IN a bold move to access cheaper hydropower resources, the government has decided to award a negotiated $2.5 billion contract to a Chinese company for construction of the 1100mw Kohala Hydropower Project in Azad Kashmir. The award will not be subjected to the process of international competitive bidding as required under the Public Procurement Regulatory Authority rules despite opposition from the executing agency— the Water and Power Development Authority.
In its last meeting, the Economic Coordination Committee (ECC) of the Cabinet allowed final negotiations with CWE of China – a subsidiary of the famous Three Gorges Corporation – before the signing of a formal agreement to construct the project on build-own-operate and transfer (BOOT) basis after the ministry of law gave its legal opinion that negotiated agreement would not violate PPRA rules.
The good news for the people and government of Azad Kashmir is that the project would stand transferred to the Azad Jammu and Kashmir government (AJK) on completion of 50 years contracted life. Had the Wapda been allowed to hold competitive bidding, the project ownership would have gone to the Wapda after five decades.
Although, arguments putforward by the Private Power and Infrastructure Board in support of the negotiated deal may not have sound legal basis, the move is expected to go a long way in encouraging regional and provincial governments, particularly AJK, Gilgit-Baltistan and Khyber Pakhtunkhwa to facilitate hydropower resource development and to improve the hydro-thermal ratio currently at 27:70 to a desirable level.
This is so because these northern areas possessing about 60,000mw of cheaper hydro resources, including over 25,000mw of simple run-of-the river, stand to gain from the ownership of this huge potential, if translated into reality. The authorities in AJK are happy with the development for the fact that starting this year, they will get water use charges on the pattern of net hydro profit admissible to KP on account of Tarbela dam.
Going forward, it would be advisable for the government to offer a reasonable upfront tariff for hydropower projects which is comparatively much lower than other competing fuels like furnace oil, diesel, natural gas, liquefied gases and even coal yet attractive enough to lure in long-term investments in a sector that isenvironment friendly, involves long-term benefits and a long development period.
However, it may be recalled that many investors working on hydropower projects had run away more than a decade ago when the then uniformed Wapda chairman insisted on signing agreements at three cents per unit tariff, instead of 4.7 cents offered in the hydro power policy of 2002. That not only affected Pakistan’s credibility among international investors but forced existing investors to move out, never to come back.
The kind of facilitations and incentives repeatedly provided to the thermal power projects, if also offered to hydropower resources could save the future generations from heavy electricity tariffs and restrict the outflow of hard-earned foreign exchange in purchase of expensive imported fuels, mostly maintaining rising trends. Moreover, the power tariffs would become more predictable and sustainable with addition of every megawatt of hydropower given the fact that its energy/fuel component remains stable throughout the life of the project.
The Wapda was strongly opposed to bypass competitive bidding and wanted a fair competition to get a lower construction cost, saying procurement rules did not allow a public sector entity to have negotiated contract award. It claimed the price offered by CWE of China was $344.32 million (about Rs30 billion) higher than cost estimates of Wapda.
The Wapda argued that since the project would be funded through public money and Wapda’s resources had been raised through public funds, it had to follow PPRA rules. A ministerial committee under the instructions of the ECC had, however, suggested to seek a legal opinion from the law ministry.
The ministry found the “view point of PPIB correct and concurred with the opinion that the project is not hit by PPRA rules 2004”, enabling the ECC to formally allow negotiated deal with the Chinese firm. China had offered to provide funding to the project and recover it through tariff over 50-year project life.
On the contrary, the cabinet division differed with the law division and said that “PPRA rules 2004 are applicable on the subject matter.”
Earlier, the PPIB sought feedback from the Chinese firm regarding an option of first right of refusal in international competitive bidding. The Chinese company, however, insisted that the MoU signed between the ministry of water and power in the presence of President Zardari, had been duly approved by the cabinet and due recognition was accorded by the government to M/S CWE as the project sponsor.
It also conveyed its concern to Pakistan’s ambassador in China that in the event of any re-determination of sponsors for the project through ICB, the sponsor is likely to be aggrieved and suffer consequential loss. “Therefore, the sponsor strongly insists that in light of the commitments made by the government under the MoU, the project is approved for further implementation at the earliest through M/S CWE”, according to PPIB.
The PPIB argued that since the project has to be implemented on BOOT basis in the private sector within the territorial jurisdiction of AJK, pursuant to the AJK Interim Constitution of 1994, AJK Council led by Prime Minister Yousaf Raza Gilani has the exclusive competence, powers and jurisdiction to exercise ‘executive authority’ in relation to the subject of electricity. Accordingly the AJK council approved the project through PPIB in accordance with the MoU.
The PPIB also argued that implementation of the project through CWE was pursuant to a binding and enforceable MoU and being an international obligation or commitment of the government provides primacy to such obligations or commitments if in conflict with the PPRA rules as recognised by its Section 5.
The goal posts changed by the AJK prime minister are also of significance. In July 2010, the AJK prime minister said that it is proposed that the project may be withdrawn from private sector as it was in contravention of 2002 power policy and the Wapda be authorised to develop this project with the collaboration of AJK government.
In March 2011, however, he wrote to Prime Minister Gilani that “keeping in view the supreme national interest, the AJK government is issuing letter of support to CWE who have given firm commitment to bring $2.5 billion to development 1100mw Kohala Hydropower Project in the soonest possible time to meet energy shortfalls in the country”.
He said so on the grounds that financial and technical resources were not available within the country and the project would enhance infrastructural and financial capacity of AJK.
The power ministry says that the project was important because the energy produced from hydropower project was in the range of 7-8 cents per unit and inclusion of hydropower in the national grid would decrease the tariff. The KHPP, a run of the river project on river Jhelum involves a 17-km long tunnel, 60 meter high dam and an underground power house.