October 15, 2001	Monday	Rajab 27, 1422

THE government in 1985 had decided to induct private sector in power generation to complement the efforts of Wapda and the KESC.

The power policy, including the innovative approach for promotion and financing of power generation in the private sector, developed with the help of the World Bank and the USAID, was published in June 1989.

Tariff was largely negotiated with the investors and some policy improvements were made in 1991 and 1993. However, major shift was made in March 1994 when the government announced the electricity tariff upfront. Later, it decided to move towards competitive power market and a policy was announced in July 1998. Now the new power policy is being formulated and is expected to be announced shortly.

In July 1989, the government planned that over 2000MW capacity may be developed by the private sector. To achieve this, the private sector was offered the opportunity to earn real rates of return. Pakistan is obligated to buy power from the IPPs and allow repatriation of profits/dividends in most cases for the concession periods up to 30 years. The question is, are we paying as much as we thought we would pay. It may not be easy to know the true cost of the IPPs’ power as the fiscal and other incentives effectively disguise the real tariff. The government may assess the real cost of the IPPs and may also carry out a critical review of the past policies, fiscal and other incentives and the institutional framework in the light of actual experiences with the investors as well as with the financiers. Lessons derived from it may be used in finalizing the new policy. The World Bank comments made in the context of implementation completion report on private sector power development projects may also be taken into consideration by removing the weaknesses and shortcomings. The main areas that need review have been grouped for clarity under the bulk tariff paid to the IPPs and the institutional framework put in place for the promotion of power generation in the private sector.

Bulk electricity tariff: The tariff is the key element and most issues are related to it. Do we wish to disguise the true tariff as in the past or we want to work with the IPPs on the basis of nominal tariff easily derived, as there will not be many fiscal or other subsidies. Let the competition be on the basis of gross or nominal tariff. Different elements that have a bearing on the final tariff are briefly touched as: 1. Take or pay basis: Pakistan started its IPPs initiative with a limited recourse financing. Take-or-pay basis has been the main element in such financing. On the basis of plant availability, investors and creditors get fully compensated through the ‘capacity purchase price’, whereas fuel cost and variable O&M cost are recovered as the ‘energy purchase price’. Now many IPPs in different countries are being set up without such assurance as to the payment for capacity component. These plants are known as the Merchant Power Plants (MPPs) and they can market power to any bidder, which may be a utility or distributor or a middleman. The MPPs are also being financed on this basis. We have to objectively decide if we wish to continue with the IPPs and, if so, on what basis.

2. Composition of tariff: At present capacity component, which is paid each month, on plant availability basis, includes fixed O&M cost; debt servicing, repayment of loan instalments, and related fees and charges; and the return on equity. Full ROE is included and there may be no incentive to owners to operate the plant more efficiently. For the new IPPs the items included in the capacity component may be revised by adjustments such as reducing the ROE from 100 per cent to say 75 per cent, and including depreciation and interest; and by excluding the repayment of principal. This will bring the payments more in line with the format used in the preparation of the income statement. It will also be more convenient for income tax computation basis.

3. Indexation: Tariff is now heavily indexed to exchange rate movements and inflation, both local and foreign. Why not move away from such heavily-indexed tariff to the nominal tariff, by removing the indexation to inflation. This will make the tariff calculation more transparent and also less prone to disputes. Alternately, we may move to a less indexed tariff.

4. At present the bulk tariff is kept low by a number of fiscal incentives, which is a big cost to the nation. The IPPs are enjoying exemptions and subsidies and will continue to do so for the next about 30 years, whereas subsidies in all other sectors are being withdrawn at the instance of the IMF or the World Bank. The tariff in future should also be made free from all subsidies. Financial incentives such as the issue of shares at discount, issue of bearer securities need to be discontinued. In the past import duties on plant and equipment were waived to reduce the project cost, but later the capital cost was burdened with the requirements such as Debt Service Escrow Account.

5. The government has assumed a number of risks, which normally are assumed by the investors. Now that the IPPs sector has matured in Pakistan, the government may revisit the risks assumed as part of earlier policies for the enhancement of the security package. Now that all other sectors are moving towards market economy, the risk sharing should also be adjusted accordingly.

6. Load dispatch centres call upon the IPPs or other generation plants to come on line and start supplying power. This is done on the basis of priority. Is that priority the most appropriate in the present day conditions? May be existing priority needs review in the light of contractual obligations. One may argue that for the IPPs to come on line, the basis should be the energy component only, and not the total generating cost. The IPPs may be called upon more often to supply the power. This way the average cost per unit paid to the IPPs is expected to come within reasonable limits.

7. Most of the existing IPPs have agreed to 60 per cent plant load factor. It may be better if it is revised upward to say 80-85 per cent. The IPPs may have to maintain their engines better or else they will lose part of the capacity component. Separate plant load factors need to be provided for steam engines, diesel engines and the gas turbines.

8. Only a few IPPs are publishing their annual audited accounts for the information of general public. Wapda, or the KESC do not publish enough project-wise details to inform the people as to what has been the cost per unit or how the IPPs cost per unit compares with the actual per unit cost of Wapda or the KESC plants. Such details need to be released for transparency purpose.

9. The Auditor General office has prepared a number of reports on the violation of rules and regulations by the IPPs or the other stakeholders. A comprehensive list of violations may be developed and issued so these are not repeated in case of fresh projects. Copies of these AG office reports may also be released to public.

10. A second look is also needed on the tariff offered to the ‘captive power plants’ as well as the ‘co-generation plants’. It is felt that the investors are getting less than a fair deal and this may be the major reason why these plants are not anxious to supply power to Wapda or the KESC. These plants may be given a fair chance.

11. Power regulator is generally the focal point in dealing with the IPPs. The NEPRA may play an important role. By collecting periodic reports, it can develop a database on various aspects of the power generation plants. The data can be used to monitor the actual performance of the IPPs as well as the utilities. It will be in a better position to clear tariff-related issues at an early date and can release such data in summary form to the general public.

12. Point of delivery of power, the construction provisions and transportation facilities as provided in the 1998 policy have the potential for disputes. The company may be restricted to the power plants only and the purchaser may arrange other facilities. The institutional framework designed with the help of the World Bank and the USAID in 1988 was reflected in the policy document published in 1989. Many changes have since taken place. Now the NEPRA and the PPIB together with the provincial governments have the main role through the PACRA, the NDFC, the MoF, the MW&P. The following areas may be reviewed for better designing and management of power generation policies as well as dealings with the IPPs:

1. It is needed to review the existing distribution of authorities and functions particularly among the NEPRA, the PPIB, and the provincial governments. It is evident that some of the stakeholders are not happy with the role and functions currently assigned to them. This issue needs careful review and decision by the top authorities.

2. It has been reported that a committee has cleared the draft of new policy. Is this committee sufficiently broad-based and supported by the teams of independent experts to advise on specific issues? Are all the energy-related departments, corporations and utilities represented on the committee? The names of the members and the TORs may be released to public. It will be better if members from the FPCCI and the consumers are also taken on this committee. Maybe there is justification for taking on board representatives from the environment protection, the ENERCON and other similar departments.

3. The NDFC has been merged with the National Bank of Pakistan (NBP). Does it follow that now the NBP will be the administrator of the long term credit fund (LTCF)? The LTCF presently is understood to have large rupee resources, which are now with the NBP. Will the NBP be providing rupee loans to the IPPs and if so what will be the terms governing such loans? Whether the new loans from the LTCF be subordinated to commercial loans/export credits as in the past? These and similar questions need to be sorted out and a final position reflected in the new policy. Another aspect that may be studied is why majority of the IPPs did not avail the LTCF loan facility and instead preferred to borrow from the IFC or the suppliers. This will help in formulating the future lending policies of the LTCF.

4. The GoP is now anxious to implement hydel and coal-based projects. These projects are relatively more difficult to finance as compared to thermal projects based on furnace oil or gas. The role of the LTCF finance may be more critical in the new situation. What steps, if any, are under consideration to facilitate this aspect of the private power projects? The LTCF administration need to be strengthened by extensive training of the NBP personnel. The government may also approach the USAID and other donors and the IFIs for fresh credit lines for augmenting the LTCF resources.

5. Different ministries and departments handle energy-related issues. In such a situation, it takes a long time to agree on common issues and still longer to get the decisions implemented. The PPIB is said to be providing one window facility but its help will be limited in case of inter-ministry differences. May be there is a justification of an office of energy under the Chief Executive. The ministers and the secretaries to the concerned ministries or departments may be taken as members. This will ensure overall integrated energy planning and smooth implementation of the projects.

6.The PPIB, the WPPO, provincial authorities, the NEPRA, the LTCF and other public sector entities related to private sector power generation need to be fully equipped to efficiently handle the IPP-related work including negotiations. These institutions must have sufficient number of professionals and experts in various disciplines. Also detailed and updated guidelines and procedures may be there with each institution, so that the IPPs are provided efficient service. This will also reduce deviations and the consequential differences among institutions as well as with the IPPs. These policies and procedure should be transparent and open. The objective is not to repeat the situation of disputes with the IPPs or the re-negotiation of tariff.

7. Pre-qualification of investors and main sponsors before the issue of the RFP is the main element of the existing power policy. This exercise looks simple but is complexed and results in disputes including litigation. Detailed criteria for the pre-qualification of bidders as well as for evaluation of proposals need to be developed and made public.

8. Power policy 1998 prescribed lock-in period for the main sponsor and others. The main sponsor is required to hold not less than 20 per cent of the equity whereas all the pre-qualified sponsors must hold 51 per cent equity for the lock-in period. The lock-in period is from the LoS issuance date until the sixth anniversary of the successful commissioning of the plant.

9. Standardized: The IA, PPA and the FSA were issued when 1994 Power Policy was announced. The purpose was to reduce the time in negotiations. All these model agreement s may be reviewed to reduce their size by taking out technical details, which are reflected in other documents, or are public instructions issued by the NEPRA or any other government agency. It may be noted that these are three agreements out of total about 20 agreements, which in any case need to be negotiated and executed for each IPP. Further, certain sections may now need rewriting as other players will be replacing WAPDA and the PSO for bulk power purchase and supply of fuel, respectively.

10. Development and maintenance of websites: At present only few ministries or departments dealing with the IPPs are maintaining some sort of website. The details provided are of not much help. There is a need to establish proper website by each such institution. Policies, procedures, formats, data, decisions, operational norms, sanctions required, etc can all be issued by the respective institution. The websites may be properly maintained and the information up-dated each month, if not every week. This will boost the IPPs programme and bring transparency.

11. Revamping of existing plants: The new policy may include initiatives for the revamp of existing power plants that have been in operation for at least 20 years. It may be cheaper and relatively quicker to substantially extend the useful life of such plants.

12. The policy covers the IPPs in the private sector. Currently the GoP is arranging large amounts to lessen the financial problems of Wapda and the KESC. It will not be a bad idea if they are given the same incentives as offered to the IPPs.

13. Hydrological risks: The GoP will bear the risk of availability of water by making fixed monthly capacity payments to the project company. The sponsors in the past have installed the thermal plants of a bigger capacity than shown in the LoI or LoS. The capacity of the hydel plants has to be viewed accordingly and suitable provisions made in the policy.

Development of any policy is not easy. Preparation of power policy is most complex and therefore demands concerted efforts from all concerned. Failure to properly understand issues or cursory attention may in the end oblige the nation to pay heavily in the form of high tariffs, blackouts, costly power, uncompetitive exports. Further, such payments may extend up to 30 years. This calls for careful handling at the policy formulation stage. It is advisable that the nation is taken into confidence and the government may release related details to the public. It may also release the draft of the policy to the public and solicit comments on different issues and policy points.