COMPARATIVE STUDY OF THE NEW POWER POLICY

By MUHAMMAD BASHIR CHAUDHRY
Feb 03 - 09, 2003 

The Secretary, Ministry of Water and Power announced the Power Policy-2002 on 24th October 2002 at Islamabad. Main objectives of the policy include providing sufficient capacity for power generation at least cost; exploitation of indigenous resources including local manufacturing capabilities; and safeguarding the environment. The policy was announced about two weeks after general elections in the country. At that time the situation was fluid and detailed comments on the policy were neither made nor were expected. Now things have somewhat settled. Missions from the international financing institutions are visiting the country for exchanging views with the elected government. Matters of mutual concern including the new policy are likely to come under discussion. In order to better appreciate its major thrust and the potential challenges/opportunities it offers, main parameters of the new policy have been compared in this paper with those of the previous power policy, issued in July 1998.

BROADER PERSPECTIVE: The title of the new document 'Policy for Power Generation Projects' shows broader perspective than that of the previous title 'Policy for New Private Independent Power Projects'. There is a major shift and the new policy, besides the private sector projects, covers public sector projects, public-private partnership projects; and projects developed by the public sector and then divested.

LIST OF POTENTIAL POWER PROJECTS: Present generation capacity is sufficient to meet future power demand up to 2004-2005. However, work on new power projects has to start in view of the long lead-time to bring power plants on line, based on indigenous resources (hydel, coal & gas). WAPDA-Vision 2025 suggests a plan to meet the upcoming deficits through additional power generation projects. The plan has been updated and a consolidated list of potential projects to be implemented in the short, medium and long term has been attached to the policy. Such a list of potential projects was not attached to the 1998 policy. The choice of implementing projects by the public sector, private sector, or by public-private partnership will depend upon the urgency of meeting 'demand' while keeping in view the resource availability position.

MAIN FEATURES OF THE NEW POWER POLICY

The basis for selection of the successful bidder in each case will be the minimum levelised tariff, either through ICB for solicited proposals or through negotiations/ICB for proposals on raw sites, i.e. locations whereof no feasibility study has been initiated. The introduction of negotiated/ICB for proposals on raw sites is an improvement over the 1998 policy. Variable tariffs over the life of the project and the stages in the selection of projects have been maintained.

The Policy continues to recognize the importance of a proper feasibility study for a particular site-specific hydel or indigenous fuel-based/renewable resource-based project, for inviting competitive bids and receiving firm offers. Now it has been specified that detailed feasibility studies will be carried out by the public/private sector before bids are invited and the Letter of Support (LoS) issued. The feasibility study may be conducted by the private sector only on raw sites, provided the proposal for the project on raw site has been reviewed/accepted and a Letter of Interest (LoI) issued after submission of the required bank guarantee.

As in the previous policy, the hydel projects in the private sector will be implemented on Build-Own-Operate-Transfer (BOOT) basis. However, now it has been provided that the BOOT projects shall, at the end of concession period, be transferred to the government. Earlier policy had provided transfer to the province.

The new policy has maintained the competitive tariffs comprising an Energy Purchase Price (EPP) and a Capacity Purchase Price (CPP) with adequate provision for escalation. However, it has been added that the CPP in case of hydel projects will be approximately 60% to 66% of the levelised tariff, because of the relatively low EPP.

The GoP will guarantee that the terms and conditions of executed agreements (i.e. the Implementation Agreement (IA), Power Purchase Agreement (PPA), Fuel Supply Agreement (FSA)/Gas Supply Agreement (GSA), and Water Use Licence (WUL), including payment terms, are maintained during the term of the agreements. This provision has been reworded from the previous policy.

Power companies will be allowed to import plant and equipment not manufactured locally (for hydel and thermal projects including projects based upon renewable resources) at concessionary rates. Companies will also be completely exempted from the payment of income tax, including turnover tax, and withholding tax on imports. However, there will be no exemption from payment of these taxes on oil-fired power projects. This is a major change from the previous policy that expected the companies to operate according to the applicable Tax Laws of Pakistan.

The new policy encourages indigenisation. To promote indigenisation, the local engineering industry will be encouraged to form joint ventures with foreign companies in order to develop power projects with a cumulative capacity of at least 2000 MW by the year 2015.

INSTITUTIONAL ARRANGEMENTS

In the new policy, PPIB role has been enhanced while that of other institutions has been adjusted. Earlier under 1998 policy, the provincial and AJK PPCs were to issue pre-qualification documents, pre-qualify the bidders, issue bidding documents and evaluate the bids for all sizes of projects, in consultation with PPIB. Now this role has been restricted to projects up to 20 MW. Projects over 20 MW will entirely be handled by PPIB. The new roles of different institutions are described below:

NATIONAL ELECTRIC POWER REGULATORY AUTHORITY (NEPRA): While performing its functions under the NEPRA Act, NEPRA shall, as far as practicable, protect the interests of consumers and companies providing electric power services in accordance with guidelines laid down by the Federal Government. NEPRA will provide to the Private Power and Infrastructure Board (PPIB) the standard forms required for tariff determination by NEPRA, which will be provided with the RFP to the bidders. PPIB will request NEPRA for determining tariff after receiving bids, under ICB. NEPRA's role in the power business, inter-alia, will be to issue licenses for companies and to regulate their operations according to NEPRA rules and regulations. The prospective applicants will be required to comply with all NEPRA rules/procedures, interalia, for grant of license before security agreements are concluded for any project.

PRIVATE POWER & INFRASTRUCTURE BOARD (PPIB): PPIB will provide a one-window facility for implementation of projects above 20 MW capacity, and will issue the LoI and LoS, prepare pre-qualification and bid documents, pre-qualify the sponsors, evaluate the bids of pre-qualified sponsors, assist the sponsors/project companies in seeking necessary consents/permissions from various governmental agencies, carry out negotiations on the IA, assist the power purchaser, fuel supplier, provincial/AJK authorities in the negotiations, execution and administration of the PPA, FSA/GSA and WUL respectively, issue and administer the GoP Guarantee backing up the power purchaser, fuel supplier, provincial/AJK Government's contractual obligations, and follow up on implementation and monitoring of the project. To facilitate co-ordination between various agencies and to help PPIB in taking timely decisions on various issues while implementing power projects, a committee under the Secretary, Water and Power, comprising representatives of PPIB, WAPDA, KESC, the Planning & Development Division, the concerned provincial/AJK Private Power Cell (PPC) or Sindh Coal Authority (SCA) (for coal-based projects in Sindh) will be constituted to oversee implementation of the Policy for Power Generation, 2002.

Provincial and AJK PPCs- One-window support at the provincial level for projects up to 20 MW would be provided by Provincial /AJK PPCs in their respective territories, and by SCA for coal-based projects in Sindh. The provinces may also act as prime movers and catalysts for marketing projects above 20 MW and for coordinating with PPIB for processing of such projects.

FINANCIAL REGIME: Main changes include withdrawal of permission for issue of bearer bonds; permission to foreign banks to underwrite shares has now been restricted to the extent allowed under the Laws of Pakistan; earlier provision pertaining to tax, State Bank of Pakistan and Forex regulations have been deleted and replaced by a new provision that reads: 'Non-residents are allowed to purchase securities issued by Pakistani companies without the State Bank of Pakistan permission and subject to the prescribed rules and regulations'. Also the provision in the previous policy regarding 'an LTCF facility that can provide long term low interest loans for a portion of project funds' has now been deleted.

FISCAL REGIME: Changes made in the new policy shall have major impact on the development and operation of new power plants, particularly the following: (a) The new policy provides that there would be customs duty at the rate of 5% on the import of plant and equipment not manufactured locally. (b) Reference in the old Policy to depreciation allowance, customs duty and LMM export refinance have been deleted. New provisions have been added that read: (i) No levy of sales tax on such plant, machinery and equipment, as the same will be used in production of taxable electricity. (ii) Exemption from income tax including turnover tax and withholding tax on imports; provided that no exemption from these taxes will be available in the case of oil-fired power projects. (iii) Exemption from provincial and local taxes and duties. (c) Repatriation under new policy has been made subject to the prescribed rules and regulations. (d) Maximum indigenisation shall be promoted in accordance with the government policy. Reference to import substitution and SRO as in old policy has been deleted. (e) A new provision has been added to the effect that the above incentives will be equally applicable to private, public-private and public sector projects.

ENVIRONMENT: Previously the policy made a reference to the government's environment guidelines, copies of which to be provided at the time of pre-qualification. The new policy has made it abundant clear. Now all requirements of the Pakistan Environmental Protection Agency (PEPA) Act 1997, interalia, relating to environmental protection, environmental impact and social soundness assessment, shall have to be met.

SOLICITED PROPOSALS: The typical schedule to conduct competitive bidding for a private power projects is similar to the schedule prescribed in the previous policy, with following changes in the new policy: (a) most of the activities earlier handles by the provincial or AJK PPCs or PPIB would now be handled exclusively by PPIB; (b) projects above 20 MW would now be exclusively handled by the PPIB; (c) time allocated for various activities has been increased considerably. However, a specific schedule will form part of the RFP circulated for each project, and (d) an important provision regarding posting of Performance Guarantee by Sponsors @ US$ 5000 per MW in favour of PPIB has been added under the new policy.

PRE-QUALIFICATION AND LOCK-IN-PERIOD: The provisions regarding the main sponsor and demonstrated capability contained in the previous policy have been slightly modified whereas the last two provisions regarding good reputation, no litigation with the government, and availability of trained manpower have been deleted. Instead a new condition regarding main sponsor's ownership of existing generation capacity has been added. This condition reads, "The main sponsor should not own more than 25% of the total generation capacity in Pakistan at the time of bidding." The provision regarding Main Sponsor holding at least 20 % equity until sixth anniversary of successful commissioning, and the pre-qualified sponsors must together holding 51% equity for the same period, has been retained in the new Policy.

REQUEST FOR PROPOSAL (RFP) AND EVALUATION OF BIDS: As per new policy, the information to be specified for RFP of projects (hydel, indigenous coal/gas, fuel oil, renewable, etc.) with capacity above 20 MW is more or less similar as provided in the earlier policy. Similar is the case for the documents to be included in the RFP. However, standardized forms for NEPRA's tariff determination would also be included in the RFP.

New provisions for evaluation of bids as per new policy are summarized below:

* Detailed evaluation criteria will be given in the RFP. Evaluation of hydel projects will be on the basis of levelised tariff calculated at 12% discount rate over the term of the project, on the basis of average hydrology or as otherwise specified in the RFP at an annual reference plant factor and within allowable levels of front-end loading.

* The bid with the lowest evaluated levelised tariff will be ranked at Number 1. PPIB will reserve the right to reject any or all bids without assigning any reason thereof, and will not assume any liabilities or claims of compensation in connection therewith. Once the bid is accepted and tariff approved by PPIB, the successful bidder will be issued its LoS by PPIB against delivery of a Performance Guarantee in favour of PPIB in the required amount valid up to three months beyond the Financial Closing date specified in the LoS, and upon payment of the cost of the feasibility study to PPIB. Under normal circumstances, no extensions in achieving Financial Closing will be granted. However, on the sponsors' request, under special circumstances, the committee may consider, a one-time extension of up to a maximum period of six months against extending the validity period of the Performance Guarantee (by the Sponsors) and increasing the guarantee amount by 100%.

IMPLEMENTATION PROCESS

Each bidder will submit a bid bond of US$ 1000 per MW at the time of submission of bids. The successful bidder will be required to post a Performance Guarantee of US$ 5000 per MW (in favour of the PPIB) valid initially for a period of three months in excess of validity of the LoS. The new policy has generally maintained the procedures as were applicable to the pervious policy.

Submission by the successful bidder to PPIB of a mutually acceptable implementation schedule, and the periodic progress reports as well as liquidated damages for not meeting the Commercial Operation Date are the same in the new policy as were in the old policy. However, now it has been provided that delays in achieving Financial Closing due to events beyond control of the sponsors/project company will be accommodated through a day-for-day extension allowed under the IA. Also it has been said that equitable compensations against parties concerned may be specified in the IA/PPA for not meeting specified milestones under the security agreements.

TARIFFS

The delivery point will either be the bus bar of the power plant or a specific location on the grid of the power purchaser, depending upon one of the following options specified in the RFP. A new option for building of the transmission line by jointly by the power purchaser and the sponsors has been added in the new policy.

Escalation provisions in the previous policy have been modified. As per new policy, escalation for dollar components to cover dollar inflation will not be provided. However, bidders may include components in the EPP and CPP, which are escalable for Pakistan Rupee inflation. Such Pakistan Rupee escalation will be effected from the bid submission date by the Pakistan Wholesale Price Index (WPI) for 'manufacturing' as notified by the GoP's Federal Bureau of Statistics (FBS).

SECURITY PACKAGE: Main changes made (a) The SP is applicable to projects above 20 MW, and (b) The model agreements are applicable on private-public projects as well.

PUBLIC-PRIVATE PARTNERSHIP: The GOP encourages establishment of power projects above 20 MW in public-private partnership. In line with the objectives of this new policy, the incentives/concessions available to private power projects will also be available to projects implemented under public-private partnership.

SMALL POWER PLANTS: Small power plants of up to 20 MW capacity will be implemented through a one-window facility available at the provincial/AJK level. Provinces will be allowed to develop projects up to 20 MW under this policy or their own. The fiscal and financial incentives/concessions outlined above will also be available to these projects. For small power plants intending to serve locations not connected or not likely to be connected to the national grid in the foreseeable future, the Provinces/AJK and respective agencies in these areas will not be required to follow this policy strictly.

SUGGESTIONS

The government is urged to consider the following:

a. For indigenisation and development of local power plant manufacturing capacity, the industrial units already making electrical equipment need to be supported.

b. For the first time, in the new policy there is no mention of government-owned Long Term Credit Fund (LTCF). It appears no specific role has been earmarked for LTCF in future power projects. LTCF, that had played useful role in the past, might have been re-modeled by eliminating any element of subsidy in its interest rates and by making it a public limited Specialized Joint Venture DFI for financing energy and energy related infrastructure projects. Existing four Joint Venture DFIs in Pakistan might participate and nurture such a specialized institution. This would also save the expertise already developed within LTCF for project finance in energy and infrastructure sectors.

c. Administrative and financial independence of NEPRA is rated high by the foreign private investors. The government may consider appointing a regular Chairman of NEPRA. The position has been vacant since September 2002.

d. All the provincial governments and the AJK PPC might review if the new power policy suits the power projects below 20 MW capacities. Changes might have to be made in the policy and the model agreements.

e. It appears the PPIB has been overloaded with responsibilities and authority while the other stakeholders/government institutions appear to have been relegated to secondary position. The government may consider a second look on this aspect.