The government of Pakistan response on ADB observations issued on Friday revealed that the report did not discuss the loss to the economy suffered in particular by the load shedding, which according to certain estimates is in the vicinity of Rs 219 billion per annum as far as industrial sector is concerned with the loss of 400,000 jobs and exports worth Rs 75 billion.
The report does not take into account international practices in power acquisition programs in emergency situations, adverse impact of crises in international and domestic financial markets on investment in power sector especially GoP IPP program.
The report does not highlight the role of the regulator in the approval of the tariffs for the RPP Program reduction in the liabilities of Buyer/GOP with the withdrawal of the SBLC of rental charges for the contract term acknowledge allocation of risks to seller with respect to site, fuel, guaranteed availability, and financing elimination of concessions in relation to restoration events, foreign exchange rate, convertibility, and project financing concessions acknowledge that these are fixed price contracts.
Responding to the ADB report on procurement process the government has commented that the if NTDC/CPPA is buyer the RPP would require a separate generation licence, incorporation of special purpose company, conduct of bankable feasibility studies, consents from various governmental agencies, defeat of purpose of RPP induction for bringing in emergency power, regulator has accepted arrangements with GENCO as buyer of electricity from the RPPs, regulator has approved gross tariff of Gencos (including RPP Tariff) at which the electricity would be provided to the NTDC and therefore there would be no contractual or performance issues between the Gencos and NTDC.
Another objection raised by the ADB the Ministry of Water and Power response has said that the GOP's financial difficulties which constrained it to substitute Standby Letter of Credit (SBLC) with GOP guarantee and higher down payment. The annual fee payable to the banks (7-10 percent) for confirmation of SBLC is a non-recoverable expense while increase in advance payment has reduced the subsequent contractual payment liabilities of the buyer as such payments are recovered through monthly rental charges.
The confirmed SBLC of Rental Charges in US$ over a period of 5 years is a very strong financial instrument equivalent to cash in hand of RPP against which it could raise (100 percent) debt financing as opposed to the offered GOP Guarantee along with (14 percent) down payment.
In view of high exposure of banks in the power sector, liquidity problems in the financial markets and circular debt, the banks are not willing to provide debt financing to the RPPs. The substitution of the SBLC with the GOP Guarantee has actually adversely affected project risk profile against the sponsors to the protection of GOP.
The SBLC is encashable over the counter without any contestation by the buyer without any time delays whereas in case of GOP Guarantee at least 45 days are required for the payments or upon full and final determination by arbitral tribunal in case dispute is raised by the GOP.
The higher upfront payment to the seller were secured through an advance payment guarantee of higher equivalent amount in favour of the buyer and therefore there were no change in the net financial position of the parties and that is why higher upfront payments were not considered even by the ADB in their financial model.
The change in down payments after receipt of bids is considered material or adverse only if it impacted the financial, equity or project risk profile, which is not the case. The changed conditions were in favour of the buyer rather then the seller and did not impact either the selection criteria or award criteria that could have obligated re-tendering.
The government further observed that the changed conditions were adverse to the sellers and any re-tendering most likely would have resulted in lesser interest from the bidders and higher tariff quotes apart from delays.
In response to another ADB objection, the government stated that the upfront payments are mobilisation advances for development, engineering, procurement and construction stages of the contract, which are common place in all standard EPC contracts for the IPPs.
In case of abandonment of the project buyer has the right to terminate the contract and recover outstanding amounts due to it as a secured party from the sale of plant and machinery. The conversely substitution of SBLC with the GOP Guarantee has adversely affected the ability of the sponsors to raise debt financing for the project.
Responding to objection that Gencos did not obtain its approval for the terms of the Contract from Nepra, Ministry of Water and Power observed that the Nepra Act and Rules do not envisage any upfront approval for the terms of the contract entered by the Gencos with third parties for additional capacity. The power acquisition program for the RPP was duly authorised by the ECC and Cabinet, where Nepra was consulted.
Terms and conditions of the rental contracts were ultimately derived from the RFP, which was again approved by the ECC. The requirement of an ICB as preferred mode for acquisition of the RPPs was recommended by Nepra.
About the provision of Fuel Payment LC prioritises RPPs over IPPs, the ministry said that IPPs are at advantageous position because their cost for financing fuel inventory/working capital required for the purchase of the fuel is borne by the power purchaser and 75 percent of their capacity payments are paid in advance.
They can invoke force majeure for non availability of fuel and receive capacity payments from power purchaser. The payment demand against Fuel Payment LC cannot be enforced before forty five (45) days from the date of invoice. The fuel Payment LC is not the primary or unconditional instrument and is a secondary or contingent liability. The assurance of fuel in the form of Fuel Payment LC is essential if RPPs are to operate as must run plants as recommended in the ADB report.
To another objection, the government said that the commercial operations will not be accepted and agreed by the buyer unless seller achieves the contract capacity and penalties will be imposed on the seller. The rental charges payable to the seller are revised downwards on pro rata basis commensurate with lesser contracted capacity. If the Contract Capacity turns out to be lower than ten percent (10 percent) than the buyer has the right to terminate the contract without any payment of termination charges.
Most of the payments originate from the buyer towards seller during plant operations and therefore security from seller is not warranted. The buyer is treated as secured party pursuant to contract in the event that any outstanding liquidated damages are not paid by the seller. The buyer shall have security in the form of payables for at least sixty (60) days rental and fuel payments (equivalent to US $45 million for a typical 200 MW RPP), which can be set off against operational failures.
The actual availability is calculated on an annual basis and if availability drops seller pays the penalties through a credit note. The dishonouring of credit note is a criminal offence. The equipment cannot be removed from site because buyer is consignee and its prior permission is required.
Strongly responding to another ADB observation, the ministry said that the references to the returns or evaluation of profits are inappropriate, statistically inaccurate and totally skewed. The project costs vary with different specifications, site characteristics, and time period etc. The source of the figures in the ADB report are undisclosed and are unsafe to rely.
The bidding was not carried out on cost plus basis rather through evaluation of lowest tariff proposed by the bidders. The fixed & variable O&M, financing costs, working capital financing costs, return on equity, insurance, have not been fully accounted for in calculations. The calculated profits such as (-2 percent or 3 percent) are not commercially practicable and nor tenable in any context.
About the ADB objection that the RFP or RSA do not refer to Import Policy Order 2009 which provides mechanism to ensure certain minimum standards for import of second hand plant & equipment, the ministry said that that the rental contracts are governed by the laws of Pakistan including Import Policy Order 2009.
The Import Policy Order incorporates implementation of specialised third party pre-shipment inspection regime for specified old and used plant and machinery with adequate safeguards for ensuring serviceability and significant residual value.
Reacting to the ADB observation on the inconsistencies in the terms of contract, Ministry of Water and Power stated that different contracts signed pursuant to different Request for Proposals and governed by terms and conditions contained therein.
Each successive round of bidding process was an attempt to overcome impediments faced in previous biddings and bring improvements. The bids floated by Pepco for PPR Guddu, Young Gen, and Techno E were site specific with fixed capacities and specific Performance Guarantee amounts specified Bids floated by PPIB included Performance Guarantee (@US $5000/MW). The penalties specified in such contracts were in accordance with the terms of respective RFPs.
The reasons for variations are logical as monthly rental charges vary from project to project based on the tariffs quoted in the bids types of securities are available with buyer to ensure commercial operations on target date.
The prime security is Advance Payment Guarantee, which is encashable to recover the advance payments made in case the Target Commercial Operations Date is not achieved by the seller. Secondly, Performance Guarantee which is encashable in full amount upon delay in the achievement of Target.
Thirdly, penalties are imposed in specified amounts recoverable from monthly rental charges. Provision for renegotiations do not impose any binding obligation on the parties to arrive at concluded settlement. The Mean Site conditions do not affect RFO based engines.
Mean Site Conditions for gas projects are matching with existing IPPs located in the vicinity (mean site temperature for Guddu RPP is matching with Liberty Power Plant and of Naudero RPP matching with Foundation Power). The rental contracts do not provide for adjustments of output with mean site conditions after commissioning.
The ministry further clarified that prior to May 2008, bidding was conducted in line with the ECC decision of February 15, 2008. The ICB for RPPs conducted after May 2008 were in accordance with framework approved by Federal Cabinet on May 14, 2008.
The ADB report has negated the general impression that the tariff of the rental projects is 45 percent higher than the IPPs tariff. Average tariff of fourteen (14) RPPs is approximately on average two (2) cents higher than comparable IPPs tariff at 60 percent plant factor (actual contemplated dispatch regime of rental plants will bring this differential down). The Nepra approved tariffs used for comparison are based on prices and values of at least 1-2 Years earlier than the date of bidding for the RPPs.
Additional power through Mangla raising can only be obtained after the reservoir is completely filled. However, as per studies the reservoir is filled after every year. As such, this power may not be counted upon on regular basis. Consequently this additional 18 percent energy (and not MW) will only be available during high-water years. Consequently thermal base load power generation of the needed capacity has to be created/acquired.
The expedite work on Loss Reduction Program and Genco Plats Upgrade. The Pepco is already vigorously implementing the program - however, financial constraints are a big impediment. The Pepco is vigorously implementing the program and even DSM Advisors under the ADB program have already been put in place in four of the Discos. The part resolution of the circular debt by the GoP in 2009 and 2010 has improved the situation and now no MW are unavailable - except 500 MW on the average, because of the non availability of gas, the Ministry of Water and Power added.