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PERHAPS it’s a bit premature to say this, but it’s worth flagging nonetheless. The big push given to power sector investments by the current government has generated a fair amount of interest in the investor community, but it also appears to be losing steam.
First the facts. When the government came into power, they announced a massive settlement of the circular debt in a single stroke, followed by promises that this time steps would be taken to ensure that this problem did not resurface. Some steps were taken, others were not. Net result is still the same: power sector receivables today are larger than they were when that promise was made.
But one area in which some of the promises did receive strong follow-up was in energy-sector investments. Three large initiatives were announced at the time. One was a string of coal-fired power plants, said to number 10 in total, that would come up mostly in southern Punjab and generate almost 6,000MW of electricity. Second was a number of LNG-fired power plants that would generate close to 3,500MW of electricity, and mostly be sited in southern Punjab too. Third was the Gadani power park, located outside Karachi, which would host a set of plants to generate almost 6,600MW of electricity from coal.
Some progress has been made in these projects, but in many cases the effort appears to be meeting difficulties. The Gadani project was the first to encounter difficulties. First it was going to be the Chinese who would be setting up the 10 plants, then competitive bids were invited. Then the government was supposed to set up the first two plants, an idea that was dropped by late 2013. Originally the project was supposed to be part of the China Pakistan Economic Corridor, but was subsequently dropped from CPEC. Today it stands all but abandoned.
The big push to attract private investment in power generation that utilises fuels other than domestic gas or furnace oil is off to a rocky start.
The other proposal to invite investment in coal-fired power plants has met with mixed success thus far. An upfront tariff for coal was only approved this month, and at least two private-sector projects have already been given the go ahead — Port Qasim Electric Power Company and Lucky Cement. Considering that it has been more than a year since this initiative to attract investment in coal was announced, the delay in approving an upfront tariff has been embarrassing. But the hard part comes now as project sponsors move to achieve financial close.
The LNG power plants project is further away. Key questions regarding infrastructure still remain unanswered, as the most recent hearing held by Nepra, the power regulator, proved. Considering that LNG will land in Karachi and the plants will be in southern Punjab, how will the fuel be transported up to the power plants? Will there be storage at some point (LNG is expensive to store)? Without storage, how will continuous supply be assured? These are important questions and until they are settled, there is not likely to be any private sector interest in the project.
Other coal-fired projects upcountry have had to be dropped from the list on account of difficulties in transporting coal in such large quantities from the port in Karachi where it will land, to the plant. Coal is bulky, and significant upgrading of railway coal-handling capacity will be required to move enough coal up to the plants to run them on a continuous basis. Since the railway does not have the capacity to carry coal in the quantities required by this large number of power plants, some of them have had to be dropped from the list.
In short, the big push to attract private investment in power generation that utilises fuels other than domestic gas or furnace oil is off to a rocky start. There is success in some areas, and failure in others. As the effort moves further along, these difficulties will be brought into even sharper relief.
To some extent, when I observe these developments, I’m reminded of an earlier big push to break our growing dependence on furnace oil and domestic gas. The Musharraf regime, much chided for not having done enough in the energy sphere, in fact presided over the largest and most energetic set of policies that sought to move our power generation away from oil towards other, cheaper fuels.
There was the Private Power Policy of 2002, for instance, which did away with upfront tariffs altogether and brought in international competitive bidding as the tariff-setting methodology. By 2004, in the absence of any private sector interest, the policy had to be modified and upfront tariffs reintroduced.
There was the large push to develop Thar coal, by Shenhua, the Chinese coal giant, which also collapsed by 2004. There was the LNG policy of 2005, which came close to fruition but ran into opposition in the courts. There was the preliminary work on hydro sites like Diamer Bhasha and Dasu hydropower, which was done in those years. There was the setting up of the Alternate Energy Development Board, and the identification of the wind corridor at Gharo, followed by work to determine a tariff for wind and solar projects.
In fact, the Musharraf government had presided over a large and energetic effort to do exactly what the Nawaz Sharif government is saying it will do now. And each one of the projects turned out to be far more complicated to carry through to fruition than was at first imagined.
Attracting private-sector interest in large power generation projects in Pakistan is tricky business. One wants to wish the present government all the best in achieving their goals they have set out for themselves, but I fear that they will be learning all the same lessons all over again. Let’s hope we’re not en route to repeating that history one more time.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, February 26th, 2015
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