In 1993, an Energy Task Force constituted by the Government of Pakistan (GOP) formulated comprehensive policy recommendations for the energy/power sector.
The Private Power and Infrastructure Board (PPIB) was created in 1994 as part of the GOP's efforts to introduce major policy reforms, facilitate private investment and structural changes in the development of power sector.
PPIB provides a "One-Window" facility to investors in the private power sector by functioning as a one-stop organisation on behalf of all ministries, departments and agencies of the GOP in matters relating to the setting up of power projects in the private sector.
These matters include negotiation of Implementation Agreements (IAs), Power Purchase Agreement (PPAs), Fuel Supply Agreements (FSAs), other related agreements, and liaison with the concerned local and international agencies for facilitating and expediting the progress of private sector projects.
In addition, with the prior approval of the GOP, PPIB is also responsible for formulating, reviewing and updating policies and procedures relating to private sector investments in power generation and allied infrastructure.
POWER POLICY 1994: BACKGROUND: Power shortage had been one of the chronic problems hampering Pakistan's socio-economic growth. By 1994, the problem had assumed such acute dimensions that power supply fell short of demand by almost 2000 MW during peak load hours.
On a routine basis, this resulted in forced interruptions in the supply of electricity to consumers during peak hours.
The term "load shedding" was coined and used colloquially for such unavoidable, large-scale power cuts.
The unreliable power supply shattered the industrial process. Many entrepreneurs were left with no option except to curtail/stop production.
The number of sick units increased manifold. Another factor contributing to the gap between demand and supply, was the rapid increase in electricity demand (estimated to be growing at a rate of 8-9% per annum).
This situation called for immediate intervention by the GOP through adoption of policy measures aimed at massive resource mobilisation for investment in the power/energy sector.
The enormous quantum of investment demand, when compared with the inadequate liquidity potential of the national exchequer, discouraged allocation of scarce GOP funds for energy.
Therefore, the GOP took a bold initiative to promote economic deregulation and private sector participation in infrastructure development. In 1993-94, the GOP decided to formulate clear policies to attract private sector investment for power generation in Pakistan.
In March 1994, the GOP announced its Private Power Policy 1994, which essentially comprised of a well-thought-out package of incentives to attract foreign direct investment (FDI) in private power generation projects.
The package of incentives envisaged in the 1994 Power Policy was internationally competitive in terms of assured cash flow for debt repayment and returns on investment.
Procedures were simplified; steps were taken to eliminate unnecessary restriction causing delays in finalisation and approval of the projects and facilitate interaction between the GOP and the investors; local currency investment requirements were reduced; and measures were adopted to create and encourage a domestic corporate debt security market.
IMPLEMENTATION OF POWER POLICY 1994: PPIB'S ROLE: The Power Policy 1994 achieved large-scale foreign investment from the private sector in power generation projects - a field hitherto considered to be the realm of public sector utilities such as Water & Power Development Authority (WAPDA)/Karachi Electric Supply Corporation (KESC).
Pursuant to the 1994 Power Policy, PPIB succeeded in attracting FDI worth US $4 Billion in three years, and helped overcome load shedding in the country.
At present, sixteen (16) independent power producers (IPPs) with a total generation capacity of around 6,000 MW (roughly one-third of the total power generation in Pakistan) are providing power to the national grid.
On behalf of the GOP, PPIB administers all IAs of IPPs established under the 1994 Power Policy, as well as HUBCO which was organised prior to the announcement of Power Policy 1994.
Administering international agreements for this quantum of power supply calls for PPIB to maintain very specialised skills covering all aspects of power engineering, legal, financial and negotiation skills.
The IPP projects, both in their implementation and operational phases, have frequently faced problems of multifarious nature, ranging from technical and financial to commercial and legal issues.
In almost all of these situations, PPIB addressed contentious issues and strove for their settlement to the best satisfaction of all stakeholders.
Close co-ordination and liaison with the concerned ministries/organisations has been maintained all along.
This process and responsibility is of a continuing nature and will be sustained with the requisite zeal and spirit.
POLICY FOR POWER GENERATION PROJECTS 2002: GOP'S LATEST ROADMAP TO ATTRACT INVESTMENT: The demand/supply projections for the WAPDA system (based on a low demand growth scenario) indicate that power shortages will appear from the year 2006.
These generation shortages are expected to be 400 MW in year 2006, and progressively increase to 5,500 MW in year 2010, if no measures are taken to bring in new capacity. With a view to address these power shortages, the GOP announced the Policy for Power Generation Projects 2002.
The policy provides a clear set of incentives along with a regulatory regime, that effectively provide a roadmap to attract the much needed investment in power generation.
The hallmark of the 2002 Power Policy is international competitive bidding (ICB). Simultaneously, the 2002 Power Policy permits interested sponsorws to submit proposals on 'raw sites', which are those potential sites where power generation is possible but detailed feasibility studies have not been carried out prior to submission of proposals.
Through announcement of a new set of incentives in the shape of the 2002 Power Policy, the GOP opened up new avenues for private entrepreneurs eagerly looking for opportunities to invest in Pakistan's power sector.
The 2002 Power Policy has received a very encouraging response from the private sector. To date, private entrepreneurs have submitted thirty-three (33) Expressions of Interest for developing power generation projects worth 5,969 MW on different raw sites. Most of these proposals are for gas-based thermal power plants.
A primary goal of the 2002 Power Policy is to optimally harness indigenous natural resources, especially the huge hydel and still-untapped coal reserves discovered in the province of Sindh.
To fulfill this policy objective, PPIB advertised a 450 MW raw-site, coal-fired project at Lakhra.
Additionally, the Government of Sindh has signed MOUs for (i) a 600 MW Thar coal project by the Shenhua Group of China, and (ii) a 1200 MW project at Thar by three Australian firms using the technology of 'Underground Coal Gasification'.
These are integrated infrastructure projects involving coal-mine development and power generation.
The power generation facilities to be set up at these sites will be governed by the terms of the 2002 Power Policy.
Thus, the prospective future power generation capacity for which foreign investors have confirmed interest totals, 9,635 MW.
Apart from these proposals initiated in the private sector, WAPDA is processing five hydel projects of 525 MW cumulative generation capacity in the public sector.
Similarly, under the Hydel Policy 1995, four (4) projects with 891 MW cumulative capacity are also being processed by PPIB.
A number of parties new to the power sector have expressed interest in setting up power projects under the 2002 Power Policy.
In order to ensure proper implementation of the 2002 Power Policy, it is therefore necessary that only serious, professionally experienced and technically sound sponsors should come forward for investing in the power sector.
The GOP would give preference to serious investors who have rich, world-wide experience in power projects of similar nature and scope.
IPPs operating in Pakistan are experienced in their field and have established their commitment through successful implementation of their power projects under the 1994 Power Policy.
The GOP wants existing IPPs to take the lead in establishing projects under the 2002 Power Policy and bringing further investment into Pakistan's power sector at a juncture where Pakistan's overall economic outlook appears highly conducive to foreign direct investment.
ATTRACTIONS FOR INVESTMENT IN PAKISTAN'S POWER SECTOR: Pakistan is blessed with abundant natural resources such as hydel, gas, coal, and renewable energy sources for power generation.
Pakistan has enormous potential for small to medium-sized hydel power projects. Hydropower potential in the country is approximately 40,000 MW, out of which 20,000 MW are economically exploitable.
In contrast, the existing installed hydel capacity is only 4,825 MW. Coal is an equally important local resource.
Pakistan's total coal reserves are estimated to be around 185 Billion tons. Even half these deposits properly exploited would mean an additional generation of 100,000 MW for the next 30 years.
PPIB has been working to attract and facilitate FDI in Pakistan's power sector. A number of foreign investors have expressed interest in setting up power generation projects that would exploit our indigenous resources including hydel, wind, natural gas, and coal.
Their proposals are evaluated as an ongoing exercise, and prospective investors are facilitated and encouraged to come up with proposals focusing on maximum utilisation of available local resources.
The domestic power market is fairly large, with a population of 140 Million, only 40% of which has access to electricity at present.
This shows the boundless potential for expansion and growth.
The current positive macro-economic with the investor-friendly regime proposed in the 2002 Power Policy, provide cogent reasons for investment in the power sector, with special focus on indigenously available fuel sources.
FISCAL INCENTIVES:
-- Customs duty @ 5% on the import of power generation plant and equipment not manufactured locally.
-- No levy of sales tax on such plant, machinery, and equipment, as the same will be used in production of taxable electricity.
-- Exemption from income tax including turnover rate tax and withholding tax on imports (provided there is no exemption of income tax on oil-fired power plants).
-- Repatriation of equity along with dividends of power generation projects is freely allowed to foreign investors, subject to the prescribed rules and regulations. Non-Muslims and non-residents exempted from payment of Zakat on dividends paid by the power generation company.
FINANCIAL INCENTIVES:
-- 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.
-- Permission for foreign banks to underwrite the issue of shares and bonds by private power companies to the extent allowed under the laws of Pakistan.
-- Non-residents allowed to purchase securities issued by Pakistani companies, without the State Bank of Pakistan's permissions but subject to the prescribed rules and regulations.
-- Abolition of 5% limit on investment of equity in associated undertakings.
-- Independent rating agencies operating in Pakistan to facilitate investors in making informed decisions about the risk and profitability of the project company's bonds/TFCs.
FUNCTIONS/ACTIVITIES PERFORMED BY PPIB: PPIB is assigned the responsibility to co-ordinate with all agencies and ministries concerned to take decisions, and monitor performance of private sector power projects as per the Security Package Agreements, while at the same time, safeguarding the interests of different stakeholders.
MAJOR ACTIVITIES BEING UNDERTAKEN BY PPIB, INCLUDE:
ISSUANCE OF LETTER OF INTEREST (LOI) Under the private power policies that have remained in force from time to time, the applicants submitting proposals are registered with PPIB which provides them all relevant documentation and necessary information.
When PPIB deems a proposal technically and financially viable, a Letter of Interest (LOI) is issued to the project sponsors.
The applicant is required to furnish a Performance Guarantee (valid for one year) within six weeks of receipt of the LOI.
ISSUANCE OF LETTER OF SUPPORT (LOS) On receipt and acceptance of a Performance Guarantee by PPIB, a Letter of Support (LOS) is issued to the sponsors. Within six weeks of issuance of the LOS, the IA and PPA are initiated/signed.
PPIB has issued the LOS to a number of project sponsors under various private power policies.
ACKNOWLEDGMENT OF FINANCIAL CLOSE: The sponsors are supposed to achieve Financial Close within one year of issuance of the LOS. In case of non-compliance with the deadline, PPIB is authorised to encash the Performance Guarantee submitted by sponsors.
Financial Close means the execution of loan agreements and receipt of equity commitments that together evidence financing for the construction, testing and completion of the power generation complex requirements of the lenders and the LOS.
To date, PPIB has acknowledged Financial Close of nineteen (19) IPPs.
SUPPORT TO OBTAIN CONSENTS: PPIB provides support to project sponsors and uses all reasonable efforts to expedite consideration of the sponsors' applications for Consents of re-issuance's thereof and the timely issuance thereof or re-issuance of any lapsed Consent.
Consents include all such approvals, authorisations, consents, grants or certificates of registration, notifications, concessions, acknowledgements, agreements, licenses, permits, decisions, or similar items required to be obtained from any relevant authority.
In case of lapse of Consents, there may be long-term implications, eg, milestones such as Financial Close may get delayed and, after a certain period of time, the sponsors may claim a GOP Event of Default under the IA if the Consent is not reissued within that specified period.
The sponsors may consequently choose to terminate their IAs.
POLICY FORMULATION: Since its inception, PPIB has formulated a number of policy frameworks for the private power sector which were subsequently announced for implementation by the GOP.
These include the 1994 Power Policy, the 1995 Hydel Policy, the 1995 Transmission Line Policy, and the 1998 Power Policy. Recently, the more investor-friendly, revised Policy for Power Generation Projects, 2002 was formulated by PPIB which was announced by the GOP in October 2002.
One of its most striking features is that it is consolidated, self-contained policy document completely encompassing various facets of the electric power development sector, including private, public, and public-private partnerships.
PPIB has to handle various project-related, time-bound activities as specified in the Security Package Agreements.
These activities are of analytical nature and relate mainly to obligations of the sponsors or the GOP and/or its entities. PPIB has been working diligently and putting in untiring efforts to facilitate the sponsors, ward of lapses of consent, avoid termination of IAs etc, for projects being dealt with by PPIB.
Termination of an IPP project as a result of a GOP Event of Default entails considerable compensation(s) payable to the sponsors by the GOP and/or its entities.
PPIB constantly monitors the situation on ground and ensures that all contractual stipulations of the Security Package Agreements are complied with in a timely manner so as to avoid any negative impact on the interests of the GOP and its entities.
In addition to the above activities, PPIB provides all possible support, eg, technical/legal and financial input to Provincial Governments whenever requested.
PPIB has been assisting the Government of Sindh (GOS) in its recent efforts to develop and utilise Sindh's coal resources for power generation, and the GoAJK in formulation and negotiation of Security Package Agreements and other issues relating to hydel power projects. Concerned quarters in the GOS fully acknowledge PPIB's positive role in this regard.
PPIB has an elaborate and user-friendly website, www.ppib.gov.pk, that contains all relevant information on the incentives and procedures for investments in power generation.