KPT: DESALINATED WATER AT WHAT COST?

By Muhammad Bashir Chaudhry
Mar 24 - 30, 2003

In a ceremony at the Karachi Port Trust headquarters on 23rd January 2003 the U.S. Ambassador to Pakistan signed a $0.287 million grant agreement on behalf of the US Trade Development Agency. The Chairman signed on behalf of the KPT. The grant will partially fund the feasibility study for a proposed 25 million gallons per day (MGD) desalination plant in Karachi. Total cost of the feasibility report is estimated at $0.381 million or Rs 20 million. KPT project reportedly is pursuant to the policy of the Government of Pakistan, which is promoting private sector participation in its water sector by inviting proposals on a build-operate-transfer (BOT) basis. KPT has allocated a 100-acre parcel of land for the desalination plant. California Enviro-Management, Inc., a U.S. small company project developer, has received a letter of intent from KPT to proceed with the project and is said to have teamed with Burns and McDonnell, a Missouri-based firm, to provide engineering services and to act as overall project manager.

The desalination plant will also include a 15 MW power generation plant, to supply electricity needed for the process. The feasibility report is expected to be available within six months and then the company would commence work on the actual plant. It is estimated that plant construction and production of water would take from 18 to 24 months. The feasibility study will assess the technical, economic and financial feasibility of the construction of a desalination plant to supply potable water to KPT and the Karachi Water and Sanitation Department for industrial and domestic use. If implemented, this public-private partnership would be the first desalination plant of this scale in Pakistan. Final decision for implementation of the project shall be made after the feasibility report has been fully assessed by the concerned authorities. With possible foreign investment of over US $ 60 million the plant on Built, Operate and Transfer (BOT) basis for 20 years lease, will provide 25 MGD of hygienic and drinking water daily.

This is a positive development and the desalination plant, when implemented, would help reduce shortage of potable water in Karachi, a port city with population of over 12 million. Karachi's total water requirements are about 600 MGD and the present shortage is placed around 150 MGD. We, the people of Karachi, look forward to the implementation of this pioneer desalination plant at the earliest. With a view to facilitate the processing and implementation of this project, the following suggestions are offered to the KPT / the promoters for their consideration.

SUGGESTIONS RELATING TO THE FEASIBILITY REPORT:

* The feasibility report shall have better credibility if the consultants working on the report are reputed for their technical competence and for the quality of reports. The KPT and other stakeholders may carefully review this aspect before the award for preparation of the report is made.

* The Terms of Reference (TOR) including the outline of the feasibility report may be carefully analysed to cover all requisite areas for investigation before the consultants are awarded the assignment. The KPT may consider sharing project details with other parties interested in desalination plants in Karachi such as the DHA. The scope of the feasibility report may be such as to provide satisfactory answers to most of the technical or other points that have a strong bearing on the project feasibility.

* Environmental aspects of the desalination project including the power generation plant at the proposed location in the Groyne Yard at East Wharf may also be fully assessed. Addition of the proposed plant may possibly add to the environmental degradation or pollution level beyond safe limits.

* The plant is said to be 25 MGD capacity. How would the total cost and cost of one MGD desalinated water work out if the capacity is raised to 50 MGD? Perhaps the DHA and the City Government may also join the project for the desalinated water to partly meet their requirements of potable water. These authorities may be associated to benefit from the feasibility report. The American Ambassador in her speech reportedly said that the feasibility study would also provide an opportunity to those organisations that plan or are interested for investment in projects like this. She also said that the United States is on the forefront for providing desalination technology to any part of the world.

* Many parts of Karachi including areas under DHA administration have ground water that is brackish and could also be desalinated, perhaps cheaply than the seawater. It needs to be confirmed if the selected technology would be suitable for desalination of such brackish water and whether the desalinated water so produced will cost-wise be comparable with the desalinated water produced from seawater.

* The feasibility report should also include details about other 25 MGD plants based on the same technology and already operating profitably in other parts of the world. Comparative data on capital cost and the cost of one MG desalinated water so produced may also be provided. The KPT / the sponsors may not opt for a technology based on which there are no existing successful projects in operation and making profit after achieving designed capacity operations.

* Pakistan has certain manufacturing capability for a large number of engineering goods, pipes, valves, etc. Karachi Shipyard and Engineering Works, located in the vicinity, may perhaps be able to supply lot of items. This aspect may be studied and local procurements made to the extent possible. This might also reduce the overall capital cost of the project.

* It is not clear what procurement procedure would be followed for plant purchase. Many sponsors and most of the creditors generally prefer International Competitive Bidding (ICB). The KPT and the sponsors may review the arrangement. Value for money must be assured.

* It has been reportedly claimed by the sponsor that the results of water test are satisfactory and water can be drunk without boiling. The desalination plant works on reverse-osmosis system and one of the latest techniques used in the world for this purpose. The laboratory tests may be compared with the standards for drinking water adopted by Pakistan and by the WHO. Before the plant would be finally accepted by the company / the KPT, sea water desalination should yield drinking water of agreed quality or better for the agreed number of days of continued plant operations at the specified capacity.

* The capital cost of the project has been given at $60 million, but no break-up of the cost of imported plant, local plant or the cost of technology has been specified. Capital cost including the financing and pre-production cost and the proposed means of finance may be reviewed carefully. In case it has been assumed that the government will waive the import duties and other charges, the amount may be calculated and provided for unless the government waiver to that effect is already available.

* The feasibility report must have details of tariff determinations including detailed assumptions for all inputs and outputs. The level of tariff would determine the profitability of the proposed company and whether it would be profitable for the KPT to switch over to the desalinated water and by giving up the water supply arrangements with the existing sources. Tariff can make or break the project.

SUGGESTION RELATING TO TARIFF AND CORPORATE MATTERS:

* The KPT may consider associating the DHA and the City government on preparation of the feasibility report, it's vetting or it may extend the cooperation to participation in the equity of the proposed company and the arrangements for the purchase of desalinated water produced by the proposed plant. The idea is to sort out difficult issues early on so that the implementation of the project is smooth.

* The KPT must have team of experts to evaluate various aspects that would be analysed and examined in the feasibility report to be submitted by the consultants / sponsors. The team must be up-dating their knowledge and collecting data on technology, similar desalination plants, operating costs, financing possibilities, etc. in the meantime. The assumptions on which the project feasibility would be developed including financial incentives and concessions, capital cost, financing plan, borrowing cost, level of pre-production expenses incurred by the promoters / sponsors, shares allocated to promoters at discount, etc. would need to be examined within a short time of the submission of the feasibility report. As the stakes are high, the KPT may also consider associating local or foreign experts.

* One gets the impression that USTDA will meet part of the capital cost of the project. In this context it may be noted that the USTDA advances economic development and U.S. commercial interests in developing and middle-income countries. The agency funds various forms of technical assistance, feasibility studies, training, orientation visits and business workshops that support the development of a modern infrastructure and a fair and open trading environment. USTDA's strategic use of foreign assistance funds to support sound investment policy and decision-making in host countries creates an enabling environment for trade, investment and sustainable economic development. In carrying out its mission, USTDA gives emphasis to economic sectors that may benefit from U.S. exports of goods and services. Therefore, the KPT / the sponsors may ascertain the factual position regarding availability of loan / equity funding for implementation of the desalination plant well in time. By the time the feasibility is submitted, local banks are also expected to be lending foreign currency loans as per the SBP instructions. That would be the time to compare the borrowing cost.

* The proposed project has been said to be a public-private partnership. However, details about the arrangements appear not to have been shared with the public. These arrangements may be negotiated well with the help of experts.

* The KPT is a public sector entity and should be getting approval to the arrangements in connection with the desalination plant being made from the government of Pakistan. The KPT may now also develop a list of approvals required from the federal, provincial or other authorities for the arrangements / the project to save time and to avoid any last minute embarrassments.

* From BOT finance basis, it is apparent there shall be long-term arrangements for sale of water to the KPT for about 20 years or so and this tariff may be indexed to inflation or exchange rates, or more such factors. These arrangements including timely payment for the desalinated water supplied to KPT may also require to be formalized through a set of inter-linked agreements. The KPT and other potential customers may engage suitable experts to help them analyze and finalize the arrangements.

* The CEM is said to be a small company. It may only be a project promoter. With the submission of feasibility report may be the real / foreign investors may possibly also join CEM and then the KPT may have to negotiate the final deal with them. The KPT may keep this aspect in view.

* Welcoming the US ambassador at the signing ceremony, the KPT Chairman had termed the project a "major initiative" that would also result in transfer of water-related technology to Pakistan. He said the CEM proposal was found attractive also due to the price at which they would distribute water to people. The KPT to make sure that both the objectives are fully achieved.

* Time schedule appears tight, both for the preparation of the feasibility report and for the implementation of project. The feasibility report after it is ready will presumably be presented to the KPT / GOP for examination, analysis, or approval. This is a time-consuming process. Further, many things in the report related to the project may need clarification. This may involve additional time. If agreement is reached on all matters including price of water per million gallons supplied, then agreements may possibly be signed for finances, construction and guarantees. Financing may take close to six months. The KPT and the sponsors while determining the date for start of commercial operations may like to factor in the time to be taken for these activities.

* It has been said that due to limited availability of domestic financing, the Government of Pakistan is promoting private-sector participation in the water sector by inviting proposals on a build-own-operate-transfer basis. The tariff at which water is sold in bulk to the utility / bulk consumers like the KPT will be the crucial point with big potential for disagreement with the project company supplying water. The KPT may like to suggest to the government to appoint a regulatory authority for tariff determination or other such purposes.

The project sponsors are said to be of Pakistani origin from USA. Their experience with the project may be made pleasant by transparent, equitable and fair treatment to them in every respect. In the past, Karachi has had many an infrastructure-related feasibility report completed and then shelved, citing lack of resources as the reason for abandoning the projects in majority of cases. One hopes that the desalination plant does not fall in that category and will be completed as planned. It is imperative that all the counter parties fulfil their part of the financial and technical responsibilities with regard to implementation of this project and to make this project a reality. We trust this project would be the harbinger of many such other projects for the welfare of the people living in different parts of Pakistan.