Hydropower generation and water sector projects are being put on a strategic path to rope in shy private investors.

The new draft policy paradigm, now in its initial phase, also supports net hydropower profit payments to all regional and provincial stakeholders, where these natural resources are located.

The private sector that has so far been reluctant to invest in long-gestation projects — having burnt its fingers in the past —would now be offered comfort through collaboration with the government, or its entities (such as Wapda).

The private sector that has so far been reluctant to invest in long-gestation projects would now be offered the option of collaboration with the government or its entities

A long standing grievance of the Khyber Pakhtunkhwa province over Net Hydropower Profit (NHP) has been effectively addressed through a backlog settlement of more than Rs75bn (being charged to consumers through the power tariff).

Similarly, an agreement has been reached with Punjab for the payment of Rs82bn by Wapda, on account of NHP for the Ghazi Barotha Hydropower Project, due since 2005. This will raise consumer tariff by 33paisa per unit countrywide.

Of this, Rs38bn would be settled upfront and the remaining Rs44bn would be paid in the next three fiscal years at a rate of about Rs14.5bn per year. Wapda will continue to pay Rs9.5bn to Punjab every year for the productive life of the project. Punjab would get Rs1.10 on each unit of electricity produced by the GBHP — the same rate paid to KP for Tarbela.

Two other stakeholders — Gilgit-Baltistan and Azad Jammu and Kashmir — however may not benefit equally despite being major sources of hydropower, because of constitutional reasons, but may be compensated on the basis of equity.

Taking a leaf out of a draft policy for the development of mega hydropower projects, which is expected to be formally approved by the Council of Common Interest (CCI) in its coming meeting, the prime minister recently agreed, in principle, to divide the Diamer-Bhasha Multipurpose Project in to two.

This would allow that the dam portion of the project to be funded through the Public Sector Development Programme (PSDP) allocations and Wapda generated resources, while financing for power generation will be arranged on a commercial basis through Wapda or by leasing its existing projects.

The policy is drawn from on past experience when private investors would lose their breath with time consuming preparatory work, which in addition to feasibility studies and engineering design, involved other legal and regulatory formalities like tariff approvals and competitive bidding.

This led to capacity addition of over 7423MW of thermal power plants by the private sector between 1995 and 2015 against only 84MW of hydropower, despite the later being cleaner and cheaper.

On top of that, multilateral lenders had their own policies and priorities for financing development projects ‘in different regions’ along with sensitivity towards dislocating and disturbing people, loss of heritage and environmental issues.

A total of seven mega projects of 24,200MW have now been identified for development on the Indus Cascade through the new initiative and more projects will follow.

The draft policy offers two options for private sector participation. Wapda will complete the preliminary work and get a feasibility stage, upfront tariff, from the regulator at attractive commercial terms before handing over the project to private investors through competitive bidding.

Competitive bidding, however, would not be based on the lowest cost and tariff because experience suggests that Chinese companies engaged in cut throat competition to secure projects at 20-25pc lower costs than engineering estimates and subsequently delayed projects or created problems of cost escalation.

Therefore, under one option Wapda will complete a detailed engineering design by consulting firms of international repute, carry out environment impact assessment (EIA), acquire land and ensure resettlement of any to be affected persons, construct roads and infrastructure, put in place a power evacuation system, get Nepra approval on upfront tariff and engage an international panel of experts (IPE) before offering the project for competitive bidding.

The IPE would shortlist bidders on the basis of technical and financial strength who would be asked to compete on the basis of early completion of the project against a bank guarantee. Wapda would finance the IPE for supervising the construction. The actual cost would form the basis of shareholding between Wapda and the investor.

Under this option, major projects like Dasu 5,400MW, Diamer-Bhasha 4,500MW and Bunji 7,100MW have been selected and would be offered to the private sector in the first stage. For this, the construction of the main dam of the Diamer-Bhasha, and its land acquisition, would be completed by Wapda while its power generation would be offered for private-public partnership.

The second option would be applied to projects like the 4,000MW Thakot and 2,400MW Pattan where the detailed engineering designs was not ready as yet. The preference for the bidder would be on the basis of early project completion and maximum energy output.

In this case as well, the government or Wapda would complete the EIA, land acquisition and resettlement, development of roads and the power evacuation system before offering the project for bidding.

The successful bidder would be selected by IPE on the basis of technical experience and financial strength against a bank guarantee to ensure committed performance targets.

In both cases, the investor would have the incentive to complete the project before the deadline and secure additional revenue due to early power sale.

They would be guaranteed additional years of operations with a higher return on equity while providing saving of interest during construction and cost savings.

Exemptions in duties and taxes during construction phase, income tax holiday for initial five years of operation will be offered to private investors.

Published in Dawn, Business & Finance weekly, December 12th, 2016