Syed Akhtar Ali

Over the last few years, we have seen many projects being implemented under a single bid approach, which in some cases has resulted in rather excessive costs. On the other hand, if the funding is available under a bilateral arrangement, there is possibly no escape from single bid projects. Competition can be organized if funding is independent of supply which is only possible when the funding is from third sources or multilateral institutions. However, as we have argued in the following, if the institutional arrangements are not throttled or bypassed and available institutions are strengthened, some controls are possible. We have also discussed as to what arrangements can be made with supplier countries to come to terms with the issue.

IFIs or multilateral institutions are not ideal also; firstly, they do not have the kind of resources that have been made available under the CPEC; there is a long processing cycle in IFIs and the funding is associated with conditionalities and agendas that may be compatible with international frameworks, but often in terms of scope and timings, not realistic or compatible with the day to day running requirements of the country. They always require some kind of surgery. Irrespective of these peculiarities, as we have mentioned, they have to lend to many borrowers and thus cannot cater to the required level of funding. The issue is not just limited to the CPEC; it is common to all bilateral funding such as from Russia, the UAE, etc, in the past. EXIM Bank and other US lending sources have attempted, albeit partially, to tackle this issue, wherein they require competition among the bidders, although restricted to the American suppliers. Perhaps Chinese can be prevailed to do the same. They have a large economy and many suppliers of single products. They are encouraging and enforcing competition in domestic sector. It may not be a bad idea to try the same in external markets.

I will give you two or three examples on which I have data and understanding of the projects. Gwadar-Nawabshah gas transmission pipeline is being planned to be built under the CPEC at a cost of USD 1.326 billion. It is of 42-inch dia and a length of 700kms. Average cost per km in this case comes out to be 1.9 million USD. Another transmission pipeline is to be built (South-North) by Russians, connecting Karachi to Lahore with a length of 1100kms and a 42-inch dia and a throughput of 420 billion cft per year. Its CAPEX has been estimated at 2.5 billion USD which comes out to be 2.29 USD per km (three times the rate in India; SNGPL has completed a 111 kms project recently at a cost of Rs 9.187 billion a unit CAPEX rate of 0.82 million USD per km). Russians demanded, reportedly, 1.20 USD but settled for 85 cents per MMBtu (which is still almost twice the required one). In India, a comparable tariff is 60 cents for a 30% larger pipeline; GAIL India asked for 1 USD but got 60 cents by the regulator PNGRB, which is still under consideration to be brought down significantly. By comparison SNGPL operates a network of 7756 kms of transmission and a distribution network of 94263 kms and delivers 434-600 Bcft per year of gas in just 100 cents per MMBtu, i.e., only 15 cents more than the Russian pipeline tariff. Most of SNGPL annual expenditure goes into salaries and distribution. Transmission component alone may not be more than 20 cents even less. Admittedly, one cannot expect new project costs with the old ones, but there has to be a limit and reasonableness. A difference of 100 % or more even among new projects should be a cause of worry for all.

It will all add up to make RLNG very expensive – terminals, pipelines and many intermediaries with their extractive pricing. MPNR has traditionally been a generous agency. It has been in earlier periods awarding oil pipeline projects with a ROE of 25% (unprecedented anywhere).

One apparent reason is that rather excessive CAPEX is demanded by the single bidders, i.e., almost twice or even more than the local cost. Typical regional rates are around or even under USD 1 million per km for comparable projects. Admittedly, there is normally a wide variation in CAPEX of pipelines, no two projects are the same. Terrain can make a lot of difference in cost. Gwadar-Nawabshah does have some inhospitable terrain of about 100 kms and the law and order problem, adds up to the costs and risks. The only way to be sure of real prices is to have competition.

In India, a comparable project (Dhabol-Bangalore, 1386 kms, 36-inch dia) has been built at a cost of 670 million USD in 2012-13. This gives a unit CAPEX of around 500 million USD per year. Accounting for diameter difference and inflation since 2012, one may add 50% to it. Perhaps more relevant project being currently implemented by GAIL India is Jagdish-Haldia pipeline (36-inch dia, 950 psi, 2538 kms) at an average cost of 0.717 USD per km. It is a fairly complex project with 46 river crossings, 17 railways crossings and 14 state highways crossings. Tariff for long distance pipelines hovers around 60 cents in India. GAIL India applied for a tariff of one Indian Rupee but got only half of it from the regulator and all of it in local finances. In our case, nothing of the sort applies. It will all go abroad.

On HVDC project (Matiari-Lahore electricity transmission line, 660 kV, 4000MW, 878kms), Chinese company kept demanding high CAPEX of more than 2 billion USD and a tariff of more than Re 1 per kWh(at a load factor of 95% which may not be achievable and at the more usual rate of 60-70%, it would be correspondingly higher) as opposed to existing tariff of NTDC of 33 paisa per kWh. Through protracted negotiations, an agreement has been reportedly signed at a mutually agreed CAPEX of 1.5 billion USD. One is not sure, if an agreement has been reached on tariff as well which has been determined at around 77 paisa per kWh by Nepra. Reportedly, this has caused considerable tension between Nepra and the line ministry.

We have given examples for energy sector which should not mean that all is well in other sectors. What to do? We neither have the money nor the technology, and the job is to be done. But will we be able to make repayments of the loans and take-or-pay payments in US dollars? Will our consumers be able to pay? Would our industry remain competitive, if unaffordable charges and tariffs are imposed on them? This would have a negative impact on our exports which would further erode our financial capacity. The answer is, may be in some cases, exceptions may have to be made and a bitter pill be swallowed. This cannot be, however, made a rule. There must be some untied loans as well. For example, given the money, pipelines can be erected by our local companies on much cheaper rates and rather quickly, as long negotiation cycles are not involved. Or some joint venture or consortium type approach could have brought down the cost. The idea is not to criticize the relevant bureaucracy or the ministry. The problem is structural and this is the curse of the single bid.

The issue merits serious considerations in a consultative mode at G-to-G level. As it may not be sustainable in the long run. After all, repayments have to be made. Projects have to remain financially and economically viable resulting in user-charges that are affordable by the consumer. Government is an intermediary only, the final payer is the consumer. We are seeing that in some cases, the resultant consumer prices and tariff appear to be quite on the higher side. While individual cases may be taken lightly on a case-to-case basis, the cumulative impact can be disastrous. You may have facilities, but consumers may not be able to use them or reduce their relevant budgets. A circuitous spiral into recession and stagnation can ensue, resulting in default and cessation of loan giving cycle. In this way, the interest of the supplier countries would also suffer. It would be in the interest of both the lender and the borrower to think of ways to minimize the vices of unfair pricing by the commercial companies which normally conduct business based on profit maximization on a transaction to transaction basis than having a longer term perspective. They don’t generally believe in the long run, arguing that we’ll all be dead in the long run. (To be continued) (The writer is a former member of Planning Commission)