Independent Power Projects [IPP] – An Academic Report

IPP Pakistan

Editors’s Note: This report was written in 2000, hence the data may be aged. It is produced for reference only.

Independent Power Projects [IPP] – An Academic Report

THE POWER SECTOR

The power sector plays a central role in the economic development and social advancement of a nation. Electric power is the thrust of a modern industrial economy and the driving force behind modern industrial technologies required for sustained economic growth and international competitiveness.

At the time of independence the country had less than 150 MW installed power generation capacity. Although the installed capacity, both thermal and hydel types, increased manifold the supply always lagged demand. In the early nineties it was estimated that there was a shortfall of about 3,000 MW. This resulted in prolonged load shedding causing billions of rupee losses to the economy. As the country was not able to add another hydel power station after Tarbela in the last 20 years, establishment of thermal power station was considered an immediate remedy to overcome the electricity shortage.

As power generation, transmission and distribution all over the country except Karachi rested with WAPDA it attained the present very large size. With the expansion in this state-owned utility, mismanagement, inefficiency and corruption also became increased. In spite of frequent hikes in tariffs, supply of electricity to various areas at subsidized tariffs, heavy transmission and distribution losses, increase in furnace oil prices in the international markets and mounting receivables impaired the financial status of both WAPDA and KESC.

With the reduction in low cost funding from multilateral donors to WAPDA, the utility tried to overcome its liquidity crunch through successive hikes in tariffs. It also floated various issues of WAPDA Bonds at colossal interest rates but finances went from bad to worse. The country reached a ‘dead end’ where addition of new power generation capacity was not possible. In the meantime HUBCO was conceived and approved in the private sector with major equity from Saudi Arabia and UK’s National Power. The World Bank and other lenders arranged funding for Asia’s largest private power plant of 1,292 MW. In spite of the best cooperation of the government of Pakistan the commencement of work on the site was delayed. However, once the work started, the project was completed ahead of schedule and is now in full operation.

Encouraged by the interest of the foreign investors in Pakistan’s power generation sector the government announced the power policy in 1994, created the PPI&B, ensured minimum capacity purchase and offered an attractive bulk power purchase rate. The overseas investors responded with unprecedented interest and MoUs for over 10,000 MW were signed. Even at that time it was said that if the country was able to materialize 25% of the agreed capacity it would be enough to overcome the immediate shortfall and would also be sufficient to meet the demand till the year 2001. It was expected that by the end of 1998 the thermal power generation capacity which would come on line would be around 3,500 MW – excluding HUBCO.

In view of the key role played by electric power in national growth and development, reform and development of the power sector through restructuring and privatisation and a liberal policy for private investments in this sector are high priorities on the national agenda.


DEMAND GROWTH

The demand for electricity is relatively inelastic. It has grown at a rapid pace over the past two decades registering an average growth rate of 9.1 % and that too during a period when the annual rate of growth in real GDP average a much lower 5.7%.

According to technical forecasts made by the World Bank and WAPDA experts, growth in electricity demand will remain equally high in the years to come and is expected to increase at an average minimum rate of 5%.

Peak demand for electric power in Pakistan, over the last three decades, has grown at an average annual rate of 12.4% while in the same period net electricity sales increased by approximately 11.5% every year.

 

 

FACTORS FUELING THE DEMAND

 

  • Urbanization:

During the past two decades, the urban population has registered a growth rate of about 15%. Every one in three people now lives in a city or a town. The cities have expanded quickly and housing schemes have further contributed to the upsurge in the demand for electricity. WAPDA’s customer base has expanded from 311,596 in 1959-60 to 10.10 million in February 1997, an average annual compound growth rate of approximately 10.13 pct. KESC presently has 1.33 million customers.

  • Low per capita electricity consumption:

Pakistan’s per capita electricity consumption is 328.6 KWH. With much of the Pakistan’s rural areas yet to receive electric power, and less than half of the population (approximately 40%) connected to the national gird, demand growth is expected to continue at a rapid pace.

  • Village Electrification:

Efforts are being made to supply electricity to remote areas of the country. Though the process is slow yet it is in operation. To date, over 67,000 villages have been supplied electricity and this number will continue to rise as more and more capacities are coming on line.


TRENDS IN DEMAND

 

  • DEMAND GROWTH AND GDP GROWTH:

Historically, the power sector has grown at a much higher rate than the GDP itself. Over the past two years however, this rate has fallen largely due to the economic slowdown (GDP growth rate plummeted to 4.6% in 1996 and 3.1% in 1997 versus an average of over 6% in the 1980’s), and partly due to pilferage (power theft is not recorded separately and is included in transmission and distribution losses). The figure on the next page shows the amount of power consumption growth over the years and its relationship with the GDP growth rate.

 

SURGE IN RESIDENTIAL CONSUMPTION::

Currently, 45.2% of the electricity sales are made to domestic consumers. As urbanization has outpaced the industrial growth in the recent years, it is natural to think that the domestic consumers or the households are the largest consumer group for electric power. Before the 90s, the industrial consumption used to be greater but the past decade has evidenced this new trend where the domestic group has emerged as the largest group not only in terms of absolute number but also in terms of consumption. Currently, 45.2% of the electricity sales are made to domestic consumers.

YearDomesticCommercialIndustrialAgricultureBulk Supply and Public LightingTraction
1991-9233.114.0734.9019.907.920.10
1992-9335.884.1734.8917.897.080.09
1993-9437.244.1032.7817.877.930.08
1994-9538.394.2530.2717.759.280.06
1995-9640.794.5828.7418.427.410.06
1996-9740.474.5626.6218.2210.440.05
1997-9841.524.4825.9717.4710.50.04
1998-99*42.524.6525.9415.5711.290.04
*Provisional  – July-March 99

 


  • DECLINE IN INDUSTRIAL CONSUMPTION:

The industrial consumption of electric power has declined for the whole of the past decade from  13,043 GWH in 1992-93 to 12,297 GWH in 1997-98 shownig an annual compound growth rate of -1.2%.

 

  • CONSUMPTION BY PROVINCE:[1]
1992-931993-941994-951995-961996-971997-98Growth Rate
Punjab2194521947236352455525121256383.20%
Sind84959054871693309289102313.80%
NWFP4688497656256267663867947.70%
Baluchistan1365140414721586166617044.50%

The highest electricity consumption in is Punjab which is primarily due to the size of the population and its size followed by Sind. However, the rate of growth of consumption in these provinces is quite low as compared to NWFP and Baluchistan probably because these remote areas are fast being developed by the government.

 


SOURCES OF POWER GENERATION IN PAKISTAN

Hydroelectric Power

WAPDA, the sole operator of hydro projects, has three large hydroelectric projects:

  • Tarbela, with a total generating capacity of 3,478-MWs
  • Mangla, with total capacity of 1,000-MW, and
  • Warsak with 240-MW.

Together with 107-MW from scattered small hydro projects, the three major projects give WAPDA 4,825-MW of hydro power.

Hydropower’s drawback is its seasonal fluctuation. There is little rain from October to May when the demand for irrigation water is high, reducing the effective capability of hydroelectric units. Reservoirs can register up to a 45 pct. difference between wet and dry seasonwater levels. Nevertheless, Pakistan has vast untapped hydro potential suitable for development.

Thermal Power

In March 99, WAPDA had 5,120-MW of thermal generating capacity. Most of WAPDA’s thermal generating capacity comes from two large complexes: Guddu (1,657-MW of steam and combined cycle units), and Jamshoro (880-MW of oil-fired units).

WAPDA’s third large thermal unit, Kot Addu (1,621-MW), was partly privatized in March 1996, and its management handed over to the investor.

KESC’s generating capacity has been concentrated in the five-unit Bin Qasim Power Station (1050-MW) and the Korangi Thermal Power Station (382-MW).

Most of the current thermal capacity is oil-fired and therefore, very expensive. It is hoped that new gas-fired and hydroelectric plants will help cut Pakistan’s oil import bill, currently $2.5 billion per year.

Nuclear Power

Pakistan produces approximately 0.25 pct. of its electric supply from its only operating nuclear power plant, the Karachi Nuclear Power Plant (KANUPP). KANUPP, which was constructed in the 1970s, uses Canadian technology, and has a gross generating capacity of 137-MW.

A second nuclear plant of a gross generating capacity of 325-MW is under construction with Chinese technical assistance at Chashma, Punjab province. It is expected to be commissioned in Fiscal Year 2000.

 

Electricity Generation by Source in 1998[2]

The total electricity generation in 1998 was 62,104 GWH.

 

SOURCEPERCENTAGE
HYDEL35.50%
OIL38.20%
GAS25.10%
COAL0.70%

NUCLEAR

0.60%

CAPACITY

Pakistan has over 15.66 Gigawatts (GW) of electricity generating capacity. Hydroelectricity makes up about 31% of this capacity, followed by thermal plants at 68%. Pakistan also has one nuclear power plant, Kanupp, which accounts for 1% of Pakistan’s total generating capacity.

 

INSTALLED CAPACITY OF ELECTRICITY

YEAR

HYDEL

THERMAL

NUCLEAR

TOTAL(MW)

1992 – 934,6265,82313710,586
1993 – 944,8266,45613711,319
1994 – 954,8267,13713712,100
1995 – 964,8268,00613712,969
1996 – 974,8269,85513714,818
1997 – 984,82610,69513715659

 


SUPPLY

Growth in power supply in recent years has come primarily from new independent power producers (IPP’s), some of which have been funded by foreign investors. The two largest private plants are the Hub power company (HUBCO) and the Kot Addu Power company.

 

Out of a total generation of 62,104 GWH, only two thirds of it (44,366 GWh) is actually supplied to the consumers. The remaining is simply lost or at least reported to have been lost during transport and distribution.

The net supply after deductions for auxillary consumption and purchases from PASM has grown at an annual compound growth rate of 4.8%.

 

 


TRENDS IN SUPPLY GROWTH

  • Increased Private Sector Participation In Power Generation

Growth in power generation in recent years has come primarily from new independent power producers (IPPs), some of which have been funded by foreign investors. In 1997, their share was only 20% but surged to 36.2% in 1998-99. With more and more IPPs coming on line every year, we expect to see greater private sector participation in this sector.

  • Rapid Increase In Thermal Capacity:

The bulk of the capacity added during the decade on account of the IPPs is thermal. In fact, it has doubled within the past five years. One major reason is the cost of setting up thermal power plants which is considerably lower than a hydel plant. Secondly, the investors were not anxious of the high operating costs because of the highly liberal government policies which in addition to hedging them against fluctuations in exchange rates or input costs have also guaranteed them a high rate of return.


DEMAND VERSUS SUPPLY

According to an estimate, Pakistan needs 98,000 GWh of electricity for its population in the next 20 years as against the current production of 62,104 GWh.

 

In the short term, Pakistan faces power oversupply, and an inability on the part of WAPDA to pay the IPP’s for all of the new capacity under construction.
During the period from 1994, to the fall of 1995, 33 projects totaling an additional 7,740 MW of capacity were approved. Much of this capacity is currently under construction, and will give Pakistan an oversupply problem until economic growth fuels enough demand growth to absorb the new capacity.  The existing generation units and the already committed additions to capacity in both the public and private sector are expected to meet all the demand increases till the year 2002-3. After which more capacity would be needed.

 


THE MARKET PLAYERS

The electric power sector in Pakistan is still primarily state-owned, but a privatization program is underway. The main state-owned utilities are WAPDA and KESC.

In the private sector, WAPDA has signed power purchase agreements with 18 IPPs and another 12 hydel power projects have been issued letter of support by the Provinces.

 

STATE OWNED UTILITIES

Karachi Electric Supply Corporation

Karachi Electric Supply Corporation is a vertically integrated electricity utility responsible for the generation, transmission and distribution of electric supply in Karachi and certain adjoining areas. KESC was incorporated in 1913. After Pakistan’s independence in 1947, the government of Pakistan (GOP) began acquiring a majority stake in the corporation and today its direct and indirect share capital has risen to 80% KESC is listed on all three stock exchanges of the country.

It has a consumer base of 1.3 million predominantly urban consumers while the total population in its licensed area comes to over 10 million. The total licensed area of KESC is 6024.34 Sq. Kms, covering Karachi Division, Industrial part of Thatta District and part of Lasbela District of Balochistan. Karachi however accounts for the bulk of its power consumption.

Karachi is the 19th most populous city in the world and accounts for almost 9% of the national population. It is the country’s largest city contributing more than 20% of national GDP. Karachi is growing at an annual rate of 5% and this figure is expected to go much higher because being the commercial centre of Pakistan. Karachi attracts more immigrants from other parts of the country then any other city and the pace of its urbanisation is far more than any other city in Pakistan. The potential for expanding the consumer base through an efficient distribution system is therefore very high.

The privatisation of KESC constitutes an important element of the government’s ambitious agenda of restructuring and privatising the power sector in Pakistan. KESC’s privatisation is being done on priority basis and expressions of interest by interested investors will be solicited in near future and is expected to be accomplished by June 30, 2000.

Water and Power Development Authority

WAPDA was established in 1958 and entrusted with a massive agenda which included generation, transmission and distribution of power along with irrigation, water supply and drainage, flood control, internal navigation etc. Today, it owns 67% of the country’s total power generation capacity, services 80% of all consumers and is the principal power generation and supply system in the country.

The installed capacity of WAPDA stood at 9,945 MW out of which 4,825 MW is hydel, and 5,120MW is thermal. The entire capacity of hydel power generation in the country exists in the WAPDA system.

Karachi Nuclear Power Plant

KANUP is a self-financing unit of the PAEC. It was comissioned in 1971and has a generation capacity of 137 MW. The electricity generated from this plant is purchased and distributed by the KESC. The plant is expected to contribute to the power supply for another 12 years.


INDEPENDENT POWER PROJECTS

Encouraged by the interest of the foreign investors in Pakistan’s power generation sector the government announced the power policy in 1994, created the PPIB, ensured minimum capacity purchase and offered an attractive bulk power purchase rate. The overseas investors responded with unprecedented interest and MoUs for over 10,000 MW were signed. Even at that time it was said that if the country was able to materialize 25% of the agreed capacity it would be enough to overcome the immediate shortfall and would also be sufficient to meet the demand till the year 2001. It was expected that by the end of 1998 the thermal power generation capacity which would come on line would be around 3,500 MW – excluding HUBCO.

IPPs currently in operation:

  • AES Lalpir – was commissioned in Nov 1997 and has an installed capacity of 362 MW.
  • AES Pak Gen – was commissioned in Feb 1998 and has a capacity of 365 MW.
  • Gul Ahmed – commissioned in Nov 1997 and can generate 136 MW
  • HUBCO – commissioned in 96 with a capacity of 1292MW
  • KAPCO – privatized by WAPDA and has a capacity of 1466MW
  • Kohinoor Energy – The Lahore-based 131.44 MW plant was completed at a cost of $138m. It was commissioned in June 1997 and has a capacity of 131 MW
  • Tapal Energy – commissioned in June 1997 and can generate 126 MW

To date, 16 IPPs have been listed on the Karachi Stock Exchange.

HUBCO

Hubco is the first private sector infrastructure project in Pakistan and its $1.5 bn financing represents the country’s single largest foreign investment. It is believed to be largest private power project in Southeast Asia (non-OECD world).

PLANT AND CAPACITY:

The plant consists of four generating units which are each rated at 323 MW with an oil-fired single re-heat boiler and tandem compound, two cylinder condensing steam turbines directly connected to a hydrogen cooled generator.

The net available output power of 1200 MW is exported to the Water and Power Development Authority (WAPDA) grid by means of the station’s 5OOkV switchyard. Fuel is received by pipeline from Pakistan State Oil (PSO).

In addition to the main electricity production and fuel storage facilities, the plant has auxiliary plant or sub-plant facilities which include a desalination plant to convert sea water into feed, demineralised and potable water; RFO and lubricating oil processing plant; hydrogen gas generation facilities and an auxiliary boiler house.

LOCATION:

It is located near the estuary of the Hub river in Balochistan, about 40kms north-west of Karachi.

FINANCING:
The project is co-financed by the World Bank along with the governments of France, UK, Italy, Japan and the US. The construction consortium was led by Mitsui of Japan.

The total financing raised for the Hub Power project, including stand-by funding, was US$1,766 million. The equity requirement, amounting to some 25% of the project funding, was US$371 million of which the leading sponsors subscribed US$149 million. The balance of the equity was raised from an international flotation of Global Depository Receipts and a domestic share offering.

OPERATION:

The company started operation in April 1997. Under the Operation and Maintenance Agreement between Hubco and National Power, National Power acts as Operator of the plant for an initial period of 12 years from the beginning of commercial operations. Under the terms of this agreement, National Power has assisted Hubco in the review of designs for the plant and has undertaken to operate the plant to the requirements set by the Power Purchase Agreement with WAPDA.

HUBCO AND WAPDA[3]:

The 1200 MW oil-fired power station began full commercial operation on March 31, 1997, earlier than scheduled by an aggregate 27 weeks, and the project cost had stood at US $1.5 billion, slightly lower than the budgeted US $1.6 billion.

Under the power purchase agreement, Wapda has to pay the fixed component of tariff irrespective of whether it used the electricity or not, and that Hubco produces power to fill orders from Wapda. The company began supplying power to Wapda from July 9, 1996 and by the close of the financial year, the company had delivered 5,821 GWhrs of electricity. From November 1996 to May 1997, Wapda had utilized the Hubco potential by 100 per cent and the company generated up to 20 per cent of all electricity supplied in the country. The utilization of the available capacity by Wapda at 73.86 per cent was higher than the base case utilization of 64.6 per cent assumed in the Equity Offer for Sale. As designed, Hubco was required to have a net output of 1200MW. However, commissioning tests have demonstrated that the actual net output was 57MW higher at 1257MW.


CAPTIVE POWER PLANTS

 

The frequent power breakdowns, load shedding, fluctuations and inflated billing are some of the ills, which have played a role in damaging the industry in Pakistan. Constantly interrupted power supply not only has stalled the process of economic growth but also has proved a discouraging factor for the potential investors particularly from external resources.

The manufacturing sector which generally relies on the public sector for power supplies says that the industry is prepared to pay the high cost of electricity provided the power producers ensure smooth supply. The industrialists while justifying the captive power plants plead that the abrupt power breakdowns besides damaging the manufacturing plants, equipment and costly materials also hamper them in meeting the export commitments

Now over 60 industrial units have applied for the oil and gas generators for self-generation alone in Karachi’s industrial areas. Currently, over 500 MW of capacity is under construction as captive power plants.

 

 

PROJECTS IN THE PIPELINE

Two power projects involving U.S.-based companies (Babcock and Wilcox, and General Electric) received $293 million from the U.S. Export-Import Bank in early 1998. These projects involved equipment and services for Uch Power Ltd. in Islamabad, and the Saba oil-fired power project.

In March 1998, Pakistan announced that U.S.-based Synergies Energy Development Inc. would build a $1.4 billion, 750-MW hydroelectric plant in the Pakistani-controlled part of Kashmir. This would represent the largest private sector hydroelectric project in South Asia to date.

Private sector projects will rely primarily on increased use of natural gas and coal. In January 1996, ground was broken for the largest foreign investment in Pakistan’s power sector to date: the $6 billion coal-fired Keti Bandar power project to be built by Consolidated Electric Power Asia (CEPA) of Hong Kong.

Other thermal projects worth mentioning are Fauji Kabirwala (157 MW), Japan Power (120 MW) Habibullah Coastal Energy (140 MW), Liberty Power (235MW), Rousch (Pak) Power (412). All of these have already signed Power Purchase Agreements with WAPDA and are expected to commence commercial production this year.

New WAPDA projects are confined to hydropower, including projects such as the 1,425-MW Ghazi-Barotha plant which takes advantage of the enormous untapped potential of the Indus River. Perhaps the most controversial hydel project is the Kalabagh Project that is planned to generate 3,600 MW but even today, it largely remains an idea … just another feasibility study.

Chashma Power Project would be Pakistan’s second Nuclear Power plant and is being designed to generate 330 MW of energy. It is a joint venture between PAEC and the China National Nuclear Corporation.

 

 

DISTRIBUTION[4]

The responsibility for power supply is shared between the two vertically integrated public sector utilities namely Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC).

Apart from their own power generation sources the two systems are also fed by private sector power plants. WAPDA supplies power to the whole country except Karachi, which is supplied by KESC. The two systems of WAPDA and KESC are interconnected through a 220 kV double circuit transmission line.

WAPDA’s distribution network is divided in eight Area Electricity Boards (AEBs). The AEBs were created as departments within WAPDA to administer the supply and distribution construction, expansion, maintenance and management of the system. These AEBs have an annual sale of over 37,000 kWh and earn a revenue of over Rs.76,000 million.

The government of Pakistan intends addressing the future needs of the country by gradually restructuring the system from an integrated utility to a decentralized scheme based on a wholesale competition model.

 

 

 

POWER POLICY 1994

 

Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan was framed in 1994. According to the World Bank, the incentives included:

1) Bulk tariff of US cents 6.5/kWh (to be paid in Pakistan Rupees) for the sale of electricity to WAPDA/KESC with indexation mechanism for fuel prices, US and Pakistani inflation, exchange rate fluctuations, O&M costs, etc.

2) Fiscal incentives consisting of exemption from corporate income tax, customs duties, sales tax, Iqra, and other surcharges on imported equipment.

3) Standardized security package which includes a model Implementation Agreement, Power Purchase Agreement and Fuel Supply Agreement.

4) Creation of a Private Power and Infrastructure Board, so as to facilitate a one-window operation.

5) Fiscal incentive to facilitate the creation of a corporate securities market in the country, including permission for power generation companies to issue corporate bonds and shares at discounted prices, and establishment of an independent rating agency.

 

The government subsequently added further incentives in March 1995 which led to a flurry of foreign investment petitions. The new guaranteed revenue return rate was extremely attractive to investors; as well as the “one-window” operation. Investors were reassured that WAPDA and KESC would purchase electricity for a very reasonable 6.5 cents/kwh. This guaranteed the foreign producer that regardless of a potential drop in demand for electricity, the government would purchase the supply of electricity at a favorable prices. Moreover, the “one-window” interface with the government helps to minimize the time spent in the Pakistani bureaucracy, thereby reducing the cost of submitting a proposal.

While these incentives generated an avalanche of applications for power production–over 116 in 1995–the liberalization process by the Pakistani government is still encountering some major problems. The government has been slow to break down WAPDA for privatization and to move towards a more market-orientated and transparent pricing regimes. Consumer price hikes are running into opposition and the government still subsidizes tariffs for certain consumers. The consumer sector is heavily subsidized at almost 50 percent, while the commercial and industrial sector pays the highest rates. What is not included in this table, however, is the cost inflicted by waste and theft of electricity that these tariffs must make up for. In addition, the overall tariff increases have been made not only to bring the prices up to par with the marketplace, but to also generate enough cash flow in WAPDA and KESC to enable the organizations to qualify for additional debt for privatization. These factors will impede the restructuring of the tariff system, and therefore privatization.

 

REGULATORY AUTHORITIES

NEPRA:

In order to promote fair competition in the electricity industry and to protect the rights of customers as well as producers and sellers of electricity, the Government of Pakistan has enacted the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997. The National Electric Power Regulatory Authority, NEPRA, has been established under this Act for regulation of electric power generation, transmission and distribution in Pakistan. NEPRA aims to provide investor confidence in the organization and growth of the electric power sector. It will aid in the rationalization of electricity rates and ensure that investment in the electricity industry in justified and will earn a reasonable return for the investors. Price increases by WAPDA and KESC must also be approved by NEPRA.

PEPCO:

The Pakistan Electric Power Company (PEPCO) has been established to manage the restructuring process, to help with the commercialization and efficiency improvement programs and to prepare the companies for privatization. PEPCO will assist in reorganizing the Power Wing of WAPDA into three thermal generation companies, one national transmission and dispatch company, and eight distribution companies, the induction of new management into these companies, and development of management and other systems to support their operation along commercial lines. The corporations have already been registered and the transfer of assets, liabilities and staff is in progress.

 

 

PRIVATIZATION

At present, the power privatisation efforts will focus on WAPDA’s distribution sector and KESC. WAPDA’s distribution sector comprises eight Area Electricity Boards serving 10 million customers whereas KESC serves 1.3 million consumers. As a step towards privatisation, corporatisation of the Area Electricity Boards is at an advanced stage. Preparatory work for privatisation of one Area Electricity Board: Faisalabad Area Electricity Board, as well as KESC has almost been completed and we intend to invite expressions of interest for these transactions in near future.

The approach of the Privatisation Commission to privatisation of the power sector will be based on a mix of “Strategic Sale” and “Management Contracts”. The decision whether to use a Strategic Sale of a Management Contract for a particular transaction will be made on a case-by-case basis. It will be based upon the perceived benefits from each possible transaction structure for a particular transaction.

Under the Strategic Sale arrangement, a public limited company is formed to acquire the assets and liabilities of the utility to be privatised. An equity interest in that company, typically 26% of the equity, is sold to a strategic investor and the strategic investor is given full management control of all key decisions of the company through shareholders’ agreement with the former government owner.

Under the Management Contract agreement, the public sector utility enters into a performance-based management contract with private sector operators in order to improve the operational and managerial efficiency of the utility, while ensuring value maximization for assets to be sold to private investors in the future.

 

PROBLEMS WITH PRIVATE SECTOR PARTICIPATION

The issue of privatization and private sector participation in Pakistan has lately become most controversial, especially in the case of the water and power sector. The incentives given to the private investors are highly lucrative. This includes purchase of 60% of installed capacity (at the rate of 6.2 U.S. cents per unit) by the Water and Power Development Authority (WAPDA), which used to be the only agency controlling the water and power sector in Pakistan. WAPDA also used to be one of the most profitable institutions in Pakistan, making a profit of over 15 billion rupees per annum just a few years back. Last year it made a net loss of Rs 17 billion, and its losses may shoot up to over Rs 50 billion in the next two years.

The main flaw of the agreements signed with the Independent Power Projects (IPPs) was that agreements were signed only for power generation. No attention was paid to transmission and distribution. The result can be seen in the closing of WAPDA’s generating units to buy power from IPPs. The other reasons for WAPDA’s fiscal imbalances are inefficiency, subsidies to various sectors and non-payment of bills by its consumers, especially the public sector. Due to all these factors the power tariffs in Pakistan in the last few years have gone up by more than 100%. In the near future they will likely increase by another 40%!

With the past experience in power generation, there is a fear that privatization of transmission and distribution of basic utilities will also result in a hike in tariffs, with no improvement in quality of service and expansion to more people and other regions. This fear is due to the fact that after the involvement of the private sector in the power sector in Pakistan since 1994, there has been virtually no improvement in quality of service. The general public in Pakistan still faces the infamous load shedding, especially in hot summers, even though the tariffs have gone up by more than 100% in last two years or so. Another implication of privatization has been the large number of layoffs, which also created socioeconomic problems for the affected in particular and the country in general.


COMPETITIVE ANALYSIS

 

ASSESSMENT OF INDUSTRY ATTRACTIVENESS:

 

THREATS FOR THE NEW ENTRANTS:

  1. High capital costs create a barrier to entry. However, these are declining rapidly worldwide for thermal and combined cycle generation.
  2. For hydrogenation, a long gestation period of three to five years is an additional deterrent.
  3. Slower demand growth and system over capacity by 1999 is likely to discourage new entrants (e.g. by introducing competitive bidding, removing tax holidays for new IPPs).

 

SUPPLIER POWER:

  1. Pakistan State Oil and Oil and Gas Development Corporation are sole suppliers for refined furnace oil and natural gas respectively.
  2. Supplier risk is mitigated by GOP-guaranteed Fuel Supply Agreements and guaranteed returns in case of stoppages due to fuel supply disruptions.
  3. Although IPPs are preferred customers due to their ability to pay cash, infrastructure bottlenecks in fuel distribution systems create problems.

 

BUYER POWER:

  1. Cash strapped public utilities WAPDA and KESC are sole buyers.
  2. Buyer power mitigated to some extent by sovereign GOP guarantees for capacity tariff payments.
  3. Hubco’s size and multilateral guarantees have neutralized WAPDA. However, WAPDA has flexed its muscles against smaller IPPs (e.g. KEL) and also tried to corner Hubco into agreeing to its terms.

 

RIVALRY AMONG EXISTING FIRMS IN THE INDUSTRY:

  1. Ideally rivalry among the IPPs should be minimized due to guaranteed off take of 60% capacity for IPPs under the 1994 Power Policy, and of 64.6% for Hubco.
  2. However, WAPDA is likely to favor large IPPs, mainly due to economies of scale, lower start up costs and cheaper tariffs.

 

 

 

[1] [1] Pakistan Energy Yearbook 1998

 

[2] Pakistan Energy Yearbook 1998

[3] Dawn,  Aug 16, 1998

[4] http://www.privatisation.gov.pk

 

 

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2 Responses

  1. Yasir Arafat says:

    I am working on role of IPPs in Pakistan energy sector. If you kindly provide the History of IPPs from 2000 to 2015 along with per production data. Actually i want to know the effect of different policies and oil shocks on IPPs productivity.
    Thanks

  2. Ravi Magazine says:

    Thanks Yasir. Unfortunately, we dont have requested data.

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