet Union, and at Jamshoro (880 MWs). Another very important porject is located in Kot Addu, the present 800 MW capacity of which is being increased to 1200 MW with the addition of the combined MW combined cycle private sector thermal project based on gas is proposed at Nandipur, near Kabirwala. It is a great achievement of the present government that has successfully negotiated a 300 MW Nuclear Power Plant with the Peoples Republic of China which will be the forerunner of future programmes. The entire nuclear power complex will be based, more or less, in Chashma area. The power projects are in fact based on rational economic planning and it is always an endeavour that these projects are based at such a location that every province gets its due share.

Electricity Tariff

The greater is the dependence on thermal power, whether it is based on oil, gas or coal, the greater will be its weightage, as thermal power in Pakistan is much more costlier than the hydel power. so as the cost of production is higher, tariff for which is bound to increase.

In fact the electricity rates charged from the consumers are based on a number of factors: on reasonableness i.e. to what extent the country's economy, industry and agriculture can bear a burden without adversely affecting its output; other factors involved in fixation of the rates, such as, production cost, the costs of fuels, plants maintenance cost, distribution and transmission system cost. Wapda's revenue generation is also to be taken into consideration as it is a commercial organization and the government does not give any funds to Wapda. The increase in the electricity tariffs, in fact, increases Wapda's self generation of resources, to help make addition to the power generation capability for the benefit of its consumers. Despite this fact, it is always kept in view that the tariffs are not increased to such an extent that cannot be borne by the consumers. Wapda does not and cannot increase the rates on its own. It only sends it proposals and the approval to make any increase is accorded by the government.

Monopolies Commission

For this purpose, the government has now appointed a Monopolies commission to ensure that the rates are not increased arbitrarily. This commission will keep liaison with the consumers organizations, and give its independent opinion to the government after studying the books of accounts in detail organizations like Wapda etc. to the effect of justifications given for an increase in the tariffs, whether these are correct or not, or need any amendment. Nevertheless, it is a fact that increased dependence on thermal power is bound to lead to higher production cost as compared to hydel and the corresponding increase in the rates.

Additionality of Resources

The induction of private sector into power generation is giving us additionality of resources, which was our shortcoming. There was about 30 per cent shortfall of resources in the 6th Five Year Plan and the past two years of the 7th Five Year Plan. Chairman Wapda had sent to the Government, Wapda's critical financial requirements for the current year which were of the order of Rs. 35 billion, but the funds given to Wapda are only Rs. 15.8 billion i.e. less than half of the requirements of the current year's public sector power programme. In the face of this situation, financial requirements to keep up the ongoing power projects of Wapda are of the order of Rs. 23 billion. This shows that Wapda, under the circumstances, faces a great difficulty in achieving its current tagets. This makes all the differences.

To eliminate loadshedding we have taken the initiative to induct the private sector into power generation area. Now there is going to be a big investment of more than 22 billion rupees in this area from the private sector, in the 42 months, in addition to the public sector budget. From this it can be judged very well how greatly this initiation is going to help us. It is hoped that in the next one year the government will be able to approve more private sector power projects, of a total of the same capacity or a little less than the 1292 MW capacity of the Hub River Power Project. All these efforts will lead to additionality of resources (to the public sector budget). To succeed in eliminating loadshedding, the best way is to get heavy investments done by the private sector and, side by side, making further improvement in the public sector power programme. It is hoped that if the present pace of arranging resources, is successfully attained in the coming years, too, the loadshedding would be over in the next 3-4 years.
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Title Annotation:excerpts from Farooq Ahmad Khan Leghari's address
Publication:Economic Review
Article Type:transcript
Date:Mar 1, 1990
Words:4025
Previous Article:WAPDA to float bonds to supplement resources.
Next Article:Power projects in the private sector.
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