Discussion at the USAID
Diamer Bhasha Dam
Informational Meeting
By:
Khalid Mansoor
CEO, The Hub Power Co. Ltd.
08th October, 2014
USAID Informational Meeting
Washington, D.C.
The Hub Power Company Limited
Table of Contents
1. Hubco’s Introduction
2. Hubco’s Experience with Laraib Hydro Project
3. Pakistan, an attractive IPP Market
4. GOP as a partner and Off-taker
5. Ups and Downs of the IPP sector
6. Profitability of Major IPPs
7. Key to success of IPPs
8. Importance of local partners to offshore investors
9. Pakistan’s Energy Crisis – Offering huge business opportunity
10. Current Energy Crisis & Proposed Management
11. Conclusion & Recommendations
The Hub Power Company Limited
About HUBCO
HUB
Capacity
Fuel
Boilers
St. Turbine
Generator
Availability
1292MW
RFO
IHI
Ansaldo
Ansaldo
80%
LARAIB ENERGY
NAROWAL
Capacity
Fuel
Engines
St. Turbine
Generator
Availability
225MW
RFO
MAN Diesel
Dresser Rand
ABB
88%
Capacity
Type
Turbines
Generator
84MW
Run-of-the- River
Andritz Hydro
Andritz Hydro
FY-2013 Highlights
Turnover
: PKR 166 Billion (USD 1.7 Billion)
Debt / Equity
: 44 / 56
Gross Profit Margin
: 10%
Return on Equity
: 30%
3 Company Limited
The Hub Power
2. Laraib - Pakistan’s 1st Hydel IPP (1/2)
Laraib (75% Hubco ownership):
• Type
:
Run-of-the-River (ROR) plant
• Power Policy
:
1995
• Units
:
4 x 21 MW units
• EPC
:
SAMBU (Korea)
• Main OEM
:
Andritz Hydro (Austria/China)
• O&M
:
TNB REMACO (Malaysia)
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2. Laraib - Pakistan’s 1st Hydel IPP (2/2)
Experience of Laraib
Long Gestation
time of 14 years
No policy framework for hydroelectric power projects existed in 1995
Several governmental changes from 1995 to 2009 mostly having different priorities, only few
having hydropower bias
New Bong Escape (NBE) being located in Azad Jammu Kashmir (AJK) i.e an autonomous
territory, where all the laws and rules of Pakistan does not apply in AJK. Hence, AJK is not the
domain of traditional or star lenders
Inventing the
wheel
Pakistan’s private sector hydropower policy evolved around this project
Development of first hydel specific Power Purchase Agreement in Pakistan
Amendment in various AJK laws (Electricity Act, Income Tax Ordinance, Stamp Duty Act,
Insurance Ordinance etc.)
Resolution of legal and constitutional anomalies related to AJK hydropower resulting in back to
back Implementation Agreements for a project based in an autonomous region to manage
project risks for financing
Challenges for
New Hydro
Electric Power
Projects
Need for a clear cut willingness from the Multilaterals to finance projects located in
Gilgit Baltistan and AJK
Large scale investment in transmission lines by GoP/Private Sector to ensure evacuation
NEPRA Tariff Rules must provide a clear road map for dealing direct tariff applications for
projects located in AJK and GB. Presently being done through state owned National
Transmission Co. (NTDC) as purchaser of electricity in Pakistan. Hence, making the process
inefficient and slow
The Hub Power Company Limited
3. Pakistan, an attractive IPP Market
Security
Package
The Implementation Agreement (IA) and Power Purchase Agreement (PPA) provide protection to
the IPPs against the followings :
1.
2.
3.
4.
5.
6.
Payment obligations of Off-taker
Changes in taxes and law of land
Remittance of foreign exchange
Protection against Discriminatory action
Events of Political Force Majeure
Water usage and Land Acquisition
Fiscal
Incentives
Exemption from Corporate Income Tax, Sales tax, levies of Workers Profit Participation Fund &
Workers Welfare Fund. Concession on Withholding Tax of Dividends of 2.5% and concessionary
custom duties on import of all IPP related equipment
Front loaded capacity tariff to cover the debt service obligations which ensures consistent returns
on equity
Attractive USD indexed 17% IRR for coal and hydel IPPs and 20% IRR in case of use of indigenous
coal
Facilitation
Measures
One window operation by the set up of Private Power Infrastructure Board (PPIB)
Unrestricted Import of Plant & Machinery, no minimum local content requirement
Operation and maintenance of Foreign currency accounts in Pakistan
100% foreign/private ownership permitted for IPPs
Established
Norms
Standardized processes and guidelines laid out by the Govt. for the IPP developers
Attractive Feed in Tariff regimes announced for thermal, wind and solar projects
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4. GOP as a Partner and an Off-taker
Pakistan is amongst the
pioneer countries in
developing Asia to
introduce contractual IPP
market
• The first power policy for
the private sector dates
back to 1994 and modified
in 2002
• Since then the policy
framework, institutional
capacity and approval
processes have matured to
a great extent
GoP is an overall reliable
partner & off-taker for IPPs
especially those based on
Hydro
• Hydro sources are
expected to have least
political risk due to their
low Tariff and overall
positive attitude by all
stakeholders
• Major contributor towards
the correction of the
current improper energy
fuel mix
Positives of GoP
• Supportive policy regime
endorsed at the highest
level in GoP
• Personal oversight of all
energy projects by the
Prime Minister of Pakistan
with a resolve to remove all
unnecessary hurdles &
bottlenecks
Negatives of GoP
• Circular Debt continues to
be the major impediment
towards timely payments
(although history does
speak in favor of hydro
projects)
• Lack of institutional
capacity / resolve to take
tough decisions to
rationalize tariff in the wake
of recent judicial activism
• Long and tedious
approval processes as
witnessed in the first hydro
project
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5. Ups and Downs of IPPs
IPPs in Pakistan have seen a smooth profitability despite of changing political regimes other than a few incidents that
were particularly targeted to reduce electricity tariff
NEPRA is an independent regulatory authority which balances the interest of the investors
consumers which minimizes project risk with various insulation measures
along side the
Delayed Payment problems have caused some concern for all IPPs but incumbent government is focusing on
the issue of inappropriate energy fuel mix, being major root cause of circular debt, through policy measures
Effective governance measures are being taken for improving collections and rationalization of tariff in line with
the current high cost of power generation to curb the growth of circular debt
Renowned international developers like AES (US) and International Power (UK) have had successful investments with
alpha returns and seamless exits
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6. Profitability of Major IPPs
Hubco Earnings
Hubco Dividends
120
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
-
100
Hubco
(1601 MW)
80
60
40
20
0
2010
2011
2012
Earnings (USDm)
2013
90
80
70
60
50
40
30
20
10
0
2014
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
2010
EPS (Cents/Share)
2012
Dividends (USDm)
2013
2014
DPS (Cents/Share)
Kapco Dividends
Kapco Earnings
KAPCO
(1340 MW)
2011
90
80
70
60
50
40
30
20
10
0
10.00
8.00
6.00
80
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
-
70
60
50
40
4.00
2.00
2010
2011
2012
Earnings (USDm)
2013
2014
EPS (Cents/Share)
30
20
10
0
2010
2011
2012
Dividends (USDm)
2013
2014
DPS (Cents/Share)
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7. Key to success of IPPs
Transparency
Low Cost
Power
Generation
Water Tight
security
package
Strong
Technical
Resume
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8. Importance of Local Partner to Offshore Investors
Strength
1. Technical know-how
2. Access to Foreign Financing
3. O&M experience
Synergic
Partnership
Weakness
Foreign Investor
4. International Vendors
relationship
1. Political Risk Management of the
host and investing country
1. Regulatory Know-how
1. Difficulty in reaching financial
close under prevailing circular debt
situation
2. Ability to attract quality HR in
Pakistan
3. Experience in bidding, tariff and
security structure negotiations with
the Govt.
Weakness
Strength
Local Partner
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9. Pakistan’s Energy Crisis – Offering huge business opportunity (1/2)
 Power load shedding (up to 20 hours) is currently the biggest socio-economic issue
for Pakistan
 Quick resolution of the energy crisis will be a huge economic boost for Pakistan and
political win for the current government
25,000
20,000
15,000
Computed Peak Demand
10,000
Corresponding Supply
5,000
Surplus/Shortfall
0
2009
2010
2011
2012
2013
-5,000
-10,000
Source: NEPRA State of Industry Report 2013
The Hub Power Company Limited
9. Pakistan’s Energy Crisis – Offering huge business opportunity (2/2)
:
:
:
Current Dependable
Capacity
Source: National Transmission & Distribution Co. (NTDC), Pakistan
4.8% (Low), 5.9% (Normal), 6.5% (High)
1.7%
Expected to increase from 800 kWh/y (presently to
2,538 kWh/y by 2035. Malaysia is now at 3,724 kWh/y)
100,000+ MW expansion
Assumptions:
• Annual GDP Growth Rate
• Annual Population Growth Rate
• Per capita power consumption
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10. Current Energy Crisis & Proposed Management (1/2)
The root causes of circular debt include :
• Inappropriate energy mix
• Lack of governance
• Irrational tariff due to lack of political will to recover higher cost of electricity
Despite payment of around USD 5 B circular debt in Jun /13, it has again reached USD 3 B
within a year!
To address the energy mix issue, low cost power projects will need to be constructed
immediately. Coal fired and high capacity hydro projects should be the prime focus
Financial Close of upcoming Power Projects would be a challenge unless :
• The menace of circular debt is controlled
• Transmission bottlenecks are removed
• An integrated energy planning framework is established
There is no other solution to resolve current circular debt issue other than :
• Enhancing the power subsidy in the short term
• Increasing Consumer Tariff
• Improvement on Governance Issues
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10. Current Energy Crisis & Proposed Management (2/2)
Cornerstones of Crisis Management Strategy
Low Cost
Generation
Low
Cost
Coal
Base
Load
Base Load
Fast
Comm.
Fast
Commissioning
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11. Conclusions & Recommendations
Country’s Energy Mix has to be corrected in order to save the precious foreign exchange (~USD 15 B per annum) spent
on oil import
Pakistan should continue to strive resolving water and land disputes with neighboring India and seek active diplomatic
mediation from friends like Us for expeditious development of hydel power projects
•Hydel projects though requires long gestation period, are essential for long term sustainability given the huge
potential in the Country
Transmission networks should be extended to autonomous territories to alleviate evacuation and financing bottlenecks
for large hydro projects. Investment in transmission lines can also be justified due to the lower tariff offered by size and
high load factor of hydel assets. Environmental and Social concerns should be addressed by GoP in a proactive manner
In order to ensure financing of the new IPPs, the Government must address issues related to circular debt and power
sector governance. Privatization of non performing Govt. entities will provide a quick fix for improved efficiencies
Energy planning needs to incorporate short term, medium term and long term measures to fix crippling power outages
on a sustainable basis
•Pakistan’s energy mix contains around 1/3rd Hydro power and is one of the lowest carbon footprint countries in
the world. Even with the addition of coal based power projects, in order to address power crisis in short term, the
overall energy mix will still remain quite environmental friendly
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Q&A
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Annexure
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Pakistan’s Energy Crisis
Inappropriate Energy Fuel Mix
•
Pakistan’s Energy fuel mix is not sustainable
•
Coal needs to replace Oil to bring down the overall cost of power generation
Sources: Overseas Investors Chamber of Commerce & Investments (OICCI) Pakistan, Energy Sub Committee,
NEPRA’s State of Industry Report 2013
The Hub Power Company Limited