PPP Experience – Pakistan

Power Sector
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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................................................................12
2.7.3 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 NEPRA’s Jurisdiction in AJK......................................................................................14
2.7.9 Hydel Tariff..................................................................................................................14
2.7.10 Legal Disputes IPP.....................................................................................................14
2.7.11 Government Subsidies (consumer tarriffs).................................................................14
2.7.12 Circular Debt (cross defaults).....................................................................................15
2.7. Suggestions for improved methodology on PPP implementation......................................15
2.1. POWER SECTOR - OVERVIEW
It is essential to provide adequate energy to industry to drive economic growth and create
employment opportunities. Historically, electricity supplies were significantly and consistently
behind demand, which have resulted in frequent and unscheduled blackouts, causing anger and
restlessness 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 power
generation 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 estimate 1, Pakistan’s hydel potential alone is 100,000 MW
with identified sites of 55,000 MW.

This demand is expected to grow by 8.8% 2 from 2010 onwards and expected to reach 36,000
MW by 2015 and 114,000 MW by 2030. Presently, only 65% to 70% of the total country’s
population has access to electricity. To bridge this, Government has envisioned a plan; Vision
2030, an investment in the tune of USD 32 billion to add another 20,000 MW by 2020. An
annual average USD 3.2 billion is required to finance this infrastructural initiative and private
sector investment is expected to be 45% or USD 15 billion within this period.

PEPCO System Historical Data/Forecast

Historical PMS Difference

Years Peak Peak
(MW) (MW) (%)
1999-00 9289 9311 0.24
2000-01 9718 9736 0.18
2001-02 10922 10243 -6.21
2002-03 10484 10799 3.00
2003-04 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 Pakistan’s 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 power
purchasing agreements (PPAs).

1
WAPDA: Vision 2025 published in Jan 2011.
2
Planning Commission: Vision 2030
As a result, a total 23 plants are now working under various IPP policies generating 5,977 MW
of the total current power generation and with total investment of over 8 billion. A total of 119 of
licenses have been issued under various IPP policies and as a result 30% of the total instated
capacity is being produced by the IPP’s i.e. the private sector.

Year Generation Transmission Distribution

Total
Public Privat NTDC KESC Ex- KESC SPP CPP
Sector e WAPD (Dist.)
Sector A
DISCOs
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 9 117 1 1 8 1 9 1 147
Total

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

Future Required Generation Capacity

Year Peak Demand Gen Capacity Gen Capacity

(MW) Required Planned
(MW) (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 in
response to the increasing reliance on the oil to produce electricity. The ratio of oil/gas in the
generation mix which stood at 24:74 back in FY05 has turned into a 47:52 ratio in FY09. Higher
share 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 invariably
resulted in higher costs per KWh. Pakistan’s 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 Nameplate/Install Derated/ Availability (MW)

Generation ed Capacity Dependable
Summer Winter
(MW) Capacity
(MW)
WAPDA Hydro 6444 6444 6250 2300*
GENCOs 4829 3580 2780 3222**
IPPs (incl 7911 7695 5750 6900**
Nuclear)
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

Consumption (Per
Country3
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
Pakistan power sector has historically been dominated by public sector utilities; WAPDA and
KESC generating a total of 11,327 MW and 1,756 MW, put together which is 67% of the total
installed capacity and are enjoying monopoly in the Power Sector. Over the years, these
3
www.adb.org/statistics, figures for 2007
institutions emerged as large monolithic, vertically integrated utilities with overstaffing,
declining skills, deteriorating maintenance of Infrastructure, financial and technical
inefficiencies, poor governance, and excessive dependence on public sector development
resources, neglect of customers and lack of competitive spirit.

Pakistan has per capita gross domestic product (GDP) 2009 of $2,609 4. It has one of the least
developed power sectors compared to other countries. Electricity consumption per head in
Pakistan is below the level of countries such as India 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 that in Sri Lanka and Vietnam.

The power sector reforms are critical for the long-term and short macro economics stability and
are 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,
better regulation, improved governance and up-gradation of technology and the machinery of the
power sector.

Analysis of Consumption Mix (July-Sept.)

Category Units-MkWh Sale %age

2010 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 back
to 1985 when the Government in view of the electricity demand patterns and lack of funds in the
public sector, decided to mobilize private sector resources by inducting it into power generation.
These initiatives were followed by the Power Policy 5 in Pakistan firstly turned up in 1994. The
power 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, the
1995 Transmission Line Policy, the 1998 Power Policy, and finally the Power Policy 2002 which
is currently in place in the country. The Government targeted to formulate a comprehensive
policy framework concerning incentives, fiscal treatment, repatriation of profits and capital,
availability of foreign exchange, and pricing.

4
The World Bank: World development Indicator Database, GDP per capita adjusted for Purchase Price Parity
(current international $): 2009
5
“Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan”), promulgated in March 1994.
In 2005, the Energy Security Action Plan (2005-2030) was approved to meet the requirements of
Pakistan’s Vision 2030 for reliable and quality energy supplies. The main objective of the plan is
to 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 the
utilization of the country’s indigenous resource to reduce dependence on imported fuel. In view
of the public sector resource constraints, an important focus is also creating an environment
conducive to the participation of the private sector, both international and domestic.

2.2.1. POWER POLICY 1994

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

Salient Features:

 "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, exchange
rate fluctuations, O&M costs, etc.
 Fiscal incentives consisting of exemption from corporate income tax, customs duties, sales tax,
Iqra, and other surcharges on imported equipment.
 Standardized security package which includes a model Implementation Agreement, Power
Purchase Agreement and Fuel Supply Agreement.
 Creation of a Private Power and Infrastructure Board, so as to facilitate a one-window operation.
 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 discounted
prices, and establishment of an independent rating agency." The government subsequently added
further incentives in March 1995 which led to a flurry of foreign investment petitions.
 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 electricity
for a very reasonable 6.5 cents/kwh. This guaranteed the foreign producer that regardless of a
potential drop in demand for electricity, the government would purchase the supply of electricity
at 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 a
proposal.

However, the authorities continued to contract further IPP capacity beyond the required level and
as a result capacity outran demand. Over 3,000 MW of private IPP capacity came on stream in
1997 alone. Maximum demand fell from 84% of capacity in 1994 to 64% in 1998. Some
reduction in this ratio was desirable in order to enhance system reliability and reduce the
incidence of power cuts. However, power demand growth stalled following the Asian financial
crisis, 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 unit
energy charge basis. Payments were guaranteed by the Government. There were a number of
disputes with IPPs in the late 1990s when government tried to reduce costs through tariff
reductions.

The term independent power producer (IPP) is the outcome of the 1994 power policy. IPP is an
entity, which is not a public utility, but which owns facilities to generate electric power for sale
to utilities and end users. The policy allowed full flexibility to IPP’s to bring capacity on line as
quickly as possible at predetermined power purchase prices. The Government guaranteed
implementation, fuel supply, and power purchase.

2.2.2. POWER POLICY 2002

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

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:

 Invitation of bids on tariff through International Competitive Bidding (ICB);

 Encourage exploitation of indigenous resources including hydel, coal, gas and renewable
resources through active involvement of the local engineering, design and manufacturing
capabilities.
 Customs duty at the rate of 5% on the import of plant and equipment not manufactured locally.
 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.
 For projects above 50 MW, One-Window support to be provided at the Federal level. For projects
below and up to 50 MW, One-Window support to be provided at the respective Provincial/Azad
Jammu and Kashmir level.
 Ministry of Water and Power (through PPIB) to remain the focal point at Federal level.
 To develop raw sites whose feasibility studies are not available, unsolicited bids would be
welcomed. The sponsors of feasibility studies on raw sites will have first right of refusal.
 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 between
60% to 66% of the total tariff.
 Hydrological risk to be borne by power purchaser (WAPDA/NTDC/KESC).    
 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 as
exclusively oil-fired power plants.
 Guarantee by Government for the performance obligations of its entities such as the power
purchaser, and the provinces. Protection to sponsors and lenders in case of termination of the
project.
 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/competitive
and stable return on investment.
  Standardized and tested agreements – namely, the Implementation Agreement (IA), the Power
Purchase Agreement (PPA), the Fuel Supply Agreement (FSA), available upfront.
 Any variation in price of fuel to be passed on to the power purchaser. Similarly, any additional
taxation over and above the tariff assumptions liable to be passed on to the power purchaser.  
 Various tariff components to be indexed for variation in the Pakistani Rupee and US$ exchange
rates to cover the exchange rate variations risk.
 Availability of Government guarantees for protection against any change in duties and taxes, and
against specified “political risks”.

2.3. INSTITUTIONAL FRAME WORK

The power sector in Pakistan has pre-dominantly been controlled by the public sector since
independence. In the decade of the 1990s, the severe constraints of availability of capital led to
inadequate generation capacity and transmission infrastructure which resulted in excessive
shortage of electricity in the country. Massive deterioration in governance and heavy losses in
the systems of the Water and Power Development Authority (WAPDA) and the Karachi Electric
Supply Company (KESC) actuated the need for restructuring of the power sector. Realizing the
need for involvement of the private sector for expansion of generation capacity, the Government
embarked upon a strategic plan for restructuring of the power sector which included creation of
an autonomous regulatory authority as a primary step towards sectoral reforms. Thereafter, the
National Electric Power Regulatory Authority (NEPRA) was established through the
promulgation of Regulation of Generation, Transmission and Distribution of Electric Power Act,
1997 (XL of 1997), as an essential component of GoP's strategic plan for privatization of the
power sector in order to oversee the functioning of the re-structured power sector and safeguard
the interest of all the stakeholders.

Government adopted a policy of unbundling for the power sector, which was enshrined in the
1997 NEPRA Act and the 1998 WAPDA Act. This involves separating responsibility for energy
sector policy (which remains with the Government), from regulation of the sector (which has
been passed to the National Electric Power Regulatory Authority (NEPRA) and operations,
which are being divided among generation, transmission, and distribution companies.

PPI exists primarily in the power generation. Therefore institutional frame relevant to PPI exists
both at the federal level and the provincial level. At the federal level there is PPIB primarily
looking after the private investment in the power sector, NERPA for issuing licenses and trarrif
matters, AEDB is new entrant in the PPI institutional frame work and mandated to explore the
alternative energy in the country. At the provincial level there is Punjab Power Development
Board (PPDB), Sindh Power Cell and Sarhad Hydel Development Organization (SHYDO). Each
of them is discussed separately in the following sections.

Table 1: Important Distribution Statistics of DISCOs during 2009-10

Company Category- Electricity Electricity Distribution % Recovery

wise No. of Purchased Sold Losses
Consumers
PESCO 2947108 12638 8258 37.00 79.39
IESCO 2059207 8396 7572 9.80 95.90
GEPCO 2454254 6987 6220 10.99 95.74
 LESCO 3182293 16101 13880 13.70 93.22
FESCO 2879188 9329 8317 10.90 97.07
MEPCO 4057491 12225 9915 18.90 94.20
HESCO 1511878 8275 5395 34.80 59.76
QESCO 490805 5167 4099 20.70 75.55
KESC 2051964 7842 9905 34.90 100.00

2.3.1. CREATION OF PRIVATE POWER AND INFRASTRUCTURE BOARD (PPIB)

The PPIB was set up in 1994 to provide a one window facility for investors in the power sector.
It negotiates, executes and administers agreements with IPPs and provides an interface between
IPPs and government.

PPIB is an administrative extension of MoW&P. IT is headed by a Managing Director and three

directors from the government officials working in the ex-officio capacity. PPIB provides a
“One-Window” facility to private sector investors in matters concerning establishing power
projects and related infrastructure. These matters include negotiation and execution of the
Implementation Agreement (IA).

PPIB also provides support to the power purchaser and fuel supplier while negotiating the Power
Purchase Agreement (PPA), Fuel Supply Agreement (FSA)/Gas Supply Agreement (GSA), other
related agreements, and liaison with the concerned local and international agencies for
facilitating and expediting progress of private sector power projects. PPIB is working to attract
and facilitate Foreign Direct Investment (FDI) in Pakistan’s power sector.

2.3.2. CREATION OF NATIONAL POWER REGULATORY AUTHORITY (NEPRA)

The 16 December 1997, issue of the Gazette of Pakistan proclaimed the enactment of the
Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, which had
become effective on 13 December 1997. Under this Act, the National Electric Power Regulatory
Authority (NEPRA) performs three main regulatory functions i.e., licensing of generation, 23
transmission and distribution of electric power, tariff determination and prescription of standards
and 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 presidential
ordinances. AEDB mandate is to develop national strategy, policies and plans for utilization of
alternative and renewable energy resources facilitate power generation through alternative or
renewable energy resources, evaluating, monitoring and certification of alternative or renewable
energy projects and products. AEDB is in the process of developing a mid-term policy which is a
logical progression from the short term policy established in 2006 which meant to be a Lenient
Phase 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 been
issued by NEPRA.

2.3.2. PUNJAB POWER DEVELOPMENT BOARD (PPDB)

At the provincial level, PPDB role is to enable private sector investment in power generation in
the Punjab province. The provinces can develop and implement power generation units having
not more than 50MW of generation capacity.

It was set up in 1995 and announced its Generation Policy in 2006. The policy offers fiscal
concessions similar to Federal Government’s Power Policy of 2002. PPDB focus is o on small
power production facilities of less than 50 MW.

2.3.2. SARHAD HYDEL DEVELOPMENT ORGANIZATION (SHYDO)

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

SHYDO is managed by a board with majority comprising of ex-officio office bearers of the NWFP
Government. SHYDO has the mandate to enter into arrangements with private companies or even
incorporate 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 the
purview of SHYDO.

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

2.6. INITIAL RESPONSE TO PPP IMPLEMENTATION

The power sector has gone through numerous reforms which are still continuing two decades
after its inception in 1985. The overall experience in the power sector of PPI can at best be
termed as modest.

Type of Projects Number of Capacit Investment

Projects y (Million
(MW) US$)
Project prior to 1994 Power Policy 1 1,292 1,608
Projects under 1994 Power Policy 14 3,048 3,479
6
NTRC official website: http://www.nepra.org.pk/lic_rew.htm accessed on Feb 20, 2011
 Project privatized from public 1 1,638 1,583
sector
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 of
infrastructure finance at the time of financial close in 1995. HUBCO is the first private sector
and largest power plant commissioned under BOO arrangement (Build Own Operate), before the
1994 policy was announced. It took HUBCO six years to achieve financial close. HUBCO set
the bench mark for IPP policy 1994 and precedence for the future of the IPP’s in the Pakistan’s
power 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 international
community as one of the best power policy of its time. It attracted 34 projects 8 for more than
9,000 MW. Including HUBCO, 20 IPPs with a total installed capacity of about 4,500 MW
reached financial close, of which four totaling 435 MW were later terminated.

By 1998 the government had issued notices for its intent to terminate the contracts of 11 IPP’s on
alleged corruption in tariff negotiations and/or technical grounds. Two third of the IPP’s were in
direct collision course with PPIB faced coercion, harassment and stiff legal proceedings against
them. The investor confidence was shattered for the prospective private sector investment.
Negotiations started with the IPP’s which coincided with the Pakistan’s worst financial crisis 9 of
1998.

Government issued the 2002 power policy, which is a slight modification of the 1994 policy. It
has 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, by
commissioning 23 IPP’s which are generating 30% of the installed capacity. The first power
policy was able to attract PPI to the tune of USD 3.47 billion by commissioning 14 projects
under this policy with combined generation capacity of 3,048 MW. This represents 60% of the
total commissioned IPP’s to date and 43% of the total private investment in the power sector.

2.7. MAJOR IMPEDIMENTS IN ATTRACTING PPI

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

7
The Hub financing package included seven senior debt facilities, most of which had a syndicate of commercial banks. There were more 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 contractors
8
Letter of Support (LOS) were issued to 34 projects
9
Following Pakistan’s nuclear tests and the subsequent imposition of economic sanctions in May 1998, Pakistan’s economic and balance of
payment situation deteriorated rapidly and foreign investment slowed to almost nothing. Within just a few weeks, the stock market declined by
40%, the free market rupee depreciated by more than 25% against the US dollar, and official reserves declined to less than 2 weeks of imports. In
early 1999, Pakistan signed an agreement with the Paris Club for rescheduling of $3.3 billion of public and publicly guaranteed
debt repayments.
2.7.1 INSTITUTIONAL FRAME WORK
WAPDA continued recognition as an integrated power sector utility is the single most
important constraint in attracting PPI in this sector. In spite of the theoretical unbundling
of WAPDA into GENCO’s, DISCO’s, WAPDA Hydel and NTDC, these in reality
remain 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, in
practice these have been reduced to notional entities and become administrative
extensions of WAPDA. Private investors shy away from PPI due to the fact that they will
be dealing with the bureaucracy within WAPDA a scare which was reinforced by the
numerous litigation cases between WAPDA and IPP’s that are still pending in various
courts. Role PEPCO was to oversee the restructuring process of WAPDA and also as the
holding company of the successor entities. Ironically PEPCO proved to be a toothless
entity and WAPDA still remained an empowering entity. Interestingly PECO Chairman
is also the Member of the WAPDA’s board.

2.7.2 “ONE WINDOW OPERATIONS ” OR FRONT OFFICES

All the institutions looking after the PPI (PPIB, AEDB, SHUDO, PPDB, NEPRA) in the
power sector are in one way or the other have limited decision making authority. Due to
the horizontal alignment with the Ministries (common Board Members), the decision
making for important projects and specially were sovereign guarantee is required needs to
be taken at the highest level i.e ECC. Such broad level governmental intervention slows
down the decision making. Governmental role in facilitating the private sector in getting
wide number of consents is desirable but its involvement in specialized areas such as
contract negotiations which require specialist expertise hampers the project progress.

2.7.3 PROJECT CONSENTS

Approximately 70 consents are required from which fair numbers are to be obtained prior
to 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 or
the Government.

2.7.4 L AND 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 it’s own. This results in price
escalation of land, elongated time for project closures and most importantly since land
needs to be acquired before the work on the projects documents (PPA, IP etc.) starts, it
becomes risky for the project developer to incur such significant costs before the
feasibility, tariff negotiations and even the license is issued by NEPRA.

2.7.5 S OVEREIGN 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 don’t take it as a risk mitigation visa-viz
decreasing cost of capital (not more than few basis points) but sees them as a tool to
facilitate the pre and post commissioning project bottle necks, both in contract
compliances and project implementation.

2.7.6 FUEL SUPPLIER PERFORMANCE GUARANTEE

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

2.7.7. COST ESCALATION RISK FOR CIVIL WORKS

There has not been much success in developing the hydro power projects in PPP
modality. The existing power policy does not provide for pass through of cost escalation
in civil works. The allocation of the “Cost Escalation Risk” is the primary constraint in
developing hydro power projects which have long construction periods. Carrying the risk
of cost escalation for elongated periods makes it financially not sustainable for the private
investors or prospective lenders.

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

2.7.8 NEPRA’ S JURISDICTION IN AJK

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

2.7.9 HYDEL TARIFF

The only hydel tarrif allowed by NERPA is of LARIAB Energy that is an endorsement of
the ECC decision to allow the hydel tariff based on 1995 hydel policy. There is however
no formal framework for the hydel tarriff. This is seen as a major constraint in itself for
promoting PPI in hydel power generation.

2.7.10 LEGAL DISPUTES IPP

 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 unit energy
charge basis. Payments were guaranteed by the Government. There were a number of
disputes with IPPs in the late 1990s when government tried to reduce costs through tariff
reductions. A more detailed description of government policy is in Appendix 3.

2.7.11 GOVERNMENT SUBSIDIES (CONSUMER TARRIFFS)

The power sector of the country suffered from serious cash shortfalls mainly due to the
mismatch in the cost of generation and selling the power. The IPPs sell electricity at a
higher rate to the power purchaser whereas the power purchaser is bound to sell at lower
rates owing to reduced tariffs. The cost differential is supposedly to be recovered
through governmental subsidies which are not acceptable to the international
development agencies. The Government was of the view that further increases in
consumer tariffs would be politically difficult if there was no accommodation by IPPs to
reduce their price to WAPDA for power purchased.

2.7.12 CIRCULAR DEBT (CROSS DEFAULTS)

The Power Purchaser is always in difficult to discharge its payment obligation due to the
aforesaid mismatch in the tariff structure. The problem aggravates due to front-loaded
IPP tariffs which are indexed to the US Dollar, combined with a devaluation of the Rupee
and 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 lenders
which have provided working capital lines and are not able to pay the fuel suppliers.
Currently WAPDA owes XXX to the IPP’s on account of the power purchases and in
turn IPP owes Rs 158.410 billion to PSO for the fuel supplies. In turn PSO owes RS 85
billion 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 - 3020
4 Thermal (Coal Fired) 4150 5385 9535
5 Thermal (Gas/RFO) 6160 2725 8885
6 Cross Border 2000 - 2000
Total 23457 14318 37775
Table 2: Future Generation Projects System

10
Including price differential claims
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 the
IPPs owed to them and were not being able to pay due to the payment defaults of the power
purchaser. 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 on
expensive 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 to
work in a harmonized manner, whereby owing to the widespread developmental
implications of any power project, it is imperative that all efforts towards the
development of such power projects are made in a coordinated manner without
compromising their respective limitations and or the broader objectives.

5.2 All the stakeholders involved in the development of the power projects need to be
open to the new ideas and show willingness to adopt the best practices being followed
worldwide for the development of power projects.

5.3 The function of the electricity regulator (NEPRA) plays an important role in
protecting the interests of all the stakeholders. It needs to be ensured by NEPRA that
the 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 while
addressing the developmental issues which inevitably arise while setting up any
power project.

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

5.5 The legal framework enabling the public-private entities to team-up for development
of the power projects need to be strengthened more providing the requisite comforts
to the financing institutions in-particular the multilaterals through which funding can
be 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 facilitating
the development of power projects through public-private partnerships. Certain
projects such as hydropower and coal based projects invites displacement and other
environmental issues for which long term strategic decisions are required. Further,
certain locations in relation to hydro and wind power projects require intervention of
other departments of the Government, particularly, with respect to acquiring land
 having clean title acceptable to the banks for security purposes and the matters in
relation thereto.

5.7 In addition, the overall tariff increases is required to be made not only to bring the
prices up to par with the marketplace, but to also generate enough cash flow in
WAPDA 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 is
actively working to identify all the disparities and formulate the most appropriate
long term solution after taking into account the interests of all the stakeholders of the
power projects. Currently, NEPRA carries out a detailed scrutiny of any of the power
project from all aspects before announcing the tariff of any particular project.