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Power projects in the private sector.

Pakistan will not be able to generate power according to its current demands. It is almost more than two years that the Government started wooing the private sector for power generation. According to one expert in the power field if just two basic assumptions can be made true the power shortage problem could be solved to a considerable extent. The assumption needed are: i) power rates are enhanced considerably, ii) power transmission cost are reduced per person served.

These two assumptions, ironically, match the study carried out by the World Bank recently on the electric power shortage in Pakistan. The greatest hitch in the growth of this sector is that the rates at which WAPDA is prepared to pay private power suppliers is almost one half of what they want.

The current installation cost of a thermal unit is one million dollars. The most economical unit for thermal power in Pakistan, was of 250 megawatts capacity which required 200 to 250 million dollars. This was a huge amount for any Pakistani firm to invest on its own. Therefore, they had to get private investment collaboration from abroad, which in the long run was not in the country's interest. The private sector's remittances of profits abroad were at a rate higher than a loan obtained at the governments level which was much cheaper.

The Private Power Cell in the Ministry of Water and Power has received as many as 19 proposals for power projects in the private sector to generate 4100 MW in the next five to seven years for which an investment of 2900 million dollars would be needed. Projects now on the cards are:-

* Two proposals for oil fired power generation i.e Hub River 1292 MW and Fauji Foundation 300 MW.

* Seven proposals for coal fired generation of over 727 MW.

* Four for diesel power generation 546 MW.

* Three for Hydro Power Generator 116.5 MW.

* One Nandpur Gas Combined cycle power plant 100 MW.

* One geothermal Altern Conceptical for 1000 MW.

Letters of intent have been issued to Fauji Foundation for its offer of 300 MW in Karachi to Army Welfare Trust for its proposal of Balloki Sulemanki Canal 10.5 MW to Altern of USA for its proposed project of 6 MW B.S. Canal tail. Other proposals are being processed by the concerned authorities.

So far coal-fired power projects have not come off the grounds in the private sector. WAPDA has taken a lead in this respect by signing a joint venture agreement with Dongfong Electric Corporation of the Peoples Republic of China for construction of three coal based power plants of 50 MW each at Khanot District Dadu Sindh.

The official surveys have indicated the estimated coal reserves of 1.25 billion tonnes out of which 197 million tonnes are reported to have been measured and 188 million tonnes have been indicated. Actual production of coal was in the region of only 2.5 million tonnes in 1988-89 and most of the coal mining is carried out in the private sector. The main consumers are the brick making kilns in the Punjab. The low level of production of coal is attributed understandably to limited demand and use of coal.

Work on Hub River Power Project is likely to start in July 1990. The sponsors have already started arranging loans and lines of credit for the project. All the new electric power projects are being set up in the south of the country. The Punjab, already handicapped by the inability of the federal authorities to sort out a lot of bitterness over the Kalabagh dispute, it seems is about to be left behind in the power generation game. However, one offer is under serious consideration from the Punjab Coalminers Association who want to set up 50 MW stations from local coal. The location of the projects is as yet not known but competent sources say that a decision on the location is about to be taken, with indications that the Mianwali - D.G. Khan area being the most likely.

Altern Inc.

The Board of Investment has approved issuance of letter of intent to an American firm Altern Inc. for generating six megawatt of hydro-electricity at the tail of Balloki Sulemanki link canal. Already at the head of the Balloki-Sulemanki link canal, the Army Welfare Trust had proposed a 10.5 megawatt power plant and a letter of intent was issued by the ECC over a year ago. The proposed project of the American firm, Altern Inc. will cost Rs. 154.8 million, including a foreign component of Rs. 103.2 million. The local component will be Rs. 51.6 million. The firm has offered to build three units of two megawatt each and provide power from its switchyard to Wapda which will bring its transmission lines to the plant. The firm will charge around 93 paisa per unit of electricity for the first 10 years. The price per unit will go down to paisa 37 after 10 yeas, and it will be 32 paisa after the expiry of 24 years. At expiry of 50 years, plant will be transferred to the government at Re. one.

Sources indicated that the plant will compulsorily supply 70 per cent f the power to Wapda failing which there would be a penalty. In case Wapda fails to utilise that capacity, the latter will be penalised. Any supply of over 70 per cent will be at concessional rate. The sponsors have been asked to prepare the feasibility study within six months of the letter of intent. The project is to be completed within two years of the signing of implementation agreement. The debt-equity ratio would be 75 to 25 and the funds would be raised by the sponsors without recourse to financing from NDFC or nationalised commercial banks, nor will the government guarantee the loan.

The profits would not be allowed to be repatriated in foreign exchange. It is stated that the Army Welfare Trust which was offered the letter of intent in January last year has accepted the terms and conditions and would soon have discussions with the Ministry of Water and Power about their 10.5 megawatt power units at the head of B.S. link canal. It may be added that while the American firm has been given the price per unit of electricity at the exchange rate of Rs. 21.50 to a dollar, the Army Welfare Trust was guaranteed the same price at the exchange rate of Rs. 17.66 to a dollar. Thus the government would be ensured of cheaper rate of power.

Hub Power Project

The 1,292 megawatt power project, approved by the Board of Investment at a meeting held under the Chairmanship of Prime Minister on December 27, would be completed over a period of 42 months. WAPDA would purchase its power for rupee 1.03 per kilowatt hour during the first 12 years whereafter its cost would decline by paisa 16 because of increase in the plant factor. The sponsors are Hawker Siddeley Power Engineering Limited of UK and Mohammad Ali Raza of Xenel Group of Saudi Arabia.

The project would be set up by the Hub River Power Group (HRPG) and Pakistan is the first Third World country to attract a heavy private investment of 1.07 billion dollars in the power sector. The HRPG would be given tax exemption and allowed an 18 per cent return on the equity of 220 million dollars. Fifty one per cent of the equity would be foreign component and 49 per cent local. The investors would be free to repatriate profit on the foreign component of the equity. If this project had been set up by WAPDA the cost of power generation would have been cheaper by at least paisa 10 per Kwh but the government was unable to arrange such a huge amount for the purpose. The government had no alternative but to induct the private sector in the field.

Before implementation of this project, government would sign three agreements with the HRPG which would specify the site of the project period of its completion and penalties in case the sponsors failed to abide by the deadline, the quantity and tariff of power to be purchased by WAPDA and arrangements to cope with the situation in the case the rupee suffered a devaluation against the basket of international currencies, and the arrangements that Pakistan government would make to supply fuel, through the Pakistan State Oil, for the project.

Pakistan Government has initialed a 3 year agreement calling for a consortium of largely British, Saudi Arabian, and Japanese companies to supply 1300 MW in oil fired capacity to the national grid. The complex is to be built at Hub River in Balochistan province 50 km. West of Karachi. The companies include Hawker Siddeley Power Engineering of the UK Xenel Industries of Saudi Arabia, K & M Engineering and Consulting Corporation of the US, and group of four Japanese companies consisting of Ihi Toshiba, Mitsui and Kumagai Gumi. Other companies in the group include British Electricity International and the Canadian utilities Power Group of Alberta.

The foreign contractors will work on the basis of build-operate transfer (BOT). Under BOT the foreign contractors take a long-term lease hold on the project and finance it from the sale of electricity produced by the project to the local utility. At the end of the lease, the project is turned over to the utility's control for a nominal fee.

The project will consume 15 lakh tons of furnace oil per annum as its raw material which will be imported by the Government and hand it over to Pakistan State Oil for its onward transmission to the power project at Hub Chowki. A pipeline will be laid from the PSO terminal to Hub Chowki for supplying the furname oil. The total cost of one billion dollars does not include the cost to be incurred on the pipeline, transmission line and oil handling job at Port Qasim. The total cost will cover 25 per cent sponsors equity and 75 per cent loan. Of the total loan, 30 per cent will come from special fund set up by the World Bank and 45 per cent from other local and foreign DFIs and the Export Credit Agencies.

It may be mentioned here that the World Bank has decided to help less developed countries through its new scheme "Build-Operate-Transfer" (BOT) financed through the Private Sector Energy Development Fund (PESDF). Besides Hub project, other small power projects will also be financed from this Fund. In order to support the initiatives taken by developing countries in mobilising private sector investments through BOTs, the World Bank has initiated in Pakistan a pilot scheme involving comprehensive programme for enhancing the role of BOTs in energy development.

In the Pakistan pilot scheme, the World Bank has undertaken to be responsible for soliciting proposals for BOTs and the review and approval of investments has been streamlined. Staff have been trained locally and supported by internationally experienced engineering and economic consultants, as well as investment bankers. The major breakthrough, however, has been in the area of finance, where the World Bank together with bilateral and multilateral aid agencies has financed a Private Sector Energy Development Fund (PSEDF) which has been created to provide long term financing up to 30 per cent of the total costs of BOTs. So far the Fund has mobilised around $ 700 million.

The full agreement covers a 30 year period, after which the project will be turned over to the control of WAPDA. The Hub Power River Group will now incorporate itself in order to be listed on the Karachi Stock Exchange (KSE). Its primary shareholders will be the consortium members themselves. Its first commercial step will be to issue dollars 100 million inconvertible bonds (it has yet to appoint an underwriter), and later it will issue shares on the KSE, to attract Pakistani investment, although initially the consortium members themselves will be the largest shareholders.

The Hub River Power Project requires Rs. 2,235 million in local currency financing during 1989-93. Out of which Rs. 507 million are to be channelised through BEL in fiscal 1989-90. The Ministry of Finance, it is learnt, had asked the SBP for an allocation in this regard. The SBP reportedly directed that funds for HRP Project be mobilized by BEL from the open market in coordination with other NBFIs. In case of shortfall, says the SBP, BEL can approach commercial banks who have sufficient funds available with them for investment. As the SBP has refused to give line of credit for Hub project, BEL will now have to form a consortium with other financial institutions or raise money from the call market thereby boosting the earnings of banks who would be able to convert their low earning treasury bills, at 5.94 per cent to lend to BEL. As it is, the earning of banks on account of funds put into Wapda Bonds have got a boost thereby raising the possibility of better rates on PLS deposits to account holders.

SBP feels that instead of mobilizing resources from the market DFIs were becoming more and more dependent on borrowed funds from SBP. And SBP's assistance to DFIs had become a source of direct injection of money in the economy generating inflationary pressure. Therefore, in order to reduce the dependence of DFIs on SBP and to check inflation, SBP for the last three years has stopped extending finance to NBFIs for general purpose other than concessionary schemes, such as for Local Machinery Manufacturing (LMM). Hub POwer Project envisages establishing four oil-fired power generating units of 323 MW each, to be commissioned in January 1993 and completed by December 1993, on build-operate-transfer basis (BOT).

Habibullah Power Plants

Final approval has been given for power generation projects to be set up at Lakhra and Quetta in collaboration with Siemens West Germany. The project estimated to cost about Rs. 2757.588 million envisaging two power plants, each of 50 MW at Lakhra and two other plants each of 15 MW at Quetta would be set up in collaboration with a private company of West Germany.

The salient features of the sanction granted by the Government in this regard are:

* The equity participation ratio would be foreign 45 per cent and local 55 per cent.

* The equity participation contributed by people of Indo-Pak origin would be treated as on NRI basis.

* The equity ratio of foreign sponsors in foreign currency is estimated to be Rs. 310 million while in local currency is estimated to be Rs. 380 million.

* The foreign currency loan is estimated to be 84 per cent i.e. Rs. 1,733 million and loan in local currency is estimated to be 16 per cent i.e. Rs. 335 million.

* Foreign currency Euro-American loan for Quetta plant is estimated to be equivalent to Rs. 321 million and for Lakhra plant estimated to be equivalent to Rs. 1273 million.

* Foreign currency Danish loan for Quetta project is estimated to be equivalent to about Rs. 140 million.

* The power from these plants would be purchased at 65 per cent annual load factor on the basis of the units delivered to WAPDA.

* The power will be supplied to WAPDA at 123 k.v. power house switch board.

Army Welfare Trust Rawalpindi

In pursuance of the present policy of encouraging private investment in the power generation sector the Federal Government have issued a letter of intent to Army Welfare Trust, Rawalpindi for the establishment of hydel power generating facilities at Baloki-Sulemanki Link canal near Chunian, District Kasur, Punjab.

It will be perhaps the first project in the private sector envisaging hydel power generation for which provisional permission has been accorded by the government. All other projects sponsored and approved in the private sector lately, relate to power generation on the basis of indigenous coal. It may be mentioned that the secondary objective of the government to allow power generation enterprises in the private sector, was to induce the private investors to increasingly bring into use the indigenous coal reserves for the purpose of power generation in addition to the primary aim to accelerate efforts in expanding power generation facilities to cope with the dire shortage of electricity vis-a-vis the growing demand.

The project would have the design capacity to generate 10.50 megawatts of electricity per annum, and would involve a total investment of about 9.06 million dollars. The sponsors are reported to have negotiated a technical assistance-cum-credit agreement with Industrial Metallurgical Pascarmona of Argentina who would make available suppliers credit to the proposed enterprise to finance the import of plant and machinery from Argentina.

The Argentinian firm would be responsible for the installation, commissioning and trial runs of the proposed facilities. The tentative agreement between the two sides provides for payment of engineering supervision, erection and commissioning charges amounting to approximately $ 1.313 million to the Argentinian firm plus payment of marine insurance charges of about $ 8,000 involving shipment of plant and machinery from Argentina.

Additionally, the Argentinian firm would have the responsibility for the shipment of plant and machinery, for which the local sponsors would be required to pay to the former an amount not exceeding $ 485,000 on account of freight and other charges against shipping documents.

Fauji Foundation Rawalpindi

Approval has been given for the local Fauji Foundation and its joint venture partners, Babcock & Wilcox and Canamerica Enterprises, both of Canada, to build a power station at Bin Qasim. The letter of intent for the contract, awarded in December 1988, calls for a 300 MW oil-fired power plant costing $ 280 million. This is now to have capacity of 600 MW. The scheme is being financed with a mixture of equity and loans. About 60 per cent of the equity, accounting for one-quarter of the financing, will be raised in Pakistan, or possibly through the International Finance Corporation (IFC).

Loans, accounting for 75 per cent of the financing, will be raised by the National Development Finance Corporation through a syndicated bond issue arranged by Pakistani banks, and through the World Bank-sponsored private sector energy fund. This is a combination of foreign export credits and development finance from aid agencies and banks. The IFC has said it is interested in lending the equivalent of 9.5 per cent of the scheme's total cost.

The sponsors of the scheme have formed a new company called Fauji Electric Power Company to own and operate the scheme. Babcock & Wilcox will build the power station under contract to this company. The sponsors have suggested a tariff of 88 paisa ($0.05) a kwh for the next 11 years. The consultants are the London office of US' Foster Wheeler Corporation and the local National Engineering Services (Pakistan-Nespak).

It is expected that training and transfer of technology will be given high priority by the new power company and that the operation of the plant will be expeditiously taken over by Pakistani personnel. The Fauji Foundation has already developed many successful large scale industries and is active in areas like sugar, gas and fertiliser. Babcock & Wilcox has been a major world thermal power station equipment company for more than 100 years, while Canamerican is a company specifically formed to help develop private infrastructure projects in Pakistan.

Xenel - Hawker Siddeley

In one of the largest projects of its kind in the world, a 600 MW thermal power station is planned with the collaboration of Hawker Siddeley of the UK. The Rs. four billion project, which will be listed on the Karachi Stock Exchange, will see the British Engineering Company, Hawker Siddeley, contribute Pound Sterling 10 million as part of its equity share. In return the company will manage the project for 25 years. The World Bank is to put up Pound Sterling 60 millin in the form of loans, while the rest will be put up by a group of Pakistani investors.

Known as "build-own-operate" schemes, such projects have become fashionable as a means of funding infrastructure development in developing countries short of foreign exchange. Few have got beyond the drawing board because of difficulties over arranging debt financing and worries about their commercial viability.

Hawker Siddeley will have a licence to operate and manage the project for between 23 and 25 years while the financing is repaid. It expects the World Bank will contribute about Pound Sterling 60 million in loans from its recently-formed private sector window. Other shareholders will include local Pakistani investors and foreign suppliers. The total equity will be Pound Sterling 50 million and the project is expected to be listed on the Karachi Stock Exchange.

The company is expected to earn a return of 18 per cent after tax. The oil-fired power station is part of a complex that will include a similar 600 MW unit sponsored by Xenel, a Saudi Arabian private company, and built on a turnkey basis by Mitsui of Japan. The stations will sell electricity to the state-owned Water and Power Development Agency on a "take or pay" basis. This means the Pakistani Government will in effect assume the financial obligations of the project if it fails to buy power under its contract.

Besides the World Bank and equity finance, the project will be funded by local currency loans and a foreign currency debt package which is expected to be guaranteed by official export credit agencies and on which Morgan Grenfell has been advising. To help ensure these debts can be serviced, Hawker Siddeley ensured that the contract would include a provision for the price of the electricity to be increased in the event of a devaluation which pushed up debt servicing costs.

Dr. Ghaith R. Pharaon

A world renowed industrialist, Dr. Ghaith R. Pharaon of Saudi Arabia, who holds interests in Pakistan Oil Fields, Attock Chemicals and Attock Cement, has now decided to go into power generation in Pakistan's private sector.

According to plan, coal fired 80 megawatt power plant would be set up at Chakwal at an estimated cost of US $ 114 million. Dr. Pharaon has planned to set up another cement plant at Fatehganij to produce three lac tonnes of cement annually meeting country's growing cement requirement. The plant would be in addition to Attock Cement project at Hub, presently producing six lac and sixty thousand tonnes of Falcon Cement. The project was initiated by Dr. Pharaon on the desire of late Prime Minister Z.A. Bhutto for industrial development of backward area of Balochistan.

More Incentives Needed

The power projects are moving at a snails pace although power projects in the private sector were cleared by the Government about two years ago. It appears that more incentives in addition to the existing ones would be required to boost the private sponsors for expediting the implementation of their power generation projects. The Government may assists the sponsors of these projects in negotiation of loans from abroad and also in providing local currency assistance which may be made recoverable in the form of supply of energy in the long run by the individual power units.

One of the difficulties appears to be the relatively large size of capital investment involved in such projects. In order to overcome this difficulty special arrangements may be backed up by the Government for making available a package of financial assistance from a consortium of local and foreign financing agencies and banks. It has been generally seen that if sponsors happen to be quite new to the field of industrial investment, they are usually unable to make a break-through in obtaining the desired level of institutional support.

The current installation cost of a thermal unit is one million dollars. The most economical unit for thermal power in Pakistan, was of 250 megawatts capacity which required 200 to 250 million dollars. This was a huge amount for any Pakistan firm to invest on its own. Therefore, they had to get private investment collaboration from abroad, which in the long run was not in the country's interest. The private sector's remittances of profits abroad were at a rate higher than a loan obtained at the government's level which was much cheaper.

According to an official estimate, the country is facing a shortfall of about 700 megawatts of electricity vis-a-vis the existing level of demand from different types of consumers. Statistics show that per capita consumption of electricity in Pakistan is at an average of 400 kwh per annum as compared to as high as 10,000 kwh in USA and Japan and about 4,000 kwh in Yugoslavia. This shows the deplorably low availability of electricity in Pakistan.

The policy initiatives of the Seventh Five Year Plan are as follows:

* Induction of private sector in power generation.

* Off-loading of WAPDA and OGDC from budget and their financial restructuring.

* Incentives package for oil and gas exploration which includes extension of exploration to offshore areas, fuel-oil parity price for offshore gas and other measures for promoting oil and gas exploration.

* New gas utilisation policy which gives highest priority to use of gas for fertilizer feedstock, followed by its use for power, gas turbines, domestic consumers and the industrial sector etc.

* Implementation of the policy of energy conservation and demandmanagement.

* Setting up of small power stations based on fluidised bed technology for increasing the use of indigenous cost.

* Selection and implementation of small hydel and low-head hydel projects to balance the thermal generation with hydel generation.

* Finalisation of a master plan for village electrification and its expeditious implementation.


Ghazi Ghariala Hydel Power Project

Ghazi Ghariala hydel power generation project of 1,000 megawats of electricity is to be constructed with the help of the World Bank and UDDP. The WAPDA had carried out initial studies in 1960 for an off channel storage at Ghariala, downstream of new Tarbela Dam. In the eighties, the WAPDA through hydro-electric project organisation took up pre-feasibility studies of a power development scheme by diverting water from the Indus and it was found that power generation of 1,000 mw at Ghariala would be economically feasible. The project is considered advantageous because power generation is firm and no resettlement of any population is involved, nor is there any dispute on sharing of water.

Since it is a run of the river project, no storage posi-problem was involved. The Ghazi-Ghariala project envisages construction of a diversion structure on Indus river downstream of Tarbela Dam in the vicinity of Ghazi village from where flows of up to about 60,000 cusecs could be carried by means of a power channel, about 30 miles long. Water from this channel would be dropped again in the Indus with available head of about 200 feet for poewr generation. The World Bank has formulated the project through its experts and suggested various studies and consultancies for undertaking the project.

According to the time-table prepared by the World Bank various studies and investigations could be carried out simultaneously within a year or so. With funding from the donor countries and World Bank and Pakistani counter local rupee resources, the project could well be undertaken, if not completed during the Seventh Plan. Experts maintain that one of the strongest points of the project is that it does not involve the resettlement or reparian issues, and the project is not expected to have any negative impact on the environment on any particular group. On the other hand, it would have a positive impact in developing fisheries at the barrage structure as well as the diversion of water through the power channel would assist in reducing the flood peaks (for Nowshera valley) in the Indus.

Pasni Power Project

First phase of 45 megawatt power plant at Pasni under construction by the Federal Government is expected to be completed by August this year. Under the first phase 17.5 megawatt electricity would be available for the coastal areas of Balochistan. With the completion of another three units almost entire Balochistan coastal belt would be electrified. Electricity from this 45 megawatt power plant would also be available to the interior of the Mekran division. To start with, 132 kv transmission line would be strung from Pasni plant to Turbat. Work on it is in progress.

Another 232 kv transmission line would be ready by the end of current year connecting Guddu with Kharan in the interior of Balochistan.

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Title Annotation:Pakistan
Author:Haidari, Iqbal
Publication:Economic Review
Date:Mar 1, 1990
Previous Article:Biggest-ever power project in private sector.
Next Article:30 years of WAPDA.

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