The Economic Internal Rate of Return (EIRR) of the Ghazi Barotha Hydropower Project has been calculated for a project life of 60 years from completion, which was estimated to be 31.4 percent. When compared to the opportunity cost of capital of 12 percent, the recalculated EIRR shows that the project is economically feasible.
This was disclosed in a completion report of Ghazi Barotha Hydropower Project by Asian Development Bank (ADB), which was released recently. According to the report, the recalculated EIRR of 31.4 percent was higher than that calculated at appraisal (17.9 percent), because the capital cost to implement the project was reduced from the initial estimate. The implementation period was longer than envisaged at appraisal (thus further reducing the discounted cash flow of the capital costs).
The re-evaluation also considered four segments of the power consumption market ie domestic, commercial, industrial and agricultural, and at appraisal only three sectors were examined ie domestic, industrial and agricultural. Also, in the re-evaluation a more detailed analysis of consumer surplus was made. At appraisal the assumptions on consumer surplus were conservative.
Commenting over the economic benefits of Ghazi Barotha Hydropower Project, it was mentioned the analysis of project benefits has used similar assumptions to those used at appraisal, but updated by the most recently available data and prices.
The value of economic benefits of electricity consumption for each major consumer category were based on (i) the induced market, which develops from the increasing electricity consumption of existing and new consumers ie incremental benefits and (ii) the diverted market, which is the current energy consumption of new consumers for which electricity replaces kerosene or diesel ie non-incremental benefits.
The benefits from the induced market (estimated at 30 percent for residential consumers, 50 percent for commercial and industrial consumers and 20 percent for agricultural consumers) are valued in terms of consumer surplus ie willingness to pay or weighted average of the electricity tariffs and financial price of kerosene.
For the diverted market (estimated at 70 percent for residential consumers, 50 percent for commercial and industrial consumers, and 80 percent for agricultural consumers), the benefits come from the resource cost savings from the displaced use of alternative energy ie kerosene for domestic consumers and diesel generated power for commercial, industrial and agricultural consumers.
According to report, the resulting average value of residential power consumption, which accounts for 49 percent of Water and Power Development Authority of Pakistan (Wapda)'s energy sales, was estimated to be Rs 17/kWh. The average economic value of industrial power consumption, which accounts for 31 percent of Wapda's energy sales, was Rs 6.5/kWh. The average economic value of commercial power consumption, which accounts for six percent of Wapda's energy sales, was Rs 11/kWh.
Finally, the average economic value of power consumption for agricultural users, who represent around 14 percent of Wapda's energy sales, was estimated to be Rs 8.6/kWh. The average weighted tariff for these four consumer groups was Rs 12.2/kWh for both incremental and non-incremental benefits.
Assuming a linear demand curve, the incremental consumer surplus would equal half the price difference before and after electrification, multiplied by the quantity difference. As the demand curve is unlikely to be linear, the product of the price and quantity differences was multiplied by a willingness-to-pay factor of 0.400, rather than 0.5. Since the incremental energy consumption was valued in local prices, the result was converted to economic border prices by multiplying the calculated consumer surplus by the standard conversion factor of 0.837.
The Ghazi Barotha Hydropower Project was set up in the public sector by the Wapda, a government-owned utility, to divert water from the Indus River at Ghazi, which is seven kilometers (km) downstream from Tarbela dam, to a 52 km power channel. The channel was to then transport the water to Barotha, where a capacity of 1,450 megawatt (MW), consisting of five units of 290 MW each, was to be installed to generate 6,600 gigawatt-hours (GWh) of power annually.
The project was a run-of-the-river project with far less environmental and social impact than is often associated with large dams and reservoirs. The project comprised three main components (i) a barrage at Ghazi, which is seven km downstream from Tarbela dam; (ii) a 52 km channel from Ghazi to Barotha and (iii) a power complex at Barotha, with a 1,450 MW generating capacity. Approximately 340-km of transmission lines were also to be installed by the project.
According the ADB report, the main objectives of the project were to meet the demand for electric power in Pakistan by generating hydropower in an environmentally sustainable and socially acceptable manner with minimal environmental and resettlement impacts. The power generated by the project was also to help moderate the impact of higher costs of thermal generation in the private sector.
As energy was in short supply in Pakistan, a cost-effective approach to improving efficiency in transportation, conversion, and consumption of energy needed to be addressed. Technical assistance (TA) was therefore associated with the loan to formulate the Power Efficiency Project to improve demand-side management and reduce power losses.
Pakistan was the borrower with Wapda acting as the Executing Agency (EA). An ADB loan of 300 million dollar from ordinary capital resources was approved on 16 January 1996. Co-financing of 947 million dollars was also provided comprising 350 million dollar from the World Bank (WB), 350 million dollars from the Japan Bank for International Co-operation (JBIC), 147 million dollars from Kreditanstalt für Wiederaufbau, 60 million dollars from the European Investment Bank and 40 million dollars from the Islamic Development Bank (IDB).
The ADB report stated that the project was successful in many aspects, except for significant delays with various causes. An important lesson from the project concerns that of the availability of counterpart funding. At appraisal, Wapda was to finance approximately 43 percent of the total project cost.
However, due to the declining performance of the Wapda and the impossibility of increasing tariffs, the level of funds available declined. The foreign development partners increased their disbursements in June 1997, to assist in covering Wapda's shortage of funds. This continued until June 1999.
Due to Wapda's not being able to generate its share of the finances, project implementation suffered. In the future, the availability of counterpart funds needs to be guaranteed more fully, and the ADB assistance to the power sector in the country should take this into account.
A key lesson of the project relates to environmental and social impacts. The environmental aspects are mainly positive in that they obviate the need for a comparably sized (thermal) generation plant and thereby reduce the damaging atmospheric impacts of such plants. However, as demonstrated in the project, reducing the potential social impacts to manageable levels is also possible, through rigorous evaluation of alternatives and public consultation and awareness building.
In this context, the selection of the final power channel alignment (and the conscious decision to avoid existing villages and settlements, even at somewhat higher costs) and locations of the barrage and powerhouse deserve to be highlighted. These decisions substantially reduced the scale of the resettlement and relocation under the project without adversely affecting its economic and financial viability.
The ADB should have been more involved with the environmental and resettlement aspects. Although the WB was responsible for the environmental and resettlement aspects of the project, the ADB could have taken a more active role, as was noted in discussions with a WB mission. The ADB had a total of seven different project officers throughout the project's duration, and this was detrimental to overall project co-ordination.
Furthermore, co-ordination among financiers could have been more efficient if a mechanism was established for regular meetings among financiers. Co-ordination among financiers was done informally.