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Power generation in private sector.


The Government of Pakistan is encouraging participation of private sector in all the fields of economy and specially in the energy sector, both in prospecting the resources and setting up power stations to meet the energy needs of the country. The Government is prepared to provide all possible facilities and assurances to the private Pakistani and expatriate investors who wish to participate in the endeavors of the Government to mitigate the present power shortage and to meet the fast rising demand for supply of power.

Presently, Pakistan is suffering from an acute power crisis. The total installed capacity of Pakistan is 8312 MW out of which hydel generation capacity is nearly 3000 MW and the remaining capacity is thermal. The population of the country is 110 million, which is increasing at a fast rate. The current peak demand is about 6400-MW and there is an annual increase of 10%. Due to enhanced village electrification programme aimed at delivering electricity to the teeming millions, this rate of increase may go up. Out of the total hydel capacity, 2550 MW is installed on the two large dams of Tarbela and Mangla. These dams were constructed under the Indus Water Treaty and are primarily designed to meet the irrigation requirements of the country. The power generation from these hydel power plants is thus sub-servient to the requirements of water for irrigation.

The capacity of hydel plants is highly susceptible to seasonal variations. The power generation fluctuates from 110% to 30% of the installed capacity between high and low water months. Thus the country is faced with shortage of power during the period from December to May each year. This situation has been existing for the last one or two decades.

The main reason for the chronic shortage in power supply is lack of financial resources for thermal power generation, to fill the gap produced by reduction of hydel capacity in low water months. Despite the fact that large allocations were made for power sector projects at the cost of health, education and communications sectors, the actual outlays have never been enough to meet the requirements. The need to save the social sectors from complete starvation and to remain within the ceilings for spending in the public sector laid down by the International Monetary Fund, the cooperation of the private sector is inevitable.

General Policy

At present two independent public sector agencies are functioning in Pakistan. They are Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC). There exists a weak inter-link of 220 k.v. lines between the two systems. But both are prevented from expanding their system by the shortage of funds with the Government. The lists of thermal and hydel power plants operating in WAPDA as on 30 June 1991 are given in Table-I and the thermal power stations of KESC are given in Table-II.
WAPDA's Installed Capacity Hydel Power Station
Big Hydels (2790 MW)
1. Tarbela 1750
2. Mangla 800
3. Warsak 240
Small Hydels (108 MW)
4. Dargai 20
5. Malakand 20
6. Rasul 22
7. Chichoki Mallian 13
8. Shadiwal 13
9. Nandipur 14
10. Kurram Garhi 4
11. Renala 1
12. Chitral 1
Total Hydel 2898
Thermal Power Stations
1. Guddu Steam & Gas Turbines 1249
2. Kot Addu Gas Turbine 800
3. Multan Steam 266
4. Faisalabad Gas Turbines 200
5. Faisalabad Steam 132
6. Shahdara Gas Turbine 86
7. Hyderabad 11
8. Sukkur Steam 50
9. Kotri Gas Turbine 130
10. Quetta 93
11. REPCO 9
12. MESCO 20
13. Jamshoro 880
Total Thermal 3959
KESC's installed Capacity Thermal Power Stations
1. Korangi Thermal 382
2. West Wharf 66 59
3. Daul Fuel STation 15
4. Korangi Town Gas Turbine 100
5. SITE Gas Turbine 125
6. Bin Qasim Thermal Unit-1 210
7. Bin Qasim - II 210
8. Bin Qasim - III 210
Total KESC 1318
Nuclear Capacity 137
Pakistan's Total
Installed Capacity 8312

In order to induct the private sector into power generation, the Government announced in November 1985 policy guidelines and offered a number of incentives and fiscal benefits. Subsequently a special institutional framework was developed to deal with private sector proposals.

Large increases in investment in power generation are required during the Seventh and Eighth Five Year Plans to remove the existing power shortages and to meet the expected increases in demand. At present the annual increase in power generation capacity is estimated at 1000 MW costing near $1.0 billion. In subsequent years the increase will be even greater asking for greater outlays.

To achieve this level of private investment, the Government is offering the private sector the opportunity to earn real rates of return which are competitive with the returns available from similar activities internationally.

Suitable Projects for the Private Sector

The projects covered by the November 1985 statement, commonly referred to as "build-own-operate' (BOO) projects, have the following main features:

* The private sector through a special project company incorporated in Pakistan will finance and build a power station and operate it for a concession period, typically more than 20 years. Extension of the concession period may be negotiated.

* The project will involve limited recourse financing, and the funds for the project will be raised without any direct sovereign guarantee of repayment. Instead, the investors in. and lenders to, the project company must look to the revenues earned by the sales of electricity for their returns on equity and the servicing of their loans.

* The output of the power station will be sold to the utilities i.e. WAPDA or KESC under a long term contract covering the concession period. The performance of the public sector utilities would be guaranteed by the Government.

Initially, private sector power stations were restricted to thermal stations based on fuel oil and indigenous coal. The policy has since been extended to include thermal stations using low calorific value gas and hydroelectric stations. In principle, the Government will give consideration to the use of any fuel, including imported coal and even nuclear energy, having regard to both economy and fuel diversity. Specific private sector projects may be solicited by the Government. Alternatively, private sector sponsors may put forward unsolicited proposals. It may be noted that each power plant will have its own cooling water system and approach roads for construction as a part of the project.

Measures Taken to Promote BOO Projects

The Government has, in collaboration with several multilateral and bi-lateral aid agencies. developed an innovative approach to encourage private sector investment in BOO power generation schemes. The key elements of this are:-

(a) The careful allocation of risk between the public and private sectors.

(b) The availability of loans to improve the debt service profile of projects. Measures have been taken on four fronts to pursue this approach. In summary, the Government has:

i) formed the Private Sector Energy Development Fund. This fund is able to extend bans to the private sector as an important source of finance for qualifying projects. Both the grace period and the repayment period of these loans are attractive with the result that a project's debt service profile will typically be more commensurate with the long life of power projects than would 'be feasible given commercial finance alone.

ii) expressed its willingness to protect the project company against certain risks which are beyond the control of the project company. This enhances the Value of the lender's "Security Package" and increases the attractiveness of the investment to both lenders and sponsors.

iii) granted power generation schemes several fiscal and other incentives, such as low equity and tax exemptions.

iv) put in place a new institutional framework to facilitate the preparation, execution and operation of private sector power generation projects.

Details of these measures are described in a Brochure titled "Investment Opportunities in Private Sector Power Generation Projects in Pakistan". I believe, copies of this brochure have been distributed among the delegates of the Conference. However, I venture to read out some of the important details from the Brochure.

The Private Sector Energy Development Fund

The Private Sector Energy Development Fund (The Fund) has been established to utilize the proceeds of loans and grants from several multi-lateral and bi-lateral aid agencies. The Fund is administered by the National Development Finance Corporation (NDFC). Loans and grant agreement have been signed with or indications of support have been received from:

1) The World Bank

2) Export Import Bank of Japan

3) US Agency for International Development

4) Nordic Investment Bank of Scandinavia

5) Government of the Republic of Italy

6) Government of France

7) UK Overseas Development Administration

8) Kredistanstalt for Weideraufbau (KFW), Federal Republic of Germany

9) Canadian International Development Agencies.

So far firm commitments of a total of US $ 408 million equivalent have been received and confirmation of current; indications of support would add another US $ 80 million equivalent to the available Funds. The Fund will lend up to 30 per cent of the total cost of approved projects, of 50 per cent of the foreign exchange costs. Loans may have a maturity of up to 23 years, with grace periods of repayment of up to 8 years. Currently, the applicable interest rate is 14 per cent per annum. Thus the Fund is providing important seed money for an easier financial structure.

Enhancement of the Security Package

As stated earlier it is anticipated that private sector power generation projects will be undertaken with limited recourse financing. Such a financing requires a comprehensive set of interlocking agreements and provisions (the security package) to give security to lenders. While details will generally need to be agreed on a case by case basis, the Government is committed to enhancing the value of the security package by assuming, or providing protection against, certain risks that would otherwise be borne by the project company. Subject to specific contractual arrangements the Government will:

* Provide protection against specific force majeure risks.

* Provide protection against changes in taxes and duties.

* Allow indexation of the price of power to protect the project company from inflation in specific cost items and changes in the rupee exchange rate.

* Ensure the convertibility of Rupees and remittability of foreign exchange to cover necessary imports, debt service, dividends and, ultimately, capital repatriation.

* Offers, through the State Bank of Pakistan, foreign exchange insurance to allow the project company to determine in advance the Rupee cost of foreign debt service commitments.

* Guarantee the performance of WAPDA under the Power Purchase Agreement, which will include protection for the project company against failure by WAPDA to take the expected amount of power or to pay the bills of energy received.

* Where fuel will be supplied from a public sector organization, guarantee the performance of the fuel supplier under the Fuel Supply Agreement.

* Arrange, subject to certain limitations, to finance a proportion of project cost over-runs through the Fund.

* Arrange for commercial loans and/or export credits to have some kind of priority over loans from the Fund.

Other Incentives

In addition to the enhancement of the security package described above the Government has established a number of incentives that will benefit private sector power projects. In particular, the Government has:

* declared that private sector power project companies shall be exempt from corporate tax.

* waived customs duties on the import of machinery for power generation.

* made available preferential loans for the purchase of locally manufactured machinery (currently the interest rate payable on such loans is 8 per cent per annum

* allowed the attractive return on investment in real terms in the tariff calculation.

* fixed the annual plant factor of 60 to 65 per cent for ensuring return and debt servicing as well as all operation and maintenance cost. The possibility of failure have, therefore, been minimized. Pakistan's present power position ensures utilization much above the agreed plant factor. Bonus has been provided for such performance and chances of higher return on investment are thus substantially more than otherwise.

* set-up, recently, a Cabinet Committee on Energy, chaired by the Prime Minister, to cut across the bureaucratic delays.

Details of Private Sector Power Generation Proposals

Letters of Intent have been issued to the following projects:-

* M/s. Xenel of Saudi Arabia for installation of 1292 MW Oil Fired Power Plant on the sea coast near Hub River, Balochistan.

* M/s. Fauji Foundation 01 Pakistan for installation of 350 MW Oil Fired Power Plant in the Lasbela district of Balochistan.

* M/s. ABS Group of Hyderabad in association with M/s. Technopromexport of USSR for installation of 840 MW Oil fired power plant at Jamshoro in the province of Sindh.

* M/s. Intrag Inc. of USA for installation of 115 MW combined cycle power plant based on low BTU gas available from Nandpur Gas fields near Multan in the province of Punjab.

* M/s. Altern Inc. of USA for installation of 6 MW Hydro Electric Plant at the Tail of the B.S. link canal, Punjab.

* M/s. Tenaska/Hawkins of USA for installation of 415 MW Combined Cycle Power Plant on low BTU gas available from Uch Gas fields in the province of Balochistan.

* M/s. FECTO of Pakistan for installation of a 134 MW hydro-electric plant on the River Allai Khwar in the province of NWFP.

The Government feels satisfied that the rate of success has been quite good in sanctioning private power schemes in Pakistan when compared with Turkey, Philippines and other developing countries, which are economically better off. At present Letters of Intent/Letters of Support have been issued in favour of the above mentioned seven active-projects. More projects are under process. Their aggregate capacity works out to 4218 MW and their estimated cost is $ 4.0 billion. The estimated investment during the 7th Plan in terms of Pakistan currency is Rs. 20.63 billion and during the 8th Plan it would be Rs. 132.3 billion. The commissioning of these projects is expected to start in the 8th Plan period (1993-98) and will continue in the future.

I would like to draw the attention of the audience to the recent approval by the Government of Pakistan for the 1292 MW Hub River Power Project costing US $1.3 billion, which is a land-mark in the history of our country. From the largest power plant project of the world to be installed in Pakistan in the private sector, you are requested to derive comfort and confidence.

The policy of the Government of Pakistan is very clear. It is encouraging the private sector in all the fields of economy, especially in the field of energy. We are prepared to give them all legitimate facilities and assurances and expect that the private sector from the friendly countries will participate in our endeavours to make the country self sufficient in power so that the menace of load shedding is eradicated forever.
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Author:Poonegar, S.R.
Publication:Economic Review
Article Type:Cover Story
Date:Apr 1, 1993
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