UNABLE to arrange financing for major water sector projects, including the critical Diamer-Bhasha dam, the government has now decided to tap international capital markets for about six projects with a combined power generation capacity of about 21,300MW.

The authorities are developing a new approach to seek about 75-80pc project financing through the private sector.

The target is to complete this homework in less than two weeks to kick-start a process of interactions with prospective investors in Washington and New York this October on the sidelines of annual meetings of the World Bank and the IMF. A high profile investor conference would be sponsored by the United States Agency for International Development (USAID) specifically on the $12bn Diamer-Bhasha dam.

Other projects include the 7,100MW Bunji hydropower project, 640MW Pattan hydropower project, 4,000MW Thakot hydropower project, 740MW Munda multipurpose project and the second part of the 4,320MW Dasu hydropower project. The total cost of these projects has been estimated at $37bn.

The plan is to formally offer the Diamer-Bhasha dam (DBD) to investors latest by June 2015, with the project completion deadline set for June 2024. This will be followed by the $11.5bn Bunji project in December 2015, for completion in December 2024. With a gap of six months, the $1.8bn Pattan hydropower project would be taken to the market for financing in June 2016, for completion in June 2022, while the $8bn Thakot project will hit the market in June 2017, for completion in June 2023. The Munda dam and Dasu would follow suit with a gap of one year each.

To begin with, the prime minister has also approved a plan to set up the Diamer-Bhasha Dam Company (DBDC) by transferring the cost of the land of the dam and operating assets of the Ghazi Barotha hydropower station to the new special purpose vehicle. A formal approval by the Economic Coordination Committee and the federal cabinet would be required for the company to be registered on the pattern of the Neelum-Jhelum Hydropower Co.

The SECP has been tasked to issue the incorporate certificate, but the transfer of assets of the Ghazi Barotha Hydropower Project (GBHB) would take a couple of months to get consent from a number of international lenders who had invested in it.

The National Electric Power Regulatory Authority (Nepra) would be asked to modify Wapda’s generation licence and grant a separate generation licence to DBDC. The NTDC and the Central Power Purchasing Agency will sign a separate power purchase agreement (PPA) with DBDC.

With net worth of $506m as of June 30, 2013 and a revenue surplus of Rs9bn per annum, the GBHP is not capable to finance the DBD project. There is a move to raise GBHP’s tariff to Rs23 per unit by loading on the project cost of DBD, as the combination of operation and development activities for short-term investors would not be attractive.

It is recognised that concessional loans for a project like DBD may not be available from lenders as they have their own political agendas, internal policies and priorities for financing development projects of different natures in different regions.

This would perhaps be the first attempt by Pakistan to tap the international commercial market, which is otherwise a significant source of financing for major infrastructure projects. The new approach will bypass the reportedly lengthy procedure of involving private investors through the private power and Infrastructure Board (PPIB), entailing a number of approvals, preparation of feasibilities and multistage tariff approvals by Nepra.

The new approach is to fast-track development of mega hydropower projects under public- private partnership mode at the development and execution stages. But before offering the project to private investors, the government will put in place complete and updated feasibility study and environmental impact assessment, followed by completion of land acquisition, resettlement and rehabilitation issues so that a dispute-free land could be handed over to the private sector through the DBDC.

For this, the government has already allocated more than Rs55bn this year for land acquisition, construction and improvement of access roads for the DBD. A power purchase agreement, power evacuation plan and determination of an upfront tariff for DBD by Nepra would be completed before formally offering infrastructure bonds in the international market.

This would be followed by the appointment of an international panel of experts for the selection of bidders through international competitive bidding, and the predetermined upfront tariff and PPA period and completion deadline would be set in the expressions of interest.

To make the projects cost-effective and attractive to investors, the government would ensure exemptions in duties and taxes during the construction phase and give a complete income tax holiday for the initial five years of operation. As an incentive, if the private sector completes the project earlier than the agreed commercial operation date, the NTDC/CPPA would be obliged to purchase electricity at the agreed tariff to ensure the benefit of early completion to investors.

The project envisages more than 17pc return on equity through an estimated levelised 30-year tariff for the private sector at 7.57 cents.

The private sector would be required to arrange $10bn in loans, while the remaining $2bn would be arranged by the government.

Published in Dawn, Economic & Business, July 28th, 2014