Azad Pattan Hydropower Project

ISLAMABAD: National Electric Power Regulatory Authority (Nepra) has approved tariff of Rs7.46 per unit for 700MW Azad Pattan Hydropower Project located in AJK at a cost of $1.517 billion.

The reference tariff has been calculated on the basis of net contracted capacity of 693.70MW and net annual energy production of 3,265.81GWh. The tariff is applicable for a period of 30 years on BOOT basis commencing from Commercial Operation Date (COD). China Gezhouba Overseas Investment Company Limited and China Gezhouba Group International Engineering Company Limited are sponsors of the project.

The project company in its tariff proposal claimed cost of $13.457 million inclusive of 16 percent sales tax under the head of other engineering consultants. The project company submitted that services of JV of MWH International, Inc USA and Peter Rae Hydro Consulting Ltd (PRHC), Canada, has been appointed as engineering consultant to deal with various technical matters prior to financial close which includes preparation of EPC tendering documents, evaluation of the EPC tenders, assistance during the EPC contract negotiations, selection of electro mechanical supplier, review of load flow study and any other technical matters which will continue till the appointment of the Owner’s Engineer and in house technical department and technical staff.

The Authority observed that these costs seem highly inflated. The OE cost of US $2 million during the development phase, if required, may be covered from the OE cost of US $20.7 million. The cost of $5.571 million shown as cost of other consultants and contingency cost of $3 million, out of pocket expenses are also excessive. Subsequent to the above-stated adjustments, the Authority has assessed $29.41 million as against the claimed amount of $63.75 million.

The project company in its tariff proposal has claimed an amount of $35.43 million under the head of Sinosure fee on debt amount only. The project company in its tariff proposal further stated that as per the requirement of the Chinese government, it is mandatory for state-owned enterprises such as CGGC, undertaking overseas investments to acquire overseas investment insurance from Sinosure for their equity investments and for the loans arranged from Chinese banks. The company stated that the Sinosure rate is 0.6 percent and by including the impact of 20 percent withholding tax payable on Sinosure payment the gross rate of 0.75 percent has assumed. This rate shall apply for loan drawn during the construction period as well as the loan repayment period during the operations of the project.

The Authority observed that this amounts is the result of clubbing the premium on Insured loan amount @ 0.75% (gross up @200/0 for withholding tax) amounting to $32.36 million and premium on commitment amount @ 0.11% resulting to $3.06 million.

Akhter Ali Shah, ex-Member Planning Commission, also raised his concerns over the claimed tariff of US cent 8.1032 /kWh in the wake of decreasing prices of other renewable technologies and return of 17 percent.

The representative of Punjab Power Development Board stated that the return on equity at 10/0 to 10.4 percent was used by Chinese companies in their bidding tariff for 135MW Taunsa Hydropower Projects, which is a true reflection of market and is an advantage of a bidding process whereby the bidding companies voluntarily reduced rate of return in order to gain a competitive advantage. Keeping in view the improved market scenario, a study on the rationalization of internal rate of return for power generation has been carried out by the Authority which also indicates the same trend of declining returns in current financial/capital market.

The Authority has observed that during the construction and operation phase, the IPPs use foreign consultants, experts and even labour instead of maximizing local manpower/experts which are readily available in Pakistan especially in hydropower sector. As a result thereof, it not only increases the project cost but also prevents transfer of technology and development of local expertise.

The Nepra directed that local manpower be utilized as far as possible during the implementation and operation of the project. In specific terms, at least 80 percent of the labour force employed during the construction of the project shall be local, and local labour shall not be discriminated against in terms of wages and facilities provided as compared to foreign labour.

The Authority has further decided for the sponsors to reduce the construction period, through provision of a sharing mechanism between the sponsors and the power purchaser of any savings due to reduction of construction period. Based on the aforementioned, the Authority has decided if the project sponsor is able to reduce the construction period and achieve COD before 69 months, the full benefit of reduction in IDC will be passed on to the power purchaser by adjusting the IDC on the actual construction period below 69 months; whereas the company will be allowed to retain the full benefit of reduction in ROEDC, i.e. the ROEDC will be calculated on 69 months regardless of the reduction in construction period.—MUSHTAQ GHUMMAN