WAPDA - HUBCO TARIFF DISPUTE

 

The sooner the issue is resolved the better it is

By SHABBIR H. KAZMI
Oct 09 - 15, 2000

Once again the much anticipated settlement of WAPDA-HUBCO dispute has eluded the market. The visit of HUBCO officials to Islamabad has been postponed. There are various conflicting news concerning the current situation and reasons for the delay in inking the final agreement. It is very difficult to say what is the real situation. Some of the analysts strongly believe that concluding the deal is not as simple as being portrayed by some circles. There is an urgent need that both the parties should sit on the negotiation table with a firm commitment to arrive at a consensus which is acceptable and mutually beneficial. No party should try to impose its desires on the other party. Whatever has happened is history, though very sad, now and cannot be changed. Both the parties should, trust each other and try to resolve a commercial issue in a commercial manner.

There are several issues which have to be sorted out before the two parties could reach a mutually acceptable solution. The GoP has reportedly accepted the much pressed HUBCO demands, i.e. withdrawal of cases against HUBCO officials, to give HUBCO the right of arbitration. However, the tariff remains the main point of dispute. It must be kept in mind that survival and long-term prosperity of both WAPDA and HUBCO are dependent on economically viable fundamentals.

On top of every thing, besides the tariff itself, the key issue is, will the tariff applicable with retrospective effect? The controversy had started in early 1998 and since then HUBCO has been receiving the amount fixed by the court as an interim arrangement. The Company made a provision of Rs 13.5 billion in accordance with International Accounting Standards for the year ending June 30, 2000. While the shareholders have not received any dividend for the last three years, the amount receivable from WAPDA has been causing serious cashflow problem for HUBCO.

Lately, there were strong indications that the GoP and HUBCO had reached an agreement on the long-standing WAPDA-HUBCO tariff dispute. M. Alireza, Chairman, HUBCO, accompanied by P. Windsor, representing National Power, were scheduled to meet the GoP officials in Islamabad on 6 October 2000. There were reports also that the GoP had agreed to the tariff proposed by HUBCO's major sponsors in the backdrop of their meeting with Chief Executive, General Pervez Musharraf in New York last month.

Reportedly the proposed tariff was based on the same structure as that of AES Lalpir, as demanded by WAPDA Chairman, Lt. General Zulfiqar Ali Khan. HUBCO proposed to reduce its Capacity Purchase Price (CPP) from 4.1 cents/kwh to 3.3 cents/kwh. The CPP includes debt repayment, fixed operations and maintenance charges and return on equity. HUBCO has also agreed to lower the internal rate of return (IRR) from 18 per cent to 14.8 per cent. The GoP also accepted HUBCO's demands of giving it the right to arbitration, withdrawal of criminal cases against its officials and accepting the sanctity of contracts.

According to some analysts the stance taken by WAPDA that only IPPs are responsible for its financial problems is not only incorrect but misstatement of the fact. The real causes of poor financial health are: mismanagement, power theft and its inability to recover overdue outstanding for a long time. WAPDA needs the power generated by IPPs to ensure uninterrupted supply of electricity because it cannot add new power generation facility, be it thermal or hydel, at least for the time being.

Besides, the country needs huge investment for revamping transmission and distribution work. Multilateral lenders have assured financial support provided both WAPDA and KESC are privatized. WAPDA-HUBCO controversy has hampered the whole process of privatization and the ultimate sufferer are consumers who are forced to pay for the inefficiency of the system. A workable option to rationalize cost, as suggested by many sector analysts, is privatization of WAPDA and KESC.

The analysts believe, that there is an urgent need to resolve the issue before the IMF review board meets in November. They also say that the ongoing dispute has tarnished Pakistan's image and adversely affected inflow of foreign direct investment (FDI). The recent reports that National Power is no longer interested in retaining its 36 per cent stake in KAPCO is an alarming situation. Pakistan, already suffering from precarious foreign exchange reserves position cannot afford to payback the cost paid by National Power for 36 per cent shares of KAPCO. Apart from every thing the exit of National Power from Pakistan would have long-term negative effect on flow of FDI into Pakistan.

The details of the agreement were not made public. However, using the reported figures, some analysts projected 2000-01 EPS of Rs 4.80 assuming that the revised tariff would be applicable from July 01, 2001. In case the revised tariff comes into effect from October 01, 2000, the EPS forecast would be lower, around Rs. 4.03.

Levelized tariff (Cents/Kkwh)

Original

Revised

CPP

4.12

3.3*

EPP

2.74

2.2**

Total

6.86

5.5***

*As reported by the press.

**currently estimated at 3.6 cents

***Based on tariff model of AES Lalpir