Friday, May 24, 2013

Pakistan Must Renegotiate IPP Contracts to Solve Electricity Crisis

Pakistan's installed generating capacity is about 20,000 MW. It exceeds current demand of 17,000 MW and actual supply of just 10,000 MW. The capacity utilization is only 50% mainly because the producers do not buy sufficient fuel and choose to operate at only 50% of capacity and still enjoy soaring profits. A third of the installed generating capacity is owned by the independent power producers (IPPs). The current IPP contracts guarantee payments and profits with no requirement for fuel efficiency.



Most private investors have built oil-powered inefficient plants because of their low construction costs and short lead times, and the oil price has skyrocketed since these plants were built in 1990s. The result is 18-20 hours of load shedding across most of Pakistan in the scorching summer heat in spite of the fact the taxpayers have shelled out billions of dollars in subsidies to the power sector since 2008.

According to an AP report, the Pakistan's government has assumed $3.6 billion of the power industry's debt. The government-owned power grid owes another $2.5 billion to private-sector generators, even as the government, according to Finance Ministry figures, spent at least $7.4 billion on electricity subsidies during the 2008-2010 period.


Here's Arif Habib Securities investment analysis of the IPPs sector:

All power companies from Arif Habib Limited research coverage witnessed surprising growth (36-58%) in net profitability. HUBC led the flock with 58% YoY jump in profit after tax, attributable to the growing indexation factors and ROE component. On the other hand, lower payables to fuel supplier and resultantly lower penal interest provided major support to KAPCO, pushing the net profitability up by 36% YoY. As far as Nishat group companies are concerned, rising fuel cost magnified the impact of fuel efficiency, which combined with O and M savings further improved the profitability. However, dividend from KAPCO and NPL disappointed the optimistic investors. Arif Habib Limited believes the dividends to rise in 2HFY13 for these companies, providing investor with greater value at the financial year end.


Source: IMF Pakistan


Pakistani government buys electricity from IPPs at a rate of Rs. 12.50 per KWhr while the consumers pay an average of Rs. 9.00, leaving a short-fall of Rs 3.50 per unit which is subsidized by the taxpayers. It adds up to hundreds of billions of rupees a year. Power subsidy target for FY 2012-13 was set at Rs 185 billion, 60 percent lower than the actual subsidy provided during FY12. The subsidy provided year-to-date (YTD) is Rs 311 billion, already having exceeded the target by 68 percent, according to PakTribune.

A significant part of the problem is the IPP contracts which guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself.  In addition, there are no incentives for the private power producers to produce power efficiently.

In a blog post published in Financial Times, Dr. Kamal Munir of Cambridge University's Judge Business School blames the IPP contracts signed as part of the power privatization in 1990s.

“The 1994 privatization of the energy sector offered investors generous returns and created pricey overcapacity,” he told Financial Times. “This created an expensive legacy which is the real problem of today’s energy crisis.” Unless that problem is dealt with, he sees no light at the end of the energy tunnel.

He says Pakistan’s government, helped by the World Bank, “sweetened” its energy privatisation with attractive conditions, fearing it wouldn’t be able to attract investors otherwise. It guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself. ”The deal was too good to be true for investors,” Munir says.

Munir says the model turned out to be badly constructed in terms of creating value for the government and people of Pakistan. Even in an environment of economic growth and efficient energy generation, it would have been hard for the government to finance the plan. But since both have been absent, it became nearly impossible to pay for privatised energy.

Since there were no incentives to be fuel-efficient, most private investors chose to build  plants using furnance oil as fuel because of their low construction costs and short lead times. This backfired as the oil price has trebled since the 1990s. Variable costs, and therefore prices to consumers, are at unsustainable levels. “No wonder many consumers can’t afford to pay their bills,” Munir says.

To make things worse, the government neglected to step on the brakes when its generous conditions attracted too many investors. Assuming economic growth would continue, it allowed too much capacity to be built and guaranteed the same return on that extra capacity, whether it was used or not.

Munir says the government should develop new power plants using cheaper fuels, and that this shouldn’t be a problem in a country with an abundance of coal, waterways and sun.

But Pakistan must first escape its vicious payment cycle.

“We need to get out of the the current deals,” says Munir. But at what cost, and does this imply default? “Your guess is as good as mine,” the academic admits.

Still, he felt it was time to make his point. “I’m not defending people who don’t pay bills and I’m not promoting government subsidies to keep prices low,” Munir says. “But why isn’t anyone talking about the policy that led to this situation to begin with?”

Fuel Cost per million BTU
The key to solving the problem is to renegotiate the old IPP contracts with new terms that reward lower fuel costs and higher efficiency. In addition to that, Pakistan's incoming government of Prime Minister Nawaz Sharif's has to explore multiple fuel options to meet the nation's growing energy needs. Some of the fuel options are as follows:

1. Developing its shale gas reserves estimated 51 trillion cubic feet near Karachi in southern Sindh province. The US experience has shown that investment in shale gas can increase production quite rapidly and prices brought down from about $12 per mmBTU in 2008 to under $2 per mmBTU recently. Pursuing this option requires US technical expertise and significant foreign investment on an accelerated schedule.



 2. Increasing production of gas from nearly 30 trillion cubic feet of remaining conventional gas reserves. This, too, requires significant investment on an accelerated schedule.

3. Converting some of the idle power generation capacity from oil and gas to imported coal to make electricity more available and affordable.

4. Utilizing Pakistan's vast coal reserves in Sindh's Thar desert.

5. Hydroelectric and other renewables including wind and solar. Several of these projects are funded and underway but it'll take a while to bring them online to make a difference.

In my view, the newly-elected government should pursue all of the above options with options 1, 2 and 3 as a priority for now. Its best interests will be served by developing its own cheap domestic shale gas on an accelerated schedule with Saudi investment and US tech know-how.

Related Links:

Haq's Musings

Comprehensive Energy Policy for Pakistan

IPP Contracts in Pakistan

Pakistan Needs Shale Gas Revolution

US Census Bureau's International Stats 

Pakistan's Vast Shale Gas Reserves

US AID Overview of Pakistan's Power Sector

US Can Help Pakistan Overcome Energy Crisis

Abundant and Cheap Coal Electricity

US Dept of Energy Report on Shale Gas

Pakistan's Twin Energy Crises

Pakistan's Electricity Crisis

Pakistan's Gas Pipeline and Distribution Network

Pakistan's Energy Statistics

US Department of Energy Data

Electrification Rates By Country

CO2 Emissions, Birth, Death Rates By Country

China Signs Power Plant Deals in Pakistan

Pakistan Pursues Hydroelectric Projects

Pakistan Energy Industry Overview

Water Scarcity in Pakistan

Energy from Thorium

Comparing US and Pakistani Tax Evasion

14 comments:

Riaz Haq said...

Here's a Daily Times report on SC hearing on load shedding:

....A three-member bench, headed by Chief Justice Iftikhar Muhammad Chaudhry and including Justice Chaudhry Ijaz Ahmed and Justice Gulzar Ahmed, noted on Tuesday that there could be a genuine problem, “but now it seems that there was an involvement of artificial factors, particularly the high inefficiency of the Pakistan Electric Power Company (PEPCO) (Private) Limited and the National Transmission and Despatch Company (NTDC) Limited officials”.

The court said that production of power plants below their capacity could be one of the reasons of severe load shedding in the country.

The court was informed that the Guddo Thermal Power Plant’s total capacity was 1,650MW, but it was presently producing 775MW, while the Jamshoro Thermal Power Plant had a capacity to produce 1,000MW, but it was generating only 300MW.

Moreover, Muzafargarh plant’s capacity was 1,100MW, but it was presently producing only 700MW.

PEPCO Managing Director Zargham Ghulam Ishaq Khan informed the court that the deterioration in production was due to faults in the machines and that spare parts had to be changed.

The court was informed that after several steps, about 975MW had been added to the current system, which would reduce the intensity of load shedding in the country.

He told the court that the technical audit of some of the thermal plants had been carried out and the machines shall be made functional to their full capacity.

He maintained that during the last couple of days, power generation had dropped drastically due to various technical reasons.

He informed the court that due to the non-availability of oil and gas to the power sector, the current power crises had gotten worse. He said that arrangements had been made for the supply of furnace oil to the plants, adding that natural gas would also be supplied to the companies so that maximum output was generated.

About the hydroelectric power plants, the MD said 60% to 70% of their capacity had been increased, and they were presently generating 3,900MW. The generation capacity could further be increased if discharge from Tarbela, Mangla and glacier melting was increased, he added.

PEPCO engineer and consultant Raziuddin, who appeared voluntarily, told the Supreme Court that the company and the NTDC needed a fulltime managing director rather making makeshift arrangements. He said that PEPCO had sufficient capability to make the units functional. He said the Gudu Power Plant had the installed capacity of 1,650MW, while it was currently generating 775MW due to fault in various machines, which needed to be fixed. He gave the example of a machine, stating that only fixing of one machine could add 100MW of electricity to the system.

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The PEPCO MD replied that they had already completed the audit of all the machines and they had also fixed machines number 5 and 7 at Gudu, adding that the current output of the plant was 835MW and not 775MW.

---

He said that Jamshoro Power Plant, after necessary repair work, was ready to generate 750MW. The CJ asked why were they not generating 750MW from Jamshoro, on which the MD said that due to the deficiency of furnace oil, they could not go ahead with the new additional capacity. He further added that power generation addition would be about 975MW after the new steps by the PEPCO


http://www.dailytimes.com.pk/default.asp?page=2013%5C05%5C22%5Cstory_22-5-2013_pg1_1

Riaz Haq said...

Since publishing this post on my blog, I have received some significant feedback from power industry insiders.

The feedback suggests that the power market is being deliberately manipulated by a few to make a lot of money at the expense of millions of Pakistanis.

It reminds me of the Enron scandal in US which caused load-shedding in California because of market manipulation. Enron falsely blamed it on gen capacity constraints cause by tough environmental regulations in California. Several Enron executives were convicted and jailed.

I hope that Pakistani media and judiciary will investigate and expose such a scandal in Pakistan. It will be great service to the entire nation.

Riaz Haq said...

Here's a Nation newspaper report on German financing of hydel projects in Pakistan:

A delegation of the KfW Development Bank, Germany, headed by Dr Claudia Loy called on Wapda Chairman here on Monday and discussed with him the matters relating to financing of various hydropower projects.
The KfW Development Bank is providing 97 million Euros for the construction of 122 MW-Keyal Khwar and has also committed to co-finance the 35 MW-Harpo Hydropower Project along with its French counterpart AFD by providing 20 million Euros. In addition, the KfW Development Bank has also shown interest in financing the 80 MW-Phandar Hydropower Project.
During the meeting with the KfW Development Bank’s delegation, Wapda Chairman thanked them for their support in financing a number of Wapda projects.
He expressed the hope that the cooperation between the KfW Development Bank and WAPDA would be further enhanced in the days to come. He apprised the delegation that main works of Keyal Khwar Hydropower Project will soon be initiated, as all the pre-requisites are almost finalised in this regard.
Wapda Chairman expressed the hope that KfW Development Bank will come forward for better investment opportunities in other hydropower projects and well being of the people of Pakistan.
The KfW Development Bank Division Chief, appreciating the technical expertise of WAPDA, said that WAPDA is one of the best organizations in Asia. She said that the KfW Development Bank and WAPDA have a long history of mutual cooperation, adding that the Bank would continue supporting WAPDA for construction of water and hydropower projects.
We feel Pakistan’s energy sector needs more financing from Germany, she added.


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/28-May-2013/german-bank-invests-in-pakistan-energy-sector

Riaz Haq said...

Here's a report on Karachi's KSE-100 hitting new highs:

Pakistani stock market surged by over 500 points today to a record high of 21,500 points on heavy buying by overseas investors, amid reports government plans to sell treasury bills worth USD 5 billion to pare debt.

The Karachi Stock Exchange's benchmark 100-share index closed 2.59 per cent, or 542.86 points, higher at 21,501.72.

"The market was buoyed by reports today that the new government plans to sell USD 5 billion in treasury bills to pay off a chain of debt that has led to power crisis and is affecting the economy," Sohail Ahmed, a market analyst, said.

The new government is planning to pay off the debt within the first 100 days in power as it believes the economy will only be lifted and foreign investments will grow if the power shortage crisis is dealt with immediately, said experts.

In Lahore, Pakistan's Prime Minister-designate Nawaz Sharif pledged that the incoming PML-N government would make efforts to overcome power problem as soon as possible.

The stock market rally came after two straight days of decline.

On the previous two trading days, the stock market saw profit-booking after a wave of massive buying saw investors betting big that the crisis-ridden economy would revert back to high growth under Sharif, set to become premier for an unprecedented third term.

The Pakistani rupee also remained stable on Tuesday ending in the market on 98.43/98.49 against the US dollar.

Sharif, himself an industrialist and co-owner of diversified multi-million dollar conglomerate Ittefaq group, has said that revival of economy would be among his top priorities. He is seen by many in Pakistan as someone who can fix the country's bleeding economy.

There are only 569 listed companies on the Karachi Stock Exchange, as against about 5,000 in the Indian stock market, where total investor wealth is close to Rs 70 lakh crore.

The number of companies listed on KSE has come down in the past few years, from more than 650 in 2009, as the country's economy has been struggling amid a turbulent political scene.

However, a clear mandate in the just-held historic polls is expected to revive the economic activities and therefore the stock markets as well.


http://www.business-standard.com/article/pti-stories/pakistan-stock-markets-zoom-to-record-high-of-21-500-113052801027_1.html

Riaz Haq said...

Here's a PakistanToday Op Ed on energy crisis:

The debate during the election was played out as a blame game between the PML-N and the PPP. The PML-N blamed the PPP for the rental power plants while its chief economic ideologue Sartaj Aziz blamed it for its 1994 power policy. The PPP’s rejoinder was that the PML-N had “cancelled the contracts of around 24,000MWs of Independent Power Plants (IPPs)” in their 1997-99 tenure, arguing that “had this additional power been available to the national grid today there would be no shortage.” But here lies the fundamental problem in the electricity debate: the crisis is not a crisis of capacity.

With over 20,000 MWs of generation capacity, Pakistan’s power sector far exceeds peak demand that hovers around 17,000 MWs. What both parties – and the PTI too – gloss over is that their energy policies during the 1990s were in fact identical. In 1992, at the insistence of the World Bank and IMF, the PML-N government’s Cabinet Committee on Privatisation approved a Strategic Plan for Restructuring WAPDA. The plan involved “unbundling” WAPDA’s Power Wing and shifting the burden of generation and distribution to the private sector. When the PPP was at the helm next, it approved the World Bank championed 1994 Power Policy which offered astonishing terms to private investors – including a 80:20 debt-to-equity ratio, minimal taxes, guaranteed capacity payments even if power plants were not producing.

The first major step in the direction was the announcement of the Hub Power Project, a 1,292 MW private sector project described as the “Deal of the Year” and later as the “Deal of the Decade.” The Hubco deal was followed by the signing of 16 IPP contracts to add 3,400MW of private thermal power to the grid, at a time when the future shortfall was assessed to be between 1000 and 1,500 MW. The PML-N, which now apparently questions the terms of the deal, only continued the process once it returned to power. In sanctioning the creation of NEPRA in 1997 and approving the unbundling of WAPDA into 13 units: eight distribution companies (DISCOS), three generation companies (GENCOS) and the National Transmission and Dispatch Company (NTDC), operating under the newly created Pakistan Electric Power Company (PEPCO). The unbundling of the WAPDA Power Wing was supposed to move the power sector “from an inefficient state-controlled monopoly to a competitive, market-driven system.” The actual plan, as the IMF describes it, was to “ready the power sector for a more attractive packaging to be sold to private investors.”

Smaller units of WAPDA could be privatised much more easily. That was the plan the PML-N had approved in 1992 and set up for packaging in 1998. Now that it has returned in 2013, the energy plan it has announced its intention to “finish their unfinished business.”

The PML-N envisages a three-step plan. Step one: merging the Ministry of Petroleum and the Ministry of Water and Power. Step two: raising Rs500 billion through treasury bills, bank loans and printing money and paying off the circular debt. Step three: selling government shares in public-owned power companies, reducing its share to 51 percent and handing over their management to private investors. The move is expected to raise another Rs500 billion. . ...


http://www.pakistantoday.com.pk/2013/06/06/comment/columns/the-case-against-privatising-power/

Riaz Haq said...

Here's a WSJ piece on Nawaz Sharif's decision to keep defense and foreign affairs portfolios for himself:

Mr. Sharif hasn't commented publicly on the reasons for retaining the defense and foreign-affairs portfolios. A spokesman for his party, Tariq Azeem, declined to comment.

An aide to Mr. Sharif, however, offered this explanation: "When Nawaz Sharif was in power in the past, there were misunderstandings between the prime minister and the army," he said. "This time there will be a direct link."

The thinking in the Sharif camp went, the aide added, was that, "with the withdrawal of international troops from Afghanistan in 2014, foreign and defense ministries are going to be working very closely together."

Mr. Sharif has frequently said he wants to improve relations with India, and has accused the army—then headed by Gen. Pervez Musharraf—of undermining his peace initiative toward India in the late 1990s. The traditional justification for retaining an army of more than 500,000 men, which eats up about 20% of Pakistan's budget, is the long history of hostilities with India. The two neighbors have fought three wars since partition in 1947.

The current army chief, Gen. Ashfaq Parvez Kayani, has differentiated himself from many of his predecessors by repeatedly stating his commitment to democracy. A spokesman for the military didn't return calls seeking comment.

Whether the shift will sap power from the army remains to be seen. Putting so much weight in one man's hands could backfire, some analysts said. "One of the reasons why people voted for Nawaz Sharif was that they thought he had the best team," said Aasiya Riaz, joint director of Pildat, an Islamabad-based think tank. But ministries require full-time "strong and effective fully fledged ministers" to enforce civilian control, she said.

----

The foreign ministry will be run by two Sharif appointees: His former foreign and finance minister, 84-year-old politician Sartaj Aziz, has been named adviser on national security and foreign affairs, and will have the rank of minister; Tariq Fatemi, a former ambassador to Washington, has been named a special adviser, and will serve as a deputy minister, with the rank of minister-of-state.

Mr. Chaudhry, the ministry spokesman, said both men were "very experienced."

----
The new finance minister, Ishaq Dar, was set to unveil an emergency budget on Wednesday.

The issue of tackling the country's energy shortage is in the hands of lawyer and former banker Khawaja Asif. The ministry of petroleum and natural resources went to entrepreneur and engineer Shahid Khaqan Abbasi.

Mr. Sharif won praise for not trying to grab control of the provincial governments in two violence-plagued western provinces, Baluchistan and Khyber Pakhtunkhwa.

In the latter, he deflected coalition entreaties from Islamists and allowed the party of former cricket star Imran Khan, which won a plurality of provincial legislature seats, to form the provincial administration.

In Baluchistan, where a low-level separatist insurgency has been waged for nearly a decade, Mr. Sharif—whose party won the most seats in the provincial legislature—last week decided to support the leader of a nationalist party, Abdul Malik Baloch, as the new chief minister.

Mr. Baloch is a middle-class professional—unusual in a province where both the government and the armed rebellion have long been led by tribal chiefs.

"Baluchistan is on fire today," Mr. Baloch said in his first address to the provincial parliament Sunday. "If the federal government and the militant organizations help the provincial administration, there will be no difficulty in finding a solution to all festering issues of the province."


http://online.wsj.com/article/SB10001424127887324904004578539070809811726.html

Riaz Haq said...

Here's FT on Pakistan's plan to settle electricity debt (called circular debt):

Pakistan is to borrow more than $5bn to pay off the country’s outstanding electricity bill amid rising anger over power cuts that have exploded into violence in some cities.
Parts of Pakistan have remained without electricity for up to 20 hours a day this summer. According to the finance ministry, the shortages have caused annual losses equivalent to 2 per cent of GDP.

The move, by the new government of Prime Minister Nawaz Sharif, constitutes a gamble. The administration is looking for a quick-fix solution to ease the power crisis but some argue that by taking on more borrowing it will only lead to further debt problems in the longer term.
The government is to raise $5bn through the sale of government bonds to pay off the debt owed to the country’s private electricity producers as well as fuel suppliers.
“We have to take our country out of the mess we are in” said Ishaq Dar, the finance minister, on Thursday announcing details of the scheme. “Clearing this backlog is our top priority”.
The government has said it will clear the debts by August this year in what is the largest such single payment to tackle serious shortages of electricity in the country’s history.
Though many analysts support Mr Sharif’s government for moving to settle the outstanding bill, some are more cautious. “The government really has to reform the electricity sector where the problems are huge” said Sakib Sherani, a prominent economist. “Without reforming the sector, this decision (settling the electricity bill) could be a gamble”.
-------


While the upcoming payments may clear the backlog of dues that have forced some electricity producers to scale down their operations, analysts warned that the power shortages were a consequence of a poorly run government-owned electricity transmission system.
In some areas of Pakistan, between 30 to 40 per cent of electricity gets lost before it reaches end users. This is mainly due to inefficient transmission systems and theft involving corrupt officials who team up with private consumers to supply connections that are never billed.
“The financial settlement will help to tackle the immediate crisis. Once the payments are made, we should have more electricity in the system,” said Shuja Rizvi of Al-Hoqani securities stock brokers in Karachi. “The danger is, there must be very aggressive reforms to tackle the [power] losses as the root cause. Otherwise, this problem will return to haunt us”.


http://www.ft.com/intl/cms/s/0/7ad51c68-d418-11e2-a464-00144feab7de.html

Riaz Haq said...

Here's a Central Asia Online report on energy projects in Pakistan:

Pakistan is at least 5,000MW short of what it is needs to support the country this summer, the Water and Power Development Authority (WAPDA) reported. On one day in May, the national power grid generated 9,200MW, 7,000MW short of demand, UPI reported.

The acute energy crisis has taken its toll on industry, agriculture and the job market, costing millions of Pakistanis their jobs over the past 10 years, according to economists.

"The energy crisis has reduced GDP growth by 2.5-3% [per year], and it directly affects the 2.5m new job seekers who enter the market every year," Dr. Ashfaq Hassan, an economist, told Central Asia Online, adding that millions of Pakistanis lost their jobs because of the crisis in the last decade.

Pakistani energy potential
It is not a matter of lacking energy resources, but rather it is a matter of properly tapping into Pakistani potential, Hassan said.

The country has large potential for economic growth and employment if exploited carefully, he said.

Pakistan in a few years could overcome the energy crisis and massive unemployment, and the GDP growth would be higher if load shedding vanished, economist A. H. Nayyar said.

The country's power potential is 59,208MW for hydropower; 100,000MW for coal; 7,500MW for wind; 2,000MW for solar; and 25,031MW for thermal, WAPDA spokeswoman Farhat Jabeen told Central Asia Online.

Projects boost energy production
The energy crisis seems to be worsening day by day, but the power generation projects are now increasing hope and the country's future is not as dark as it once seemed.

Several stakeholders are involved and the authorities are trying hard to contain the power shortage and load shedding in Pakistan, Jabeen said.

Construction is progressing on 17 small- to medium-size dams and other power-generating projects, and some of them should be ready within a few months, she said.

More than 400MW will be added to the national grid this month, and another 4,000MW in the next five years, she added.

Three dams are nearing completion and two others are scheduled to be finished in 2015, official records reveal.

Improving job market and alternative energy
Besides helping to ease the energy crisis, the projects will boost employment.

The dam projects, for example, have directly employed 19,200 workers in the past five years, the WAPDA dams director said.

The energy development sector has provided more than 100,000 jobs in various projects over the past eight years, official records reveal.

Energy development projects are already denting the unemployment rate. There are also expectations that the increased employment will trickle down to industry and agriculture.

Development activities like those in the energy sector always have a positive effect on other areas of the economy, Nayyar said, noting more job opportunities will come to cement and other industries.

Alternative energy plans on tap, too
The government is not only encouraging the dams as energy sources but also promoting solar, wind, nuclear and other means. It initiated projects in this direction as well.

The Alternative Energy Development Board initiated wind, solar and other projects that will add 500MW to the national grid within two years, Chief Executive Arif Alauddin told Central Asia Online.

But the potential for such projects is much greater as these sectors are attracting huge investment, he said.


http://centralasiaonline.com/en_GB/articles/caii/features/pakistan/main/2013/06/13/feature-02

Riaz Haq said...

Here's a GlobalPost report on coal conversion of gas-oil-fired power plants in Pakistan:

Pakistan has asked the Manila-based Asian Development Bank to help finance two coal-fired power units at the Jamshoro thermal power station in Sindh, a senior official of Pakistan's Water and Power Development Authority told Kyodo News this week.

Zafar Umar Farooqi, chief engineer at the authority, said Pakistan had initially sought a $433 million ADB loan for one 600-megawatt unit but the bank has now been asked to consider a loan for two units.

He said the size of ADB loan will be decided after consultations with the bank, but he indicated the total cost of Jamshoro project would be around $1.5 billion.

The government-owned WAPDA operates an 850-MW oil-gas fired thermal power plant at Jamshoro at less than 40 percent of its capacity because of a shortage of fuel oil and gas.

The ADB loan will be used to convert the existing plant to coal and set up an additional coal-fired plant at the site, increasing installed capacity at Jamshoro to 2,050 MW.

The government has already invited expressions of interest from consultants to oversee construction at Jamshoro, which is about 150 kilometers northeast of Karachi and uses water from the Indus River for cooling.

Pakistan has long examined setting up coal-fired power plants to use its own lignite coal, but efforts have been unsuccessful because of the high ash content in the coal.

Ismail Khan, senior external relations officer for the ADB for Pakistan, said the new units at Jamshoro would be designed to use mixed local and imported coal, most probably from Indonesia.

Farooqi said separate tenders will be invited for conversion of existing Jamshoro plant from oil-gas to coal.

Pakistan has an acute power shortage and the new government of Pakistan Muslim League (N) has given top priority to increasing power generation.


http://www.globalpost.com/dispatch/news/kyodo-news-international/130620/pakistan-seeks-adb-loans-coal-fired-power-plants

Riaz Haq said...

Here's a Dawn report on MOU with IPPs on new terms:

A meeting presided over by Finance Minister Ishaq Dar decided to make the payment to IPPs to clear a major part of the Rs506bn circular debt with four major conditions for which a fresh memorandum of understanding (MoU) will be signed on Friday morning, followed by immediate disbursements, finance ministry spokesman Rana Assad Amin told Dawn.

In return, the IPPs will commit in writing in the MoU to achieve their maximum generation capacity and provide 1,700MW to the national grid before Ramazan.

The Hubco, Lalpir, Pakgen and Saba plants, having almost 1,800 megawatts capacity, will make a commitment to convert to coal-based power generation within 16 months.

All IPPs have also agreed to reduce their interest rate on receivables by two percentage points from the existing Kibor (Karachi Inter-Bank Offer Rate) plus four per cent and increase their credit period from 45 to 60 days to ease the payment pressure on distribution companies.

Since the two relaxations would require amendments to the existing power purchase agreements, the IPPs would initially sign an MoU, Mr Rana said. Subsequently, the National Electric Power Regulatory Authority and Private Power and Infrastructure Board would approve an addendum to the agreements, he said.

He said the IPPs and the government had agreed to resolve through arbitration their dispute over Rs23bn outstanding amounts currently pending before the Supreme Court.


http://beta.dawn.com/news/1021183

Riaz Haq said...

Here's a NY Times story on KESC performance in Karachi:

Since Pakistan’s biggest electricity company was privatized, its headquarters has been looted, its employees kidnapped and its boss nearly arrested by the government.

Despite all of that, it is regarded as a roaring success.

Power cuts lasting 12 hours a day or more have devastated the Pakistani economy. The loss of millions of jobs has fueled unrest in a nuclear-armed nation already beset by a Taliban insurgency.

The only city bucking the trend is the violent metropolis of Karachi, Pakistan’s financial heart — and that is thanks to Tabish Gauhar and his team at the Karachi Electricity Supply Co.

“It has consumed every ounce of my energy,” Mr. Gauhar, 42, said in an interview. “But we have helped millions of people.”

The new government of Prime Minister Nawaz Sharif won an election in May partly because it had promised to fix the power cuts. Now many are wondering whether the Karachi utility’s successful privatization will be repeated elsewhere.

Pakistan’s power companies share similar problems. Workers are often corrupt, and influential families rarely pay bills. The government sells power below the cost of production but pays subsidies late or not at all. Plants cannot afford fuel.

At the state-run Peshawar Electricity Supply Co., the majority of workers are illiterate, most new hires are relatives of existing staff members, and 37 percent of the power generated was stolen, according to a 2011 audit funded by the U.S. Agency for International Development.

Karachi Electricity Supply had all the same problems when the Dubai-based private equity firm Abraaj Capital bought a controlling stake in 2008. Mr. Gauhar and his Abraaj team decided to slash the work force by a third, cut off nonpayers and destroy illegal connections.
----------
Many in the populist pro-labor government vilified the power company. Later, legislators tried to arrest Mr. Gauhar on charges that he had not attended subcommittee meetings in the capital.

After the protests dissipated, Karachi Electricity Supply’s next problem was making customers pay. More than a third of the company’s electricity was stolen in 2009. Those who got bills often ignored them.

One wealthy patriarch said he could not possibly start paying because his colleagues would think he had no influence left.

Karachi Electricity Supply started cutting off those who did not pay their bills. When a transformer burned out in an area with high theft, the company asked for two months’ worth of payment from the area’s residents before replacing it.

The company divided up the city of 18 million. Areas where 80 percent of people pay bills now have no regular power cuts. Areas with high loss — often crime-ridden, sweltering slums — have long power cuts. Karachi Electricity Supply is widely hated in such places.

Muhammed Fayyaz, who works as a driver, says his neighborhood often has as much as 10 hours of cuts per day. Summer temperatures top 40 degrees Celsius (104 Fahrenheit), and protests are frequent.

“People block the main road and throw stones at passing vehicles,” he said.

Mr. Fayyaz lives in a high-theft area. Stealing power is easy. Makeshift wires with metal hooks festoon Karachi Electricity Supply’s lines in the sun-baked streets. Some lead to roadside businesses. Others head into the distance atop lines of makeshift bamboo poles.

“We clean them up, but in five minutes they are back again,” said Muhammad Siddiq, a manager at the utility.


http://www.nytimes.com/2013/07/02/business/global/turning-on-the-lights-in-pakistan.html?_r=1&

Riaz Haq said...

Despite raising concerns about the lack of transparency in payments made to IPPs to decrease the circular debt, the Asian Development Bank is planning to offer $2.1 billion in loans for the country’s ailing energy sector.
The investment, planned under the new Country Partnership Strategy (CPS) 2015-19 estimated at $5.1 billion, is expected to be effective from early next year, with 41% of the financing focusing in the energy sector alone, according to finance ministry officials.

With the country facing debilitating energy infrastructure, the new investment will be allocated for transmission, distribution, grid connectivity, hydropower generation and import of gas, according to the draft CPS.
However, Pakistan will be required to take hard decisions aimed at increasing power tariffs, reducing line losses and shifting the energy mix. These conditions to funding are being described as in line with the government’s 2013 National Power Policy.
The multilateral lender hopes that the over $2 billion investment in the power sector in the next three years will allow the government to withdraw electricity subsidies. It is also discussing the condition of reducing line losses and bringing them in line with the benchmark approved by National Electric Power Regulatory Authority (Nepra), according to the draft CPS.
The strategy and the government’s power policy are also aimed at achieving zero load-shedding by 2018, a goal that seems overambitious.
Lack of transparency
While the ADB paints a rosy picture of the country’s power sector five years down the line, it has also highlighted the grave situation faced by the energy sector. The draft document of the CPS states that the private participation in the energy sector has been curtailed because of “chronic concerns about payment to power suppliers, unclear investment policies and lack of transparent payment practices”.
It is the first time that an international lender has highlighted the issue of lack of transparent payment practices in a policy document.
“There were concerns raised on the payments to the IPPs (Independent Power Producers) not being based on merit,” according to the draft CPS. The draft document did not elaborate who raised these concerns.
The issue of favouritism in power payments shot into the limelight in June last year when the government cleared Rs480 billion circular debt. There were allegations that the government made out of turn and excessive payments to a Lahore-based industrialist due to his close proximity with the ruling party.

http://tribune.com.pk/story/779095/benchmark-adb-to-earmark-2-billion-loan-for-energy-sector/

Riaz Haq said...

ISLAMABAD: Federal Minister for Planning, Development and Reforms, Ahsan Iqbal Tuesday said that Energy projects of 16600 Mega Watt (MW) signed under Pak-China Economic Corridor during recent visit of the Prime Minister to China would help overcome energy crisis in the country.
Addressing a press conference here, the minister said that the energy projects would be completed in two phases.
"During the first phase the energy projects of 10,400 MW electricity worth of $15.5 will be completed while in the second phase different projects of 6600 MW electricity will be concluded ", he said adding development of energy infrastructure and up-gradation of system of transmission lines was also included in the agreements.
Ahsan Iqbal said that energy projects of 9000 MW would be completed by 2018 which would mean that the government would be able to eliminate power load-shedding in the country during its tenure.
The minister said that coal-based power plants would generate 7500 MW and the cost per unit of electricity would be about 10 cents which would be far cheaper than that of oil.
He said that under the Corridor, 1000 MW of the largest solar park would also be established in Cholistan while hydal based energy projects would be of 1600 MW.
Giving details about Thar Coal Projects, the minister said that in the first phase two projects of 2000 MW would be developed from Thar Coal while under the agreements with China overall 6600 MW Thar Coal projects would be completed
He said that a package of $650 million was also included in the agreements for development of Gwadar sea port and airport.
Iqbal further said that 1736 kilometers of railway track would be upgraded which would not only help to ease out transportation system of goods and coal but it would also help improving transportation facility for the passengers.
The Minister strongly condemned Pakistan Tehreek-e-Insaf (PTI) Imran Khan's statement against Chinese development assistance to Pakistan under "China-Pakistan Economic Corridor" and said that Pakistan and China are closest friends and enjoy time tested all weather friendship.
"At a time when international investors were shying away from Pakistan due to security environment in the region, decision of Chinese and Pakistani leadership during PM Nawaz Sharif's visit to Beijing to take Pak-China relations to new heights in economic field through China Pakistan Economic Corridor Project is a milestone", he added.
The most critical energy and infrastructure sectors related projects will infuse new life into Pakistan's economy, he added.
He said the projects are in IPP mode as investment projects and rejected Imran Khan's assertion that these projects were being financed through borrowing.
Iqbal said that these projects were coming under the energy policy which was open for all investors from any part of the world.

http://www.brecorder.com/top-news/108-pakistan-top-news/204294-16600-mw-projects-under-pak-china-economic-corridor-to-help-overcome-energy-crisis-ahsan.html

Riaz Haq said...

AGP finds Rs 980 bn (about US$ 9 billion) irregularities in #Pakistan power sector http://www.dawn.com/news/1208273

The auditor general of Pakistan (AGP) has found embezzlement, misappropriation and irregularities of around Rs980 billion in the accounts of Water and Power Development Authority (Wapda) and other power companies working under the Ministry of Water and Power in the audit year 2013-14 and has asked the president to order investigations into specific cases.

The amount is equal to nearly one-fourth of the Rs4 trillion federal budget for fiscal year 2015-16 and can explain why the government has to inject huge subsidies out of taxpayers’ money every year to clear the circular debt that keep emerging again and again. Over the past five years, the federal government is estimated to have injected more than Rs2 trillion into the power sector, besides increasing consumer tariff by about 200 per cent.

On top of that, the AGP has also made observations over Rs4.2 trillion in an unsettled audit backlog from the past few years.

The audit pertained to Rs414 billion of expenditure and Rs898 billion of revenue for fiscal year 2012-13.

In its report to the president of Pakistan — as mandated under Article 171 of the Constitution — the AGP has put together seven broad categories of findings from an audit of the accounts of Wapda, four generation companies (Gencos), 10 distribution companies (Discos) and the National Transmission and Despatch Company (NTDC).

Wapda’s Directorate General of Audit — a specialised wing empowered to look after power sector accounts — said it had ignored the instances of misappropriation, fraud and other irregularities amounting to less than Rs1 million. In FY2012-13, the directorate said, an audit found 184 cases of irregular expenditures or unjustified payments and rule violations amounting to Rs368.65 billion.

Another 88 cases, worth Rs572.63 billion, pertained to non-recoveries and overpayments; 18 cases to accidents and negligence that cost around Rs19.5 billion; Rs5.8 billion was linked to cases where there were weaknesses in internal control systems; and transactions of around Rs11.8 billion were called into question over non-production of record. Another nine cases, worth around Rs350 million, were related to embezzlement of public money through theft and misuse of funds.

However, at the instance of audit, only Rs31.9 billion could be recovered and the AGP pointed out that it was beyond their capacity to carry out a “100 per cent” audit of these entities.

But the AGP pointed out that the internal control mechanisms in Wapda and its corporate entities did carry out complete audits, which also included consumer service offices, and also carried out physical examinations.

The AGP said that the recurrence of frequent irregularities “cast a shadow of doubt on the effectiveness of this internal control system”. The internal controls, it said, were deteriorating gradually as there had been an increase in cases of unauthorised extension of load, non-implementation of equipment removal orders, theft of material and electricity and violation of procurement rules as well as the Nepra Act.

The audit revealed that power distribution companies could not collect Rs401 billion from various defaulters in FY2012-13, while the procurement of material and consultancy services, provision of PC-1s and contracts involved the violation of procurement rules

“There was poor monitoring of revenue collection, embezzlement of funds, misappropriation and theft of material, misuse of public funds, incorrect billing, non-implementation of commercial procedure and non-adherence to provisions of power policy,” the AGP said.