O&M of 4 public sector gencos: government not to allow 7 percent mobilisation advance

The government has decided not to allow 7 percent mobilisation advance for operation and maintenance of four public sector power generation companies (gencos), fearing a scandal like rental power plants (RPPs), sources in PPIB told Business Recorder. However, incentives will be offered to the contractors in customs duty on import of equipment, machinery and spare parts for thermal power plants , besides exemption from income tax, as the pattern of independent power producers (IPPs).
Sources said that Nepra will determine revised tariff, for ten years, which the power sector analysts believe would definitely increase the consumer end tariff. The Economic Co-ordination Committee (ECC) of the Cabinet had approved gencos' outsourcing plan on August 23, 2011.
Official documents, available with Business Recorder, show that before presenting the summary, attention of the ECC was drawn to the fact that the summary contained a proposal for outsourcing the management and O&M operation of gencos s to private O&M operators for a limited period, which fell in the domain of the Council of Common Interests (CCI) under Article 154 of the Constitution, read with entries 4 & 18 of Part-II of the Federal Legislative List, as amended through the 18th Constitutional Amendment. The Ministry of Water and Powers had relied upon the judgements of the Sindh High Court and the Supreme Court of Pakistan which were pronounced in 1996 and 1997 respectively well before the above amendment. It was clarified that the CCI was concerned with the policy matters only and the issue placed before the ECC was not a policy matter.
According to Pepco estimates an investment of $166 million is plan for restructuring gencos required an investment of $166 million is required for maintenance of genco in addition to United States Agency for International Development (USAID) assistance of $51.6 million for additional 1220 MW from Jamshoro, Guddu and Muzuffargarh thermal power stations. USAID, has prepared an upgradation plan of gencos that envisages enhancement of efficiency in the Jamshoro thermal plant by 245 MW, Guddu 380 MW and Muzuffargarh by 595 MW.
The ECC was informed that electricity generation capacity of four generation companies (gencos) had de-rated from the originally installed capacity of 4829 MW to 3580 MW. Lately, out of that de-rated capacity, availability remained very low, hovering between 1400 MW and 2000 MW. Consequently, the Private Power & Infrastructure Board (PPIB), which had successfully inducted private power over 8283 MW in the country, had prepared a concept paper which proposed outsourcing of management, operations and maintenance, and rehabilitation of public sector power stations under gencos to well qualified private sector operators for a limited period. The concept paper assesses that induction of O&M contractors for public sector power stations would result in additional availability of around 1243 MW of electricity and saving of Rs 81.6 billion/annum (at current rates), if efficiency is improved to 3:3 percent.
Salient features of the proposed plan are as follows: (i) O&M contractor would be inducted through open bidding to be carried out by PPIB in accordance with Public Procurement Rules; (ii); no retrenchment of existing staff would be made; (iii) no mobilisation advance would be paid by gencos/government of Pakistan to O&M contractor; (iv) no upward revision of tariff would be involved due to induction of O&M contractor; (v) Ministry of Water and Power, on behalf of GoP, shall issue 'policy guidelines' pursuant to which and subject to submission of petition by respective gencos ;(iv) Nepra shall rationalise and determine, for the purposes of bidding, a unit-wise multi-year baseline tariff for ten-year period for individual power stations, for single baseline fuel, Variable Operation and Maintenance (VO&M) and Fixed Operation and Maintenance (FO&M) components, relying on their current performance parameters with provision for improvements expected from USAID funding in pipeline; (v) determine, based on lowest evaluated bid(s), a unit-wise multi-year reference tariff for ten-year period for individual power stations, for both baseline and proposed cheaper fuels, VO&M, FO&M and O&M contractor's improvement cost (benefit sharing) components; (vi) allow gencos automatic indexation mechanism and payment mode for fuels, VO&M and Improvement Cost components similar to IPPs; (vi) evaluation and selection of O&M contractor through a criterion based on benefit sharing, percentage of which to be determined through bidding process; (vii) customs duty at the rate of 5 percent on the import of equipment, machinery and spares for carrying out Balancing, Modernisation and Replacement (BMR) and exemption from income tax as in case of IPPs; (viii) contract between the O&M contractor and respective genco for outsourcing of the management, operations and maintenance, and rehabilitation functions for a period of ten years; and; (ix) constitution of an 'implementation committee' under Ministry of Water and Power with representatives from Planning Commission, Privatisation Commission, Ministry of Finance, Ministry of Petroleum & Natural Resources, Pepco (or successor), and concerned genco to oversee, take decisions and grant all successor), and concerned genco to oversee, take decisions and grant all necessary approvals, for and on behalf of the GoP, in relation to the outsourcing of the management, operations and maintenance, and rehabilitation of public sector stations.
During the ensuing discussion, ECC members stressed on careful re-evaluation of some of the proposals made in the summary.
Some ECC members apprehended that chances of tariff going up could not be ruled out, besides O&M operators' ability to take over full control of plants.
Ministry of Water and Power, however, explained that efficiency could be brought through management change. It was stated that despite transfer of management control to private O&M operators, the Board of Directors/Governors of these power plants would remain with the GoP and these Boards of Directors /Governors would be restructured through the Cabinet Committee on Restructuring (CCoR), headed by the Finance Minister. It was nevertheless suggested that the proposed implementation committee should have representation from the private sector as well.
The ECC , after threadbare discussion, cleared the proposal of the Ministry of Water and Power, with the direction that the implementation committee shall also include 2-3 members from the private sector.
It is pertinent to mention here that a technical audit study of gencos--Jamshoro, Guddu, and Muzaffargarh power plants--conducted by Hagler Bailly, exposed reasons behind decline in performance and gave recommendations to improve performance, suggesting that resolution of management and operational issues in generation companies could help improve efficiency of power sector.
According to the study, the resolution of management and operational issues identified in the study require a complete change in the management approach and operational environment of the gencos . The government could consider bringing in independent management under a performance-based operational and management contract based on a structure of incentives and penalties against the performance of the power stations. The terms and conditions of the contract could be designed in a manner so as to make the contractor responsible for injecting investment for rehabilitation of the units and bringing in highly trained and experienced senior managers. This approach will help in establishing and expanding the O&M industry, ultimately leading to improvement in the efficiency of the power sector.