Wapda should abandonits hard-line approach towards IPPs

Mar 06 - 12, 2000

WAPDA is hailing its new agreements with smaller IPPs as a great success and resulting in cash flow relief of $1 billion over the next 30 years. Those IPPs which have not yet signed the new agreements are being branded as 'difficult", 'unpatriotic" and "serving the interests of the multilateral agencies" WAPDA's telling the World Bank and IMF that an orderly process" is being followed and dangling the agreements with smaller lPPs as a measure of the orderly process to secure the IMF tranche which has been held back due to unsatisfactory progress on the IPP dispute. Senior officials of the Asian Development Bank who are on a mission to discuss the WAPDA restructuring and for which ADB will provide $250 million dollars, have also stressed to the GoP to reach an "amicable accord" with Hubco and other lPPs. By showing progress on smaller IPPs and publicizing it, WAPDA is strategically isolating the larger "rogue IPPs", and using the agreements with smaller IPPs to ipress upon the multilateral agencies to release their funding for Pakistan. Accords with smaller IPPs also make the larger IPPs look bad in the public eye, and this is what WAPDA is strategically maneuvering

Senior officials of IPPs stress that the stalemate can only be broken by the GoP who should ask WAPDA to abandon its hard-line approach and reduce its unreasonable demands towards Hubco, Kapco, Uch Power and AES, so as to reach an expeditious solution to the commercial dispute. As far as Hubco is concerned, the stalemate will continue ad-infinitum unless WAPDA addresses Hubco's principled stand in which the Company is pointing out that the corruption issues be resolved immediately before any tariff negotiations can resume. A number of smaller IPPs e.g. Tapal Power, Kohinoor, Fauji Kabirwala, Gul Ahmed Energy are also facing difficulty in reaching a reasonable solution. Another smaller IPP, Rousch has offered a tariff reduction but it has been reliably learnt that the accord was not achieved under "amicable" circumstances as claimed by WAPDA rather WAPDA threatened to not commission the plant and cancel the contract unless Rousch acquiesced to grant cash flow concessions to WAPDA.

The main features of so called new agreements with other IPPs are: (1) marginal decrease in tariff over the initial one to ten year period of project life; (2) an increase of eight years in project life from 22 to 30 years; (3) waiver by WAPDA of liquidated damages due to IPPs from WAPDA; (4) resolution of technical matters relating to commercial operations date and other claims on each other; (5) waiver of letter of credit requirement by IPPs and WAPDA.

The crucial point is that an increase in project life has allowed IPPs to show a reduction in tariff over the initial ten years of project life. However, the additional payments made by WAPDA to these IPPs over the last eight years of extended project life are of such magnitude that they completely offset the savings in the initial period. For example, in SEPCOLs case the life of the project has been extended from twenty-two to thirty years. During the first twenty-two years tariff reductions provide a savings of $19 million. In the year 22-30, WAPDA would be purchasing electricity worth $42 million inclusive of capacity payment charges. Moreover, WAPDA would be waiving liquidated damages worth $4.3 million. These damages are due to WAPDA from SEPCOL for not having its required plant capacity available as per contract. So, while WAPDA saves 19 million from SEPCOL, it pays an additional 46 million resulting in additional payments or negative net savings of $27 million.

Japan Power has offered a much larger tariff reduction of $128 million in the first twenty-two years but as expected, it requires WAPDA to pay an additional $139 million in the years 22-30 for power purchase during the extended eight year period of the contract. In addition WAPDA has been asked to waive liquidated damages worth $5 million. Of these IPPs, SABA Power is perhaps the only IPP which is offering WAPDA savings of $17 million over the project life on the condition that WAPDA would purchase the full base case 60 per cent plant capacity. The offer made by Habibullah Coastal is not directly comaparble to other IPP offers as it uses natural gas, a much cheaper fuel than the furnace oil used by other IPPs. Nevertheless, delays in implementation of these offers can still occur as they are subject to approval by the GOP, Company's Banks and their Board of Directors.

Newspaper comments of WAPDA Chairman show that WAPDA has rejected Hubco's earlier offer in which it had offered a tariff reduction of 0.23 US Cents per kilowatt hour over the entire project life of 30 years. This tariff reduction amounts to a fall in IRR from 18 percent to 15 percent. Unlike other IPPs, Hubco has not extended its original project life which was 30 years to start with.