THE POWER SECTOR
Developing a competitive power industry for economic develpment
By NAWEENN A. MANGI
Jul 06 - 12, 1996
Pakistan's power industry, traditionally dominated by the colossal monopoly WAPDA, has undergone widespread changes in the past years, with the extensive development of the private sector. Of course, the economic benefits of privatisation are now widely accepted; it not only works better and yields quick rewards but it makes for efficiency, higher output, increasing profitability and developing a competitive industry which serves consumers well.
The problem that arises, though, is that privatisation is always political; governments have aims that are non-economic. These, can be ensuring that enterprises are not forced to close down, reducing budget deficits, raising revenue and so on.
There are also political obstacles to overcome, mainly the closed and conservative attitudes of state-owned management who are generally unfamiliar with the ways of the market place. Publicly-owned and operated enterprises are normally driven by political gain, and bear little relevance to production, quality or the safeguarding of the consumer. In most cases where power is still in the public sector, and certainly in Pakistan, the set-up and plant have become highly inefficient and obsolete. The level of investment required for greater efficiency would be enormous.
In Pakistan, as in most of the developing world, the demand for power has far exceeded production and supply. And since power is the basis for industry, the inadequacy of electricity has caused the country an estimated annual loss of $ 1 billion. Pakistan needs much more power than the state-owned infrastructure can ever hope to produce and distribute with any level of efficiency and reliability.
The existing total installed capacity in the country is 12550 MW; of which 7588 MW (60%) is thermal, 4825 MW (39%) is hydel and 137 MW (1%) is nuclear. Peak electricity demand has been estimated at 11000 MW, load shedding during each homes at 2000 MW (up from 1000 MW two years ago), the energy shortfall per year at 2.1 billion kWh, and the loss per kWh at Rs 15.
The growth rate in demand is approximated at 8% a year, and the additional capacity required by the year 2008 will be 12000 MW while by 2018 it will climb to 47000 MW.
By some calculations, Pakistan's potential capacity is 40000 MW and in order to be free of load shedding by 1998, an additional 7000 MW of power are required.
The total economically usable hydel power potential has been estimated at 20000 MW.
Although more and more countries have been looking towards a comprehensive process of privatisation, Pakistan has stood out noticeably as the government has embarked on a strong drive for privatisation. This will bring in substantial funds for development and the retirement of national debt.
Pakistan's much acclaimed private power policy announced in early 1994 provides excellent incentives for both local and foreign investors in this lucrative sector. The terms are internationally competitive, there is an attractive fiscal framework for investment and the Private Power and Infrastructure Boards was created as a one-stop-shop to evaluate and negotiate project bids and contracts while the National Electric Power Regulatory Authority has been set up to monitor the regulatory regime.
Firstly, investors are free to choose the site and opt for the energy source as well as the technology.
Secondly, the government of Pakistan guarantees a long term Power Purchase Agreement for between 15 and 30 years with regards to the performance of WAPDA or KESC. Furthermore in the cases where fuel is supplied by the public sector the performance of the fuel supplier will be guaranteed by the government under the Fuel Supply Agreement, mostly with PSO. The government also provides protection against changes in certain taxes and duties (there is no corporate income tax for private investors) and ensures the convertibility of foreign exchange to cover the necessary expenses of the project. There are exemptions from import duties and sales taxes on plant and equipment and concessional loans for locally manufactures machinery. The participation of local partners to set up power projects is not mandatory.
The bulk power tariff rate will be 6.5 cents per kWh for the first 10 years and the levalised tariff for the life of the project is 5.9 cents per kWh. A premium of 0.25 cents per kWh for going on-line before 1998 will be allowed for projects above 100 MW.
The minimum equity requirement for projects is 20% of total capital, the government has established a Private Sector Energy Fund with the assistance of the World Bank to provide up to 40% of the capital costs of the project and the projects are allowed to issue bonds and shares at a discounted price.
As far as the tariff structure is concerned the tariff is divided into two components; the capacity and the energy price. The former is paid on a monthly basis and in arrears; even when there is no sale or generation of electricity, this price is paid based on a 60% load factor. It consists of a non-escalable component which covers debt repayment, and an escalable component, which covers fixed operations and maintenance costs insurance and administrative costs and return on equity of 17-18%. The third component is the foreign exchange risk insurance which covers the premium payable to the State Bank.
The energy price is based on the number of units supplied to WAPDA or KESC. It is only charged when electricity is sold and the price is indexed to rupee / dollar parity as is the capacity price. This consists of the fuel cost and the variable operation and maintenance cost.
In addition to privatising existing infrastructure the thrust of the government has been towards attracting private power projects. However, in addition to independent power projects, recent times have seen the development of several captive power plants as well; Nishat Tek, Kohinoor Power, Tri-star, Sitara Energy , Ibrahim Energy to name a few, supplying electricity only to associated concerns.
The $1.6 billion, 1292 MW Hub Power Company which just began supply to WAPDA (see story on Hubco) was the first and remains the largest of the independent power projects in Pakistan.
A new project which is expected this month is the $ 120.5 million, 135.6 MW Japan Power Generation Limited. It is sponsored by Zafar Mahmood (10%) and the Uppal family (16%), and there is a collaboration with Mitsubishi Heavy Industries for the manufacture of machinery and with Toyota Tsushu Corporation for operation and maintenance.
They have signed a power purchase agreement with WAPDA for 107 MW and the government has guaranteed WAPDA's performance.
Southern Electric Power Company is a 117 W project with a net capacity of 112.5 MW and has a power purchase agreement with WAPDA for 22 years. It is a $ 119.5 million joint venture between B.C. Hydro of Canada and Southern Company Ltd.
The $ 1.583 billion Kot Addu Power Station was sold to National Power earlier in the year for $ 215 million for a 26% stake making the English company a major player in Pakistan. The Privatisation of the 880 MW Jamshoro Power Station is also expected to be completed soon.
Possibly one of the most interesting issues up next is the intended privatisation of the Faisalabad Area Electricity Board, one of the eight area electricity boards of WAPDA. This will be the first time the distribution of electricity will be privatised, and inter-facing with the consumer will be involved. The privatisation is to be implemented by the International Finance Corporation and the marketing of the project is expected to begin in September this year. Both the method and the final sale of the FAEB, one of the largest area boards of WAPDA will have significant implications for the overall privatisation process in the country.
WAPDA (10655 MW plant serving 8.9 million consumers) itself, along with KESC, are both huge, inefficient utilities plagued by overstaffing and large transmission and distribution losses of nearly 23% for WAPDA and 34% for KESC. The successful privatisation of the FAEB will kick off the process for the other area boards of WAPDA as well. KESC, the 1738 MW plant serving 1.25 million consumers in Karachi and surrounding areas, is also proposed to be privatised within the year.
Furnace oil bill
An issue of considerable importance, especially in the context of the $ 3 billion trade deficit is the country's ability to pay for what is expected to be a huge import bill for fuel as more and more power projects come on line.
Demand for fuel will inevitably rise from current levels of 7-8% a year and result in a higher and higher import bill, This will be mainly due to the additional demand of furnace oil in the power sector. According to a paper prepared by the ministry of Petroleum, twelve units are expected to be generated by 1997-98 with a total generating capacity of 4400 MW. According to Anwar Saifullah Khan, the Minister of Petroleum and Natural Resources, in a speech delivered to the Economist Roundtable Conference in Islamabad last year, Pakistan's indigenous supply of oil satisfies only 20% of the current oil requirement. The oil bill is therefore expected to grow from the current level of around $ 1.5 billion to around $ 4 billion by the year 2000. The point here is that though this import if fuel will have its benefits in the long-term with the establishment of lucrative private power projects, the import bill for fuel n the meantime in going to be astronomical-where is this money going to come from? This is a central issue and one that is going to be of increasing importance in the years to come; it is towards this area that policy should be directed.
The experience of much of South America has shown that the privatisation of power is a viable solution for most of the developing world. Begun in the last decade, Argentina's power privatisation started yielding positive results in 1992. Over a period of four years, the frequency and duration of shortfalls in supply began to fall, and availability rose from 30% to 56%.
Pakistan's power policy, has, on the whole, been well received by both the domestic and international investor community, and MOUs totaling over US $ 20 billion have been signed. If even 60% of the total expected number of projects come into production, and additional 2500 MW of capacity is expected d to be on-line by June 1998.
With a severe shortage of power and major difficulties in efficiency of operation and reliable supply, this would be an important development for the infrastructure of the economy.