Ministry asked to remain consistent with existing practice of tariff determination

Economic Co-ordination Committee (ECC) of the Cabinet has directed the Ministry of Water and Power to make withholding tax on dividends as per actual payments and Rate on Return during Construction (RoEDC) as part of Policy Framework for private sector transmission line projects, 2015 in order to be consistent with the existing practice of tariff determination.
Ministry of Water and Power, in its summary informed the ECC on December 20, 2016 that the Government of Pakistan had announced the Policy Framework for Private Sector Transmission Line Projects, 2015 to attract private sector investment for augmentation of transmission network in the country to transmit electricity from upcoming power projects to the load centers.
Accordingly, National Transmission & Dispatch Company Limited (NTDCL) and State Grid Corporation of China (SGCC) entered into a Co-operation Agreement on April 20, 2015. As per the Co-operation Agreement, the Matiari-Lahore HVDC Transmission Project will be implemented under Agreement on China-Pakistan Economic Corridor (CPEC) between China & Pakistan and the Transmission Policy 2015 along with the guidelines. Under the Co-operation Agreement, SGCC has nominated its subsidiary ie China Electric Power Equipment & Technology Co Ltd (CET) to develop the transmission line projects on a BOOT model.
Ministry of Water and Power further revealed that NEPRA determined the tariff for the project on August 18, 2016. However, CET had requested PPIB to file Motion for Leave for Review, as the tariff and cost allowed by the Authority were un-acceptable to CET. Subsequently, PPIB filed a review petition on September 2, 2016. NEPRA provided its decision on November 24, 2016 on a review petition on which CET had certain reservations and requested PPIB to seek/provide clarifications on the tariff determined by NEPRA. The following clarifications/requests of CET required policy directives to NEPRA as NEPRA has previously rejected PPIB's request in the tariff and review petitions: (i) NEPRA has neither allowed the withholding tax on dividends as a pass-through item nor grossed up (increased) the ROE to provide 17% net of tax IRR to CET. Disallowing withholding tax on dividends would be a policy deviation and discriminatory treatment for this project as other CPEC projects have been allowed withholding tax on dividends either as a pass-through for cost plus tariff-based projects such as Karot and Kohala Hydropower projects or the ROE has been grossed up for projects under upfront tariff both for imported and local coal based projects to provide desired IRR net of withholding tax. Therefore, consistent with its previous determinations for CPEC projects and as agreed under Co-operation Agreement (i) 17% IRR net of withholding tax on dividends should be allowed and (ii) CET has requested to allow Return on Equity during Construction (RoEDC) from actual construction start date in order to meet the tight timelines and upon the request of GoP CET plans to start construction before financial close. CET has proposed NEPRA may allow 27 months ROEDC from the actual start date of construction without any adjustment for actual draw downs at COD to mitigate risks inherent with a pre-financial closing equity injection, subject to submission of verifiable documentary evidence to NEPRA.
Ministry of Water and Power argued that as a matter of precedence, ECC on July 23, 2009 already approved the framework for the implementation of hydropower projects under 1995 Hydel Policy which states that for hydropower projects, a 30-month period prior to construction start, may be allowed for Internal Rate of Return (IRR) calculation subject to provision of related audited accounts.
Ministry of Water and Power made following proposals for consideration of the ECC for issuance of policy guidelines to NEPRA: (i) NEPRA to allow withholding tax on dividends as pass-through item in the tariff as per actual payments or gross up the IRR as per precedent of other CPEC projects to provide 17% IRR on net of withholding tax basis; and (ii) NEPRA to allow ROEDC from actual construction start date to COD for the Project based on 27 month construction time without adjustment for actual draw downs at COD.
During the ensuing discussion, the Secretary, Water and Power Division informed the meeting that the exemption proposed by the Ministry in the summary had been granted by NEPRA in Guidelines For Determination of Tariff for Independent Power Producers, 2005, however, the same was being refused by NEPRA for the Matiari-Lahore HVDC transmission project. He stated that this decision of NEPRA was discriminatory and requested that the said proposal be made part of Policy Framework for Private Transmission Sector Transmission Line Projects, 2015 in order to be consistent with the existing practice of tariff determination.
After a brief discussion, the ECC allowed withholding tax on dividends as a pass-through item in the tariff as per actual payments or gross up the IRR to provide 17 per cent IRR on net withholding tax and ROEDC from actual construction start date to COD for the project subject to submission of verified documentary evidence to NEPRA on equity injected and actually utilised before the financial close of the project. The ECC also directed the Ministry of Water and Power to take above decisions a part of Policy Framework for Private Sector Transmission Line Projects 2015 in order to be consistent with the existing practice of tariff determination.