THAT reservations over the Pak-China bi­la­­teral coal power projects were raised in rabble-rousing forums instead of the sober atmosphere of a parliamentary committee is unfortunate. Whatever the merits of the objections to the proposed deals, they ought to have been raised in a more responsible manner. Further damage can be averted if we clear the air, unbundle some of the issues and see how these project opportunities have evolved.

Last summer the incoming PML-N government released the National Power Policy 2013. As one of the policy objectives, the weighted average cost of producing electricity was to be brought down. To do this the policy proposed to characteristically change the energy mix — from gas, which is a depleting resource, and furnace oil, which is an expensive fuel, to coal.

Over the longer term, the policy proposed to tap the hydropower potential of the Indus Basin cascade at sites like Thakot, Patan and Dasu and subsequently at Bunji and Diamer-Basha. Coal, it was felt was not just economical but also the fastest solution since projects could be commissioned within three to four years from financial close. After whetting by all provinces the policy was approved by the Council of Common Interests and work on implementation began.

A month later, in September 2013, Nepra, the electric power regulatory authority, announced an upfront tariff on coal power projects. The aim was to help the project sponsors arrive at their investment decisions early and then achieve financial close on fast track. That not too many investment decisions were forthcoming; and the one that was, Engro Energy, was unable to achieve financial close; perhaps indicated that the tariff was too low. There was little wrong with Nepra’s conservative approach. Often a ‘reverse auction’ of this sort is an effective method to arrive at fair pricing.

Several projects can be jointly developed by Pakistan and China.

Of course there was the added complication of coal’s deleterious climate effects. No worries, we justified to ourselves, because Pakistan’s grid — thanks to the large share of natural gas and hydro power — is one of the cleanest in the world. Surely we could get away with a bit of coal in the mix. Western financial institutions had a different view. Coal was an absolute no-no. Their stakeholders would have none of it. At any rate, given the chronic circular debt malaise, global financial institutions had little appetite to invest in our power sector.

In the face of these roadblocks the government reached out to the Chinese leadership. A number of projects have been identified that can be jointly developed. These include, among others, two power plants each at Gadani, Sahiwal, Thar and one at Bin Qasim. A coal handling and logistics infrastructure is also part of the parcel as is a transmission infrastructure for evacuation of electricity from the site to the grid.

Amidst a global economic slowdown and the slack demand for coal power plants, Chinese power plant manufacturers didn’t have too many orders either. A meeting point was possible if the Pakistan government enhanced the tariff somewhat and improved the rates of return; the projects would become viable to receive Chinese funding. In June this year, Nepra revised the tariff. To minimise the cost of capital, power projects need to be structured at around 80:20 debt-equity ratio. Chinese government financing could now be provided to cover the debt component.

One reservation that has been aired about the deal is of bypassing of the public procurement rules. These reservations are not valid for private-sector projects in IPP mode. Even for Gencos that may opt for retrofitting for coal conversion and for Greenfield projects involving federal/provincial government equity there is no harm if the government puts such projects under independent boards and empowers these boards to procure through direct negotiations while keeping the global industry benchmarks on cost per megawatt, efficiency and other key parameters in view.

This information is widely and freely available. To further address transparency concerns, negotiated proposals can be made the subject of public hearings before they are signed. The larger consideration is whether the policy objective of bringing down the weighted average cost of electricity production is being met. Another consideration should be that the equipment is of high quality and must perform up to the standard, unlike the earlier experience with Chinese locomotives.

But perhaps even more than capital cost, the mechanism to procure fuel supply contracts needs to be fully transparent because fuel is a recurring and ‘pass through’ cost — passed on to the government — and prices are harder to ascertain for coal than for furnace oil and natural gas.

Pakistan needs affordable energy. A course has been charted, and while differences in viewpoints can exist, issues must not be obfuscated for political gain.

The writer is a business strategist and entrepreneur

moazzamhusain@gmail.com

Twitter: @moazzamhusain

Published in Dawn, September 16th, 2014