11 October 2004	Monday	25 Shaban 1425

The Private Power and Infrastructure Board (PPIB) has recently achieved a historical landmark by according and arranging all necessary approvals of the government for establishing the first ever hydroelectric power station in the private sector.

All requisite documentation having been completed, there appears to be no hurdle now in implementing the project on a fast track. The signing of the standard security package agreements and documents took place, in April this year, for the implementation of Upper Jhehlum Canal/New Bong Escape project, of 79 MW capacity that will be located downstream of the Mangla Dam.

The government signed with the sponsors the security package documents that include Implementation Agreement (IA), Power Purchase Power Purchase Agreement (PPA) and Water Use Agreement (WUA).

The investor, Messrs Laraib Energy, has been working on this project since many years, having obtained The Letter of Interest (LOI) and the Letter of Support (LOS) under the power policies of 1994 and 1995.

As the first Independent Power Producer (IPP) of hydro-electricity, it indeed marked the beginning of constructing a series of hydroelectric power projects in the private sector under the Power Policy 2002.

This development will pave the way for influx of further investment, domestic as well as foreign, in power projects based on indigenous and renewable resources. The government is keen to induct private sector in the hydropower sub-sector to enhance the power generation capacity in the country, mainly for the reasons of generating and supplying cheap electricity.

The Policy for Power Generation Projects Year 2002 has already received an overwhelming response from the investors. The PPIB has received many proposals, known as Expression of Interest (EoI), which amount to a cumulative power generation of 3,721 MW.

These proposals, which entail an investment of about 3.6 billion dollars, are at present under various stages of processing at the PPIB, an arm of the Ministry of Water and Power.

On examining these proposals, the government has already issued Letter of Interest (LOI) to sponsors of a number of projects that includes, besides thermal power projects, a number of hydropower projects too.

The government has approved, in principle, a raw site proposal of foreign investors for the development of Munda Dam Multipurpose Project for 740 MW power generation. To be constructed in the NWFP, about 35 kilometers from Peshawar, the project would cost about one billion dollars.

The sponsors are AMZO Corporation of the USA. Also, LOI has been issued for Kotli hydropower project of 97 MW capacity that is proposed to establish in Azad Jammu and Kashmir, and its sponsors include Saudi Arabian investors. These sponsors are currently undertaking the preparation of feasibility study of the respective projects.

In addition, Messrs. Synergics Hydro Asia are processing other two hydroelectric power projects with the PPIB; namely Matiltan in the NWFP, capacity 84 MW and Kohala in the Azad Jammu and Kashmir, capacity 600 MW, as per hydel policy 1995.

Also, Rupali group of Pakistan has shown interest to set up two hydropower projects, a 130 MW capacity plant at Keyal Khwar, Kohistan district and another 700 MW power station in Swat valley. The government has recently approved the detailed feasibility studies of these projects, initially planned for development by the public sector.

Pakistan emerged as a power market in response to the Power Policy 1994 that attracted entrepreneurs from all over the world bringing foreign direct investment of about three billion dollars.

As a result, the Independent Power Producers (IPPs) now contribute 5,816 MW to the total installed power generation capacity in the country though all related to thermal. Today, more promising opportunities exist for foreign, as well as domestic investment in Pakistan's power sector attracting substantial capital, in particular for setting up hydroelectric power plants.

Pakistan has huge underdeveloped water power reserves having the potential for economic hydroelectric power generation to the extent of 40,000 MW to 50,000 MW, according to the reliable estimates, which can be exploited optimally to the economic well being of the nation.

Large-scale hydro already contributes significant share of the national power supply, but it is still hardly 15 per cent of the total hydel potential. Sites have already been identified, and studies carried out, for hydel projects having an additional cumulative capacity of 31,308 MW, capable to generate 153,327 million kWh annually.

At present, economic factors are in favour of hydroelectric power generation the world over because of ever-increasing furnace oil prices, environmental impacts of coal and depleting natural gas reserves the world over, Pakistan being no exception.

At present, Pakistan has 18,598 MW installed generation capacity that is translated into capability of over 80,000 million kWh of electricity per year. Historically, WAPDA (Water and Power Development Authority) power generation system was hydroelectric based, and until 1986 the share of hydel power was 58.5 per cent and that of thermal 41.5 per cent, which continually declined.

During recent years the ratio has reversed, primarily because of IPP's thermal power units, resulting in higher electricity cost. Now, hydel power generation is about 30 per cent and there is a need to reverse thermal/hydel share again in favour of hydroelectric for economic and environmental reasons.

The ideal hydel/thermal ratio will be 70:30, to be achieved in medium to long run, for attaining lower tariff resulting in an overall national development scenario. The Power Policy 2002 encourages development of hydroelectric power projects of various capacities in public as well as private sector, giving special incentives and concessions.

The projects are to implement on Build, Own-Operate and Transfer (BOOT) basis, through solicited and unsolicited proposals from the entrepreneurs. The Policy document proposes to develop hydroelectric power projects, small to medium and mega size, with cumulative capacity of at least 22,563 MW.

The schedules of projects under the envisaged short-term plan covers hydel projects of 800 MW to be commissioned during December 2004-June 2006, whereas medium term plan include hydel projects of cumulative capacity of 6,130 MW, to be commissioned by December 2020, including Kalabagh project.

The long-term plan covers additional projects, including Basha Diamer project, of a total capacity of 15,633 MW. It is thus evident that in future hydel energy will be used as a major source of power energy in the country.

Hydropower development is complex and cost extensive, as each project has to be tailored according to the site conditions and environments. Yet it has competitive edge as high initial investment is obviated by a comparative cost/kWh.

As the investment climate always remains influenced by a number of factors, external as well as internal, it is the prime responsibility of the government to attract and facilitate investment in this vital sector.

First and foremost is the need for stimulating the interest of prospective investors. A broad based investor friendly Power Policy is in place, providing a legislative and administrative framework, and a sound sectoral infrastructure already exists.

The confidence building measures are however to be employed by the government to ensure that the current Power Policy remains consistent and valid for a long period.

Having seen the national power policies at frequent intervals in the past, that are Power Policy 1994, Hydel Policy 1995 and Power Policy 1998, the investor will remain shy to invest particularly in establishing the hydel power projects that essentially require long gestation period.

In the past, implementation of hydel projects was stalled due to political, regulatory and financing barriers, on one hand, and on the other, because of inexperience and non-seriousness of the investors.

It is on record that Letter of Interest (LOI) to 41 projects of cumulative capacity 1,850 MW were issued, under Hydel Policy 1995, but Letter of Support (LOS) were obtained by investors only for 13 projects for generating capacity of 350 MW only.

It is most unfortunate that not even a single project out of the above could be implemented, although the government extended the respective LOS up to June 2001. A number of LOI and LOS were also issued by the Government of Punjab for small hydel power projects on existing canals and barrages during the same period, but practically no physical progress was observed on any scheme.

It thus becomes highly important for the PPIB to evaluate such experiences, and make efforts to remove impediments with a view to achieving desired results of the policy implementation.

More than ever before, it becomes necessary in the wake of recent problems faced by the IPPs that the measures be adopted by anticipating the risks private investors may face and addressing of these issues by all the stakeholders.

There are several issues related to the market characteristics, regulatory hurdles, financing constraints and economic studies etc that need be looked into from an investor's point of view too.

Serious initiatives and strategy formulation are thus required, on the part of the investors as well as the government, to develop the other identified hydel power projects.

Though a number of feasibility studies have been carried out for various projects, the prospective owners and operators of the power plants have to be aware of hydrological risks and confident of financial viability of such schemes.

The proposed projects will therefore require detailed investigations with regard to feasibility and full preparations in respect of financial and technical resources before implementation.

Also, steps are to be taken to remove the institutional barriers that hampered the exploitation of project sites until recently. Neither the private investor nor the government alone can do this, as there are many risks involved for the private investors to under take operations, besides involving huge investments.

Recognizing this factor, the Policy already proposes public-private partnership for mega projects. It is imperative to provide a sound business environment for private sector investment concerning taxation, labour regulations, financial regime, environment considerations and other aspects related to implementation of the proposed projects.

The salient features of the Policy and incentives provided therein along with security package are therefore to be projected for the world power sector players at national and international levels, through marketing seminars and workshops.

Promotion of locally produced plant machinery is a significant feature of the Policy. For the purpose, domestic engineering industry will be encouraged to form joint ventures with foreign companies to develop power projects with total capacity of 2,000 MW by the year 2015.

Import of only the plant and machinery that is not produced locally will be allowed at concessionary rates. Engineering industry, such as Heavy Mechanical Complex, HMC-3 and Heavy Electrical Complex, have the necessary engineering and physical facilities and the experience to manufacture major items of the equipment, structure, accessories and spares for all types of power plants, including the precision parts.

In recent past Heavy Mechanical Complex has produced and supplied major equipment to power sector projects, including hydel, in public and private sectors, amounting to over 35,000 tons of equipment.

The requisite advanced technology, however, will essentially be required from abroad. In Pakistan, the most economical and reliable technology has to be adopted, evaluating our past operational experience in this field.