National Electric Power Regulatory Authority (Nepra) has reportedly challenged Prime Minister's directives on induction of security costs for the CPEC projects in power tariff, saying that allowing additional security cost to the CPEC project will create legal complexities and discrimination among other power projects, sources close to Finance Minister told Business Recorder.
Giving the background, the sources said, in a meeting convened to review security situation after a bomb blast in Quetta on August 8, 2016 the issue of security costs of various CPEC projects was raised again. Prime Minister observed that inspite of an early decision to include 1 per cent of the total capital cost of project as security costs at the time of regulatory approval at various forums, relevant Ministers/ Division particularly Water and Power, Planning & Development and Communications have not been able to make necessary adjustments. Resultantly, a number of projects in the power and communication sectors have gone into implementation without any arrangement for recovery of even recurrent expenditure of special security on these projects. Prime Minister further observed that apart from provision of cost of establishment of separate forces including a Special Security Division of Pakistan Army other associated costs have not been taken into account. In these projects, Government of Pakistan will have to cater for recurring expenditure on an annual basis for the maintenance of the force even after completion of these projects which will be a huge strain on the limited resources of the federal government.
Prime Minister heard the viewpoints of different stakeholders and ordered that the Ministry of Water and Power ensure that all remaining sponsors of power projects where the financial close has not yet been achieved add 1 per cent of the actual capital cost, on account of security for the project. This would also include the projects under early harvest where the financial close is still pending, as well as new additions to the projects already under implementation.
Prime Minister also directed that for the projects which have already come under implementation, Ministry of Water and Power must immediately carry out an exercise in consultation with Finance Division for an increase in tariff through Nepra to cover for recurring security costs of the projects for their entire period of operation.
Subsequently, Ministry of Water and Power prepared a summary in the light of Prime Minister's order, saying that as pr standardized Implementation Agreement (IA) approved by the ECC, IPPs are responsible for the security of their personnel. However, in case of additional security requirement by the company to be provided by the Government of Pakistan, there is a maximum cap for security related expenses up to $ 150,000 annually (with 3 per cent indexation).
Water and Power Ministry argued that the proposed 1 per cent of total project cost for funding of Special Security Division for the CPEC projects is required to be allowed in the project cost which shall be distributed annually starting from the construction period till the term of Power Purchase Agreement (PPA). This cost will be net of $ 150,000 amount already envisaged under the IA.
The sources said, Ministry of Water and Power further stated that for the CPEC early harvest projects where financial close is still pending as well as new addition to the CPEC projects under IA ECC may approve and allow issuance of a policy directive to Nepra to allow 1 per cent of the capital cost net of $ 150,000 on account of security to be distributed annually starting from the construction period till the term of the PPA.
However, when the summary was sent to Nepra comments, the latter stated that the draft summary is not clearly spelling out which category of CPEC projects are to be given the proposed security costs. The regulator further argued that it announced different upfront tariffs for wind, solar, coal and baggase and small hydel by following a due and consultative process and hearing provided in Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997(Nepra Act) and Nepra tariff (Standards & Procedure) Rule, 1998( tariff rules). In addition to that, Nepra has also determined tariff of a few large hydel and LNG projects under cost plus regime following due process. The proposed tariffs have attained finality and to include new security cost will create legal complexities.
Nepra further argued that while determining the tariffs a reasonable security cost is already included in the administrative cost and is allowed in the tariff of the individual projects.
The sources said Nepra argues that in order to provide cover for the risk of sabotage, the insurance cost has separately been provided in the tariff.
"Extra security arrangements are needed during the construction period to safeguard the expatriates. Extension of the similar security arrangements during the entire term of 30 years shall be burdensome," the sources quoted Nepra as saying.
Nepra has also made a point that all the IPPs are supposed to have similar security risks as that of CPEC projects. Allowing additional security cost to the CPEC projects will be discriminatory against other projects. There are number of IPPs functioning at present and they will also demand similar security cost. The extension of the policy to these IPPs will have a financial impact.
The ECC, in its meeting held on September 23, 2016, set aside the arguments of the regulator and approved a summary of Water and Power Ministry for issuance of a policy directive to NEPRA to allow 1% of the Capital cost net of aforementioned $ 150,000/- amount on account of security to be distributed annually starting from the construction period till the term of the PPA.
When contacted an official of Competition Commission of Pakistan (CCP) said that prima facie the ECC decision is discriminatory to other similar projects which are not funded from CPEC.
"The affected parties can approach the CCP or the latter can also take suo moto on the decision of the ECC," the sources continued.
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