FRIDAY JULY 08: Four hydropower projects: government gives LoS up to three-year extension

ISLAMABAD: The government has given an extension in Letter of Support (LoS) up to three years for four hydropower projects, ie 840MW Suki Kinari, 147MW, Patrind, 100MW Kotli and 100MW Gulpur hydropower project, official sources told Business Recorder.
This has been decided by the Board of Private Power and Infrastructure Board (PPIB), in its meeting held under the chairmanship of Minister for Water and Power, Syed Naveed Qamar. Managing Director, PPIB, briefed the Board that presently 15 hydropower projects with a total capacity of 5620MW are being implemented in the private sector through PPIB.
As per the provisions of the 2002 policy, the sponsors are required to file a tariff petition with Nepra within three months after the approval of feasibility study by the POE. After tariff approval by Nepra, PPIB issues a Letter of Support (LoS) to the sponsors upon submission of the Performance Guarantee (PG) and fulfilment of other prerequisites. The LoS is issued for 15-18 months for achievement of financial close within this limit.
In July 2008, Nepra announced the 'mechanism for determination of tariff for hydropower projects. The mechanism specifies tariff determination at three distinct stages of project development. The 1st stage tariff is based on feasibility level cost; 2nd stage tariff is worked out on the basis of EPC cost; while the 3rd stage tariff is determined at Commercial Operation Date (COD). Under this mechanism, the LoS is required to be issued to accomplish four critical milestones for implementation of the project; ie a) finalisation/signing of EPC cost and contract, b) Nepra's approval of EPC stage tariff, c) signing of project agreements, and d) achievement of FC to enable construction start.
According to the Managing Director, who is being replaced with permanent MD, selection of EPC contractor is a major activity and requires considerable time for preparation of tender documents for International Competitive Bidding(ICB), detailed design and engineering, preparation and submission of bids by EPC contractors, evaluation of bids, and finalisation of firm EPC costs/contracts. In reality, the process of selection of the EPC contractor normally takes 12-15 months. Subsequently, submission of EPC level tariff petition to Nepra and its approval by the authority may take considerable time. Therefore, the validity of the LoS needs to be fixed realistically, so that all activities to be performed under the LoS could be completed within the overall time allowed.
Accordingly, the LoS period should be increased from 15-18 months to about 30-36 months. MD PPIB further informed the Board that sponsors of hydropower projects that are at an advanced stage of development - namely, 840MW Suki Kinari, 147MW Patrind, 100MW Kotli, and 100MW Gulpur - have already requested for extension/issuance of LoS for the extended period.
Some of the Board members maintained that if this approach was to be adopted as a general rule, the project companies would slacken as they would have too much time to achieve these milestones; and efforts to minimise the time for completion of projects to eliminate power shortages must be taken. These members emphasised that instead of upfront increase there should be a provision for subsequent extensions. However, MD PPIB and many other members stressed that if the initially allowed time is not reasonable to complete all the required activities, the sponsors will be reluctant to submit the PG against a schedule which is not achievable. After detailed deliberation, consensus was reached on convening a meeting of the stakeholders to discuss and agree on a reasonable timeframe to complete all activities under the LoS; however, it was agreed that the LOS for each of the four aforementioned projects may be extended/issued based on the proposed timeframe of 30-36 months.
The Board was apprised that banks are generally reluctant to issue PGs for periods exceeding 2 years. The members deliberated the issue and it was agreed that in case of non-availability of PG from the banks beyond 2 years, sponsors may be allowed to submit PG initially for up to 2 years and it should be extended at least 3 months before expiry of such PG for the rest of the time period of the LoS. If the PG is not extended, it will constitute an event of default and the PG will be encashed by PPIB.
The Board approved extension/ issuance of LOS for the 840 MW Suki Kinari, 147 MW Patrind, 100 MW Gulpur hydropower projects up to 30-36 months. It was also decided that in case of non-availability of PG from the banks beyond 2 years, sponsors should be allowed to submit PG initially for up to 2 years and it should be extended at least 3 months before expiry of such PG for the remaining time period of the LOS; if the PG is not extended as mentioned above, it will constitute an event of default and the PG will be encashed by PPIB.