Big hydropower contract rules being relaxed

ISLAMABAD: The government has decided in principle to relax conditions for awarding contracts to international companies for big hydropower projects, by doing away with the international competitive bidding (ICB) required under the existing procurement rules.

A senior government official told Dawn that from investors’ point of view the procedure for taking up mega projects for investment on build, own, operate and transfer (BOOT) basis involved a lot of time and money for evaluating data relating to a project, site visits and formation of joint venture companies. For this reason, renowned private investors are hardly interested in taking part in the ICB.

“They are not interested to invest time and money without having firm commitment for the business,” he said.

As a result, the share of hydropower in the overall electricity supply which was 70 per cent in the early 1980s has now declined to less than 30 per cent, putting heavy reliance on imported furnace oil costing over $10 billion per annum and resulting in unaffordable electricity tariff. The country can produce up to 40,000MW of electricity through simple run-of-the-river projects at about 8 cents per unit compared with 15-18 cents per unit of thermal power.

The official said that fresh guidelines had been prepared by an inter-ministerial committee for a fast-track induction of hydropower projects by attracting investment in this indigenous and cheaper source of power generation.

“The objective is to ensure quick award of projects as far as possible to attract world renowned companies in the hydropower business through BOOT where money from the government is involved and a private investor is ready to arrange financing and get return on the equity.”

The revised guidelines have been forwarded to the Economic Coordination Committee (ECC) of the cabinet for consideration and approval, he said.

Under the guidelines, the government will invite early next year (January 2011) proposals for development of hydropower projects in all four provinces and Azad Kashmir on the BOOT basis. After completion of 25-50 years of operations, the projects would stand transferred to regional governments at a notional price of Re1.

For projects whose feasibility studies have been completed, the sponsors will enter into implementation, power purchase and water use agreements with the government and sell electricity at a tariff to be determined by the National Electric Power Regulatory Authority (Nepra).

The projects where feasibility studies are not available, the sponsors will conduct bankable studies under monitoring by a panel of experts and then enter into implementation, power purchase and water use agreement with respective governments provided these projects are linked to the national grid.

In both cases, Nepra will approve a two part tariff involving cost of geological conditions, the cost of civil works and resettlement cost that could be reopened for final approval in case of variation on ground realities.

Besides, the sponsors will also be entitled to a capacity purchase price comprising fixed payments like debt servicing, rate of return, insurance and fixed operation and maintenance expenditure and the energy purchase price comprising water use charges and variable operational and maintenance cost.

The power purchaser (the government or the central power purchasing agency) will bear the hydrological risk, meaning that in case the plant is there but water is not available, the project company will get the capacity payment price of the tariff based on assumed generated energy concept. However, the government will not guarantee the risk and cost of the feasibility study even if the study is approved by a panel of experts. The sponsors will have to ensure equity participation of 20-30 per cent for financing the project and arrange the remaining amount through debt for which the tariff adjustment will be allowed against US dollar, Japanese yen, pound sterling and euro. The sponsor will also be required to hold at least 20 per cent equity in the project for at least first six years of project commissioning.

The sponsor will be charged a processing fee of $10,000 by the government to consider the request and, if approved, will be charged at $1000 per MW as performance guarantee for issuance of letter of intent to go ahead with the project feasibility and agree to an implementation schedule including a request for tariff determination.

An additional $5000 per MW performance guarantee will also be charged before the issuance of letter of support (LOS) that would enable the sponsor to achieve financial close within 12 months.

The sponsors will be required to start construction activities within 72 months after the announcement of the financial close and start commercial operations in another 74 months. The government believes that about 12-24 months could be saved by avoiding international competitive bidding.