The power sector is facing the fourth of its crisis since the setting up of the Water and Power Development Authority (WAPDA) in 1958 and the formulation of the National Grid. The present government has very seriously taken up mitigation of the ongoing crisis through rehabilitation of the once placed on the back burner GENCOs through an ambitious recovery plan of 1215 MW, fast track induction of IPPs and also the fast track, but much maligned rental power plants (RPPs).
This has been buffeted by demand side management and conservation for which the public and the provincial governments have to be felicitated. Again, the present government has been the first, which considered recovery of full cost of service as the most important requirement for the sustainability of the power sector. However, even after plus 60% increase in power tariffs between early 2008 till to date, there remains a gap of at least Rs 2.50 per unit between the cost and the existing tariff.
PEPCO's approved business plan for 2010-11 has all elements of a successful plan and hopefully by the end of the current fiscal, the above gap would stand adjusted. This can, if handled aptly, be the harbinger for a deficit-free FY 2011-12 with the non-complaint KESC and the various provincial entities finally paying for what they use.
The current reforms with full autonomy for the power sector corporatized entities (PSCEs) are envisaged to further bring efficiency to the system. However, as the reform plan is innovative in context, its implementation would require the greatest of care and the best of professional expertise.
The resolution of present power crisis, on the other hand, would entail quick capacity additions. More so, when reform during shortages and continuing deficits is always fraught with danger. Looking at capacity additions, we see that not much IPP power is around the corner.
Specially, when the last of tenders for contracting the same by the PPIB attracted only one bid and that too from a Turkish investor. Although, nearly all the important business houses of Pakistan had bought the bidding documents, sadly none was able to participate.
Experts opine that it could be on account of the continuing circular debt and the power sector's inability to fully pay for its power purchases, but then quite of few are of the opinion that the drought is on account of the very shallow financial strength of the Pakistani corporate/private sector and the multinationals (MNCs) staying away from Pakistan due to the risk factor and the highly competitive nature of the power sector here. Actually, the MNCs would only come for windfall gains - a preposition not much evident in the current scenario.
My various visits to the chambers of commerce and industry in Pakistan reveal that there was great interest for investments in the power sector, but indeed it was nigh impossible for the Pakistanis to cough up the needed equity amounts and then also arrange for the loans from the local banking sector for the normal 200 MW IPPs. The situation attains seriousness when the banks consider themselves to be ever-exposed in the power sector.
It was considered that smaller version of the IPPs could be arranged. Considering this as doable and a niche that could be filled up by the local investors, PEPCO was able to float a small IPP policy (SIPP) during August this year. It is understood that the SIPP policy is highly acceptable and has since been recommended by most of the stakeholders, including the Ministry of Water and Power.
Explaining the genesis of the SIPP policy, we see that the government of Pakistan's Policy for Power Generation Projects of 2002 (the "GOP Policy 2002") essentially deals with power generation projects with capacity more than 50 MW. The Private Power Infrastructure Board (PPIB) acts as one-window facilitator to seek private investment in the power sector from investors interested in the above category of power projects.
The GOP Policy 2002 allows the provinces to seek power-generation addition for projects up to 50 MW at their own. However, whatever is said we see that due to lack of adequate infrastructure and experience to develop and monitor power generation projects, the provinces have not been able to make sufficient power generation addition.
Pursuant to the above stated facts, it was expedient and in public interest to issue the policy guidelines for power generation addition through small independent power projects ("SIPPs") with a maximum capacity up to 50 MW. These guidelines are aimed at providing a policy framework, whereby the private sector is facilitated to establish, operate and manage SIPPs on a commercial basis and through bilateral contracts with power distribution companies ("DISCOs"), licensed by National Electric Power Regulatory Authority (NEPRA).
So as to make the SIPP policy acceptable, a set of financial incentives has been suggested to be available to SIPPs viz, permission for power generation companies to issue corporate registered bonds, permission to issue shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk, and lastly permission for foreign banks to underwrite the issue of shares and bonds by the private power companies to the extent allowed under the laws of Pakistan.
Additionally, customs duty will be applicable at the rate of 5% on the import of plant and equipment, not manufactured locally, no levy of sales tax on such plant, machinery and equipment as will be used in production of taxable electricity, exemption from income tax, including turnover rate tax and withholding tax on imports, repatriation of equity along with dividends is freely allowed, subject to the prescribed rules and regulations, parties may raise local and foreign finance in accordance with the law and regulations applicable to the industry in general, maximum indigenization shall be promoted in accordance with the governmental policy, and non-Muslims and non-residents shall be exempted from payment of Zakat on dividends paid by the project company owning the SIPP.
According to the preliminary studies and the interest shown to invest under the above SIPP policy, we see that it will be able to attract 1000-2000 MW during the next three years equalling an investment of little less than USD 3.0 billion. And the beauty of the whole scheme is that it will be mostly local investment, while some of the investors would be able to attract foreign partners and that the SIPPs would be located in the load centres, thus supplementing the National Grid.
Experts are also of the opinion that induction of SIPPs would lead to distributed generation - a dire requirement of any good power system. Additionally, SIPPs would also be able to treat the issues of low voltage and other constrictions in DISCOs, which otherwise would require much greater investments as the whole part of the effected power system otherwise has to be corrected. As the SIPPs are envisaged to be based on all kinds of fuel viz. RFO naphtha, natural gas, LNG, LPG, SNG and even municipal waste, the present pressure on oil imports would also be reduced.
SIPPs besides bridging the deficits are thus a great opportunity for the Pakistani Corporate sector and also for the DISCOs, which are programmed to handle such investments. This experience would come very handy soon enough when like the rest of world, the profitable amongst the Pakistani DISCOs would start acquiring generating companies to further enhance their financial prowess. Local investments in SIPPs would allow the Pakistani corporate sector to start thinking once again to set-up the bigger of the IPPs and to also shoulder the burden of mega-power parks along with the public sectors GENCOs.
(The writer is member Central Council of IEEEP) ([email protected])
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