THE Indus basin is a strength that Pakistan is fortunate to have. However, unfortunately it failed to play to its strengths post 1985. In this context this article looks at hydroelectricity and critiques certain aspects of the latest policy for mega hydropower projects that is under various stages of approval.

Hydel power is the most commonly used resource for generating renewable energy worldwide. Considering that worldwide technical potential for hydroelectricity is estimated at 16,000TWh/year, hydro potential is still underutilised though gaining traction due to renewed push towards green energy. Worldwide hydro generation capacity has increased by 20pc over 2010 to 2014 and now stands at 1,061GW.

In the not too distant past, Pakistan was producing more than 60pc of its electricity through hydel power as opposed to only 31pc currently. Apparently our previous economic managers failed to appreciate the benefits of hydroelectricity as they allowed its share to decline in the overall electricity mix. The cost of generation is less than Rs2/kWh for hydroelectricity on average, as compared to approximately Rs12/kWh for Gencos and Rs16/kWh for IPPs.

Given the unique Indus basin, Pakistan’s identified hydro potential is 40,000MW between Shyok project and Kalabagh, whereas the installed nameplate capacity is only 7,116MW as of 2014. Nepra in its ‘State of Industry Report 2014’ states: “It is a drawback of the country that its power production is dominated by thermal power plants running on oil and gas.’ The costs of generation provided above clearly state the case for further hydel power generation capacity.

However, acute power shortages have made us look at all avenues of power generation including the cost-effective hydroelectricity and quite a number of mega projects are in the pipeline including extension and refurbishment of existing units. Considering that the hydro projects are the largest power generation units in the world, it makes sense to utilise the economies available in the Indus basin to plug the capacity shortages along with improving the transmission system.

A majority of mega infrastructural projects tend to suffer from cost escalations and time delays, however, nowhere in the world have project initiators stopped taking cost perspectives in offer decisions

In a scenario where developments such as Tarbela IV and V, Mangla dam raising, Dasu and Daimer Basha are taking place, a positive step is that a new government policy for mega hydropower projects is being introduced to initially develop 24,200MW hydropower projects through collaboration with the private sector and has potentially identified seven projects initially. The policy has been in the works for more than a year and still has a few more hurdles to negotiate.

At a higher level, the policy seems to be aimed at offering hydel projects to the private sector, mainly Chinese investors on attractive terms.

Interestingly, the criterion for bidder selection is based on an early completion timeframe for projects which already have detailed engineering designs. Projects that do not have detailed engineering designs will be offered on the basis of completion timeframe and maximum energy generation as per proposed engineering design.

The policy also offers the regular tax incentives however as per information available, it totally ignores the cost component for project award. This begs some serious questions:

Are we developing a policy that will not take the cost of the project into consideration, especially since Wapda, an organisation run on taxpayers’ money, will be a shareholder along with the private bidder in the project? Could this lead to sub-optimal utilisation of resources in a financially stretched economy?

The apparent reason given for the above timeframe-based criterion is that during cost-based bidding, companies tend to undercut each other aggressively creating cost escalation and project delays later on which hamper project development.

On the other hand, the same argument can also be applied to companies underbidding each other in terms of project completion timeframe which can lead to project delays and consequent cost over-runs later on. For instance, one could argue that companies will undercut each other by 20pc on timeframe as compared to engineering estimates and then run into project delays leading to cost escalation.

It has been established by numerous international studies that majority of mega infrastructural projects tend to suffer from cost escalations and time delays, however, nowhere in the world have project initiators stopped taking cost perspectives in offer decisions. It is a fallacy on part of our economic managers to assume that issues of cost escalation and time delays will simply vanish by ignoring them in the decision-making matrix.

Nassim Taleb argues that delivery of any large project is a high risk, stochastic activity exposed to black swans. On the contrary, we think of this world in Newtonian, deterministic terms where things are under our control and can go as per plan. They do not. Latest management science proposes solutions to such problems while acknowledging the associated risks and uncertainty.

On a positive note, we could incorporate the following recommendations in the mega hydropower project policy to improve its effectiveness and chances of success:

• Acknowledge cost escalation and time delays in mega projects and look towards best practices being developed internationally to manage mega infrastructural projects.

• Incorporate a holistic decision making matrix for partner selection based on cost competitiveness, timeframe, risk allocation and energy output

*Introduce latest management tools available for dealing with uncertainty such as Bayesian/ Monte Carlo techniques and probabilistic modelling to ensure proper bidder selection, cost estimation and project management

• Ensure regular and consistent performance monitoring, reporting and information sharing

• Follow an equivalent criteria for distribution of net hydel profits

mustafa.amjed@gmail.com

Published in Dawn, Business & Finance weekly, May 16th, 2016