Sie sind auf Seite 1von 110
Information Memorandum February 2010
Information Memorandum
February 2010
Contents 1. EXECUTIVE SUMMARY 11 1.1 Transaction Overview 11 1.2 Investment Environment in Pakistan 12

Contents

1. EXECUTIVE SUMMARY

Contents 1. EXECUTIVE SUMMARY 11 1.1 Transaction Overview 11 1.2 Investment Environment in Pakistan 12 1.3

11

1.1 Transaction Overview

11

1.2 Investment Environment in Pakistan

12

1.3

Pakistan Energy Sector Overview

13

1.3.1Power Sector

13

1.3.2

Regulatory and Institutional Framework

14

1.4 The Project

15

1.5 The Financials

16

2. TRANSACTION OVERVIEW

18

2.1 Introduction

18

2.2 Project Status

18

2.3 Current Status

19

2.4 Way Forward

19

2.5 Capital Structure

20

2.6 Communication with the Company

21

3. INVESTMENT ENVIRONMENT IN PAKISTAN

22

3.1 Introduction

22

3.2 Political Situation

22

3.3 Legal System

23

3.4 The Economy

23

3.4.1 Key Highlights of FY2009

24

3.4.2 Exchange Rate

25

3.4.3 Credit Rating

25

3.5 Capital Markets

25

3.6 Policy Incentives for Foreign Investors

27

3.6.1 Investment Incentive Package

28

3.6.2 Exchange Control

29

3.7

Tax Regimes

29

3.7.1 Tax Rates

29

3.7.2 Withholding Tax

30

ii

3.7.3 Inter-Corporate Dividend Tax 30 3.7.4 Unilateral Relief 30 3.7.5 Tax Treaties 31 3.7.6 Capital
3.7.3 Inter-Corporate Dividend Tax 30 3.7.4 Unilateral Relief 30 3.7.5 Tax Treaties 31 3.7.6 Capital

3.7.3 Inter-Corporate Dividend Tax

30

3.7.4 Unilateral Relief

30

3.7.5 Tax Treaties

31

3.7.6 Capital Gains Tax

31

4.

PAKISTAN ENERGY SECTOR

32

4.1

Energy Sector Overview

32

4.1.1 Oil

32

4.1.2 Gas

35

4.1.3 Coal

36

4.2

Power Sector

37

4.2.1 Installed Generation Capacity

37

4.2.2 Structure of Power Sector

38

4.2.3 National Transmission and Despatch Company

39

4.3

Independent Power Producers

41

4.3.1

IPP Fast Track Initiative:

43

4.4 RPPs

43

4.5 Power Sector Demand vs Supply Dynamics

44

4.5.1 Demand Patterns

46

4.5.2 Sector Demand

46

4.5.3 Regional Demand

46

5

POWER SECTOR REGULATION

47

5.1 Regulatory Framework

47

5.2 Provincial Representation at NEPRA

47

5.3 Institutional Framework

47

5.4 NEPRA’s Role and Responsibilities

48

 

5.5 Licenses

49

 

5.6 Tariffs

49

5.7 Transition to Competition

50

6.

THE PROJECT

51

6.1 Grange Power Limited

51

6.2 Objective of the Company

51

iii

6.3 The Project 52   6.4 Plant Site 52 6.5 Plant Capacity 53 6.6 Engineering
6.3 The Project 52   6.4 Plant Site 52 6.5 Plant Capacity 53 6.6 Engineering

6.3 The Project

52

 

6.4 Plant Site

52

6.5 Plant Capacity

53

6.6 Engineering Procurement & Construction Agreement

54

6.6.1

Layout Plant and Buildings

54

6.6.2Machinery and Suppliers

55

6.6.3 EPC Timeline

57

6.6.4 EPC Costs

57

6.7 Tariff Determination

59

6.8 Tariff Structure

60

6.8.1 Capacity Purchase Price

60

6.8.2 Energy Purchase Price

60

6.8.3 Tariff Adjustments to CPP Components

60

6.8.4 Adjustments to EPP Components

61

6.9 Taxes

61

6.10 Summary of Key Agreements and Contracts

62

6.10.1 Power Purchase Agreement

62

6.10.2 Implementation Agreement

63

6.10.3 Fuel Supply Agreement

65

6.10.4 Engineering & Procurement Contract and Construction Contract

66

6.10.5 Project and Construction Management Contract

67

6.10.6 Operation and Maintenance Contract

68

6.10.7 Local Loan Agreement

68

7. PROJECT SPONSORS AND CONTRACTORS

70

7.1

Ownership and Control

70

7.1.1Shareholder Control

70

7.1.2Board of Directors

70

7.2

Shareholder Profiles

71

7.2.1Mr. Assad Sheikh

71

7.2.2Mr. Shuja Hussain

72

7.2.3Mr. Amjad Faquir

72

iv

7.2.4Grange Holdings Group 74 7.2.5Albario Engineering Pvt. Ltd 78 7.2.6China National Machinery &
7.2.4Grange Holdings Group 74 7.2.5Albario Engineering Pvt. Ltd 78 7.2.6China National Machinery &

7.2.4Grange Holdings Group

74

7.2.5Albario Engineering Pvt. Ltd

78

7.2.6China National Machinery & Equipment Import & Export Corporation

80

7.3

Contractor and Consultant Profiles

82

7.3.1Korea Plant Service and Engineering Co Ltd

82

7.3.2Scott Wilson

85

7.3.3AbacusConsulting

87

7.3.4Haidermota &

89

8 FINANCIALS

91

8.1 Overview

91

8.2 Tariff Determination

91

8.3 Technical and Operational Assumptions

92

8.3.1Project Cost

92

8.3.2Capital Structure

92

8.3.3Capital Expenditure Plan

92

8.3.4Project Financing

93

8.3.5Operation and Maintenance Costs:

93

8.3.6Projected Generation

94

8.3.7Fuel Consumption Rate

94

8.3.8Fuel Cost

95

8.3.9Insurance

95

8.3.10 Taxation

95

8.3.11 Customs Duties

95

8.3.12 PPA Letter of Credit

96

8.3.13 Indexation

96

8.4

Financial Analysis

96

9 RISK MITIGATION

98

APPENDIX A: DETAILED TARIFF SCHEDULE

102

APPENDIX

B:

FINANCIAL MODEL

103

v

ABBREVIATIONS AND GLOSSARY OF TERMS Abbreviation Description “Abacus” AbacusConsulting Technologies
ABBREVIATIONS AND GLOSSARY OF TERMS Abbreviation Description “Abacus” AbacusConsulting Technologies

ABBREVIATIONS AND GLOSSARY OF TERMS

Abbreviation

Description

“Abacus”

AbacusConsulting Technologies (Private) Limited Albario Engineering (Private) Limited Arif Habib Bank Limited Azad Jammu and Kashmir Attock Refinery Limited Barrels per day Board of Investment Balance of Plant British Petroleum Basis points British thermal unit Compound Annual Growth Rate China East Resource Import and Export Corporation Cubic foot or cubic feet Capital Gains Tax Chashma Nuclear Power Plant China National Machinery and Equipment Import and Export Corporation Commercial Operations Date EPC Contractors referring to CMEC and CERIECO together as E&P Contractor and Construction Contractor, respectively Consumer Price Index Capacity Purchase Price Central Power Purchasing Agency Commission of Social Care Inspection, in UK Government owned Distribution Company unbundled from WAPDA Debt Service Coverage Ratio Debt Service Reserve Account Engineering and Procurement Expression of Interest Environmental Impact Assessment Engineering, Procurement and Construction Energy Purchase Price Federal Board of Revenue Federal Bureau of Statistics Foreign Direct Investment The execution of financing documents and equity commitments that evidence sufficient funding to completely construct and commission the Project. Fuel Supply Agreement Gross Domestic Product Government owned Generation Companies unbundled from WAPDA Grange Holdings Group Government of Pakistan Grange Power Limited Gigawatt

“AEPL”

“AHBL”

“AJK”

“ARL”

“bbl/d”

“BOI”

“BOP”

“BP”

“bps”

“Btu”

“CAGR”

“CERIECO”

“cft”

“CGT”

“CHASNUPP”

“CMEC”

“COD”

“Contractors”

“CPI”

“CPP”

“CPPA”

“CSCI”

“DISCO”

“DSCR”

“DSRA”

“E&P”

“EOI”

“EIA”

“EPC”

“EPP”

“FBR”

“FBS”

“FDI”

“Financial Close”

“FSA”

“GDP”

“GENCO”

“GHG”

“GoP”

“GPL”

“GW”

vi

Abbreviation Description “GWh” “HHV” “HSD” “HSE” “HSFO” “IA” “IDA” “IDC” “IM”
Abbreviation Description “GWh” “HHV” “HSD” “HSE” “HSFO” “IA” “IDA” “IDC” “IM”

Abbreviation

Description

“GWh” “HHV” “HSD” “HSE” “HSFO” “IA” “IDA” “IDC” “IM” “IMF” “Income Tax Ordinance” “IPP” “IRR” “ISO”

Gigawatt hours Higher Heat Value High Speed Diesel Health, Safety and Environment High Sulphur Fuel Oil Implementation Agreement Initial Depreciation Allowance Initial Dependable Capacity Information Memorandum International Monetary Fund Income Tax Ordinance, 2001 as updated in October 2009 Independent Power Producer Internal Rate of Return International Organization of Standardization, referring in the IM to standard

“KANUPP”

plant capacity under specific atmospheric conditions such as ambient temperature (15 0 C), altitude (sea level), pressure (1 bar). Karachi Nuclear Power Plant

“KESC”

Karachi Electric Supply Corporation

“kg”

Kilogram

“KIBOR”

Karachi Interbank Offered Rate

“KPS”

Korea Plant Service and Engineering Company Limited

“KSE”

Karachi Stock Exchange

“KSE-100”

A stock index used as a benchmark to compare prices on KSE over a period of

“kW”

time. Kilowatt

“kWh”

Kilowatt hour

“LC”

Letter of Credit

“LHV”

Lower Heating Value

“LIBOR”

London Interbank Offered Rate

“LOI”

Letter of Interest

“LOS”

Letter of Support

“LPG”

Liquefied Petroleum Gas

“Ltd”

Limited used alone to indicate a public limited company in Pakistan

“MGCL”

Mari Gas Company Limited

“MMCF”

Million Cubic Feet

“MW”

Megawatt

“MWh”

Megawatt hours

“NBP”

National Bank of Pakistan

“NEPRA”

National Electric Power Regulatory Authority

“NHBC”

National House Building Company

“NEQS”

National Environmental Quality Standards

“NOC”

No Objection Certificate

“NPCC”

National Power Control Center

“NPV”

Net Present Value

“NRL”

National Refinery Limited

“NTDC”

National Transmission and Despatch Company

vii

Abbreviation Description “O&M” “OCAC” “OGDC” “OGRA” “OMC” “PAEC” “PARCO” “PEPCO”
Abbreviation Description “O&M” “OCAC” “OGDC” “OGRA” “OMC” “PAEC” “PARCO” “PEPCO”

Abbreviation

Description

“O&M” “OCAC” “OGDC” “OGRA” “OMC” “PAEC” “PARCO” “PEPCO” “PES” “PKR” “plc” “PME” “Power Purchaser” “PPA” “PPIB” “PPL” “PRL” “PSO” “Pvt. Ltd” “PwC” Consulting “RFF” “RFO” “ROA” “ROE” “ROEDC” “RPP” “SBP” “Scott Wilson” “SLCF” “SNGPL” “SSGC” “Tariff Rules” “Tcf” “TFF” “TIE” “UK” “USA” “USD” “WAPDA” “WPI”

Operations and Maintenance Oil Companies Advisory Committee Oil and Gas Development Company Limited Oil and Gas Regulatory Authority Oil Marketing Company Pakistan Atomic Energy Commission Pak Arab Refinery Corporation Pakistan Electric Power Company Pakistan Engineering Services Pakistan Rupee Public limited company in UK Plant Machinery and Equipment NTDC through CPPA Power Purchase Agreement Private Power Infrastructure Board Pakistan Petroleum Limited Pakistan Refinery Limited Pakistan State Oil Company Limited Private Limited used with a private limited company in Pakistan PricewaterhouseCoopers Consulting Running Finance Facility Residual Fuel Oil also referred to as Furnace Oil Return on Assets Return on Equity Return on Equity During Construction Rental Power Producer State Bank of Pakistan Scott Wilson Group plc Standby Letter of Credit Facility Sui Northern Gas Pipelines Limited Sui Southern Gas Company NEPRA’s Tariff Standards and Procedures Rules, 1998 Trillion cubic feet Term Finance Facility Times Interest Earned United Kingdom United States of America United States Dollar Water and Power Development Authority Wholesale Price Index

viii

IMPORTANT NOTICE This confidential Information Memorandum (or “IM”) has been prepared by AbacusConsulting ( the
IMPORTANT NOTICE This confidential Information Memorandum (or “IM”) has been prepared by AbacusConsulting ( the

IMPORTANT NOTICE

This confidential Information Memorandum (or “IM”) has been prepared by AbacusConsulting (the “Advisor”) solely for information purposes from materials provided to the Advisor by Grange Power Ltd (the “Company”) and their representatives. Other sources of information are largely secondary in nature, including published data from PPIB, WAPDA and other public sources. No surveys have been conducted to validate the information gathered from secondary sources, and no formal due diligence has been conducted to verify information provided by the designated representatives of the Company, which is assumed to be correct.

This Information Memorandum may be distributed by the Company or its designated representatives solely for the use of interested investors and financiers to determine whether they would like to proceed with further investigation into the Project.

Use of this IM is governed by the terms of the Confidentiality Agreement executed with each potential investor, which strictly limits the circulation and copying of the information contained in this document. This IM may not be reproduced or used without the prior written approval of the Company or the Advisor for any purpose other than the evaluation of the Project by the recipient.

The information contained in this Information Memorandum has been prepared in good faith to assist the recipient in making their own evaluation of the transaction and does not purport to contain all the information that the recipient may desire. In all cases, the recipient should conduct their own investigation and analysis of the Project and of the data in this IM. The Advisor does not assume any responsibility for independent verification of any of the information contained in this IM, including any statements about the prospects of the Project contained herein. Neither the Company nor the Advisor makes any representation or warranty (express or implied) as to the accuracy, fairness or completeness of this IM or the information contained in, or omitted from, this document. Each expressly disclaims any and all liability for representations or warranties (express or implied) contained in, or omitted from this IM or any other written or oral communications transmitted or made available to the recipient in the course of its evaluation of the transaction.

This Information Memorandum does not constitute or form part of any offer for sale of the equity interest, nor does it constitute the basis of any contract which may be concluded for such a sale. Only those particular representations and warranties, if any, which may be made to a party in a definitive written agreement regarding the transaction, when, as and if executed, and subject to such limitations and restrictions as may be specified in that agreement, will have any legal effect.

This Important Notice also applies in its entirety to any supplements issued subsequently to this IM, whatever form those supplements might take. Without limiting the generality of the foregoing, each potential investor agrees that neither the Company nor the Advisor has any liability in relation to use by any person of the financial projections or other analysis based on the financial model prepared for the transaction.

ix

The statements, financial estimates and projections in this Information Memorandum and other information provided in
The statements, financial estimates and projections in this Information Memorandum and other information provided in

The statements, financial estimates and projections in this Information Memorandum and other information provided in connection with this reflect various assumptions made by the Company concerning anticipated results and are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company. Accordingly, no representations are made by the Company or the Advisor and there can be no assurance that such statements, estimates and projections will be realized. The actual results will likely vary from the forecast, and those variations may be material. Neither the Company nor the Advisor makes any representations as to the accuracy or completeness of such statements, estimates and projections or that any forecasts will be achieved.

By accepting this Information Memorandum, the recipient acknowledges and agrees to abide by the statements made in this Important Notice with respect to the confidentiality of information in the IM and the constraint on reproducing this IM, in whole or in part. Further, by accepting this Information Memorandum, the recipient shall be deemed to have agreed to the disclaimers made by the Company and the Advisor in this Important Notice, and to have waived, to the fullest extent permitted by law, any and all claims against the Company and the Advisor or any of their directors, agents, advisers, officers or employees, in relation to any matters covered by the disclaimers.

This Information Memorandum and any other information provided in connection with this should not be construed as the giving of investment advice by the Company or the Advisor. All information contained in the IM relating to the Company originates from the Company.

This Information Memorandum and the Project as a whole have been prepared in compliance with the laws of Pakistan. Investors subject to laws of other countries must comply with such relevant laws. Investors with operations, interests or ownership in other countries should seek their own legal advice to ensure they remain in compliance with their respective laws in relation to this IM and the Project.

The Company and the Advisor reserve the right, without prior notice, to change the procedure and process for the investment, or delay or terminate the same, or to terminate discussions with any potential investor, at any time.

This Important Notice also applies in its entirety to any electronic copies or information transmitted over the internet.

x

1. EXECUTIVE SUMMARY

1.

EXECUTIVE SUMMARY

1. EXECUTIVE SUMMARY
1. EXECUTIVE SUMMARY

This Information Memorandum has been developed to assist potential investors and financiers in making a decision towards investing in Grange Power Limited.

1.1 Transaction Overview

Grange Power Limited (“GPL”) is a public limited company based in Pakistan, established with the objective of setting up a state-of-the-art power generation plant in Arifwala, Pakistan, with a gross ISO capacity of 163.35 MW. The IPP is being developed under the Government’s ‘Fast Track’ initiative which allows it to pass certain otherwise necessary procedural steps and achieve completion in a much shorter time period.

The Project is at an advanced preconstruction stage: the land has been acquired, tariff determined by NEPRA (at US¢ 12.4778per kWh), Generation License and other necessary approvals obtained from NEPRA and various government departments. On the other hand, EPC agreement has been signed with CMEC and CERIECO with contractual negotiations at the final stage; and other contracts also at advance stages of negotiation.

The Management of GPL is currently in the process of organizing the Performance Guarantee, subject to detailed discussions with its lenders following which the LOS shall be issued for the Project by the PPIB. The draft PPA and IA have been provided to GPL for review and expected to be signed in June 2010, along with the FSA which is being negotiated with PSO. Negotiations are underway with a local bank to arrange syndicated project funding for the onshore debt component. Financial Close is expected by July 2010. Commencement of civil works is expected in June 2010 with the COD expected in August 2012.

The total project cost is estimated to be approximately USD 218 million, of which 25 percent or about USD 54 million is planned as equity and the remaining USD 164 million shall be arranged as long term loan. The major shareholder in GPL is Grange Holdings Group which currently holds 96 percent of the total number of shares outstanding. The remaining 4 percent are equally held by Albario Engineering (Pvt.) Ltd, Mr. Shuja Hussain, Mr. Assad Sheikh and Mr. Amjad Faquir.

The EPC and equipment costs together constitute about 75 percent of the total project cost or USD 164 million. Of this, USD 28 million is estimated as the onshore component and is planned to be arranged through local banks, whereas the offshore cost of USD 136 million shall be organized through foreign banks and financial institutions.

11

1.2 Investment Environment in Pakistan Pakistan is the sixth most populous nation in the world,

1.2 Investment Environment in Pakistan

1.2 Investment Environment in Pakistan Pakistan is the sixth most populous nation in the world, with

Pakistan is the sixth most populous nation in the world, with an approximately 164 million inhabitants (2009 estimates).It is strategically located in the South Asian corridor, bordering India, China, Afghanistan, Iran and the Arabian Sea.

The Government of Pakistan is in the process of political, economic and institutional reform, with a view to strengthening the economy of the country, eliminating corruption from the government and improving the investment environment in Pakistan.

The following table summarizes Pakistan’s economic performance over the past 5 years:

Table 1.1: Pakistan Economic Indicators

Economic Indicator

FY05

FY06

FY07

FY08

FY09*

Actual

Actual

Actual

Actual

Provisional

Macroeconomics Real GDP Growth Agriculture Growth Manufacturing Growth Population (Million) Per Capita Income( USD) Financial Conditions External Debt Outstanding ( USD Billion) Debt Servicing as % of GDP Forex Reserves ( USD Billion) Budget Surplus/ (Deficit) (USD Billion) Inflation (CPI) Exchange Rate (PKR : USD) KSE-100 Index (as of yearend June 30) Trade Total Exports Current Price (USD Billion) Total Imports Current Price (USD Billion ) Export Growth Import Growth

9.0%

5.8%

6.8%

4.1%

2.4%

6.5%

6.3%

4.1%

1.1%

4.7%

15.5

10.0

8.4

4.8

(3.3)

151

153

156

159

163

733

833

925

1,042

1,046

34.04

35.68

37.36

46.3

50.1

4.7

4.8

3.8

1.1

0.8

10.9

13.1

12.9

15.8

11.4

(5,649)

(4,556)

(6,212)

(11,173)

(8,547)

9.3%

7.9%

7.7%

12%

22.3%

59.8

59.8

60.6

62.5

78.0

7450.12

9989.41

13772.46

12289.03

7162.18

14.3

16.4

13.9

19.0

14.7

20.5

28.5

24.9

39.9

28.9

16.8%

14.3%

3.2%

12.2%

-3.03%

32.1%

38.7%

6.8%

30.8%

-9.78%

* Provisional Results Source: Economic Survey of Pakistan 2008-09

A number of manufacturing and non manufacturing sectors are now open to foreign investors, and this coupled with the resilience the country has shown in the wake of the most testing of economic times, means that the country remains an attractive option for potential investors.

12

1.3 Pakistan Energy Sector Overview The Government of Pakistan has identified the energy sector in

1.3 Pakistan Energy Sector Overview

1.3 Pakistan Energy Sector Overview The Government of Pakistan has identified the energy sector in Pakistan

The Government of Pakistan has identified the energy sector in Pakistan as playing a pivotal role in the development and growth of the Pakistan economy. GoP has stated the main objectives of its policy for the Pakistan energy sector as ensuring adequate, secure and cost effective supplies; efficient utilization of resources; and minimization of negative environmental impacts.

The key sources of primary energy in Pakistan are oil, gas and hydroelectricity. Petroleum products and natural gas account for almost 80 percent of commercial energy, hydroelectricity for about 11 percent and the rest is made up by coal, liquefied petroleum gas (“LPG”) and nuclear energy.

1.3.1 Power Sector

Historically, the power sector in Pakistan has consisted of two major state-owned utilities: WAPDA and KESC which have operated largely independent of each other and servicing separate regions. In 1994, the power sector was opened up to private investors through the formation of PPIB, and a host of policy initiatives under the Power Sector Policies of 1994, 1998 and 2002, along with transmission and hydel policies liberalized the power sector to a great degree. The following table details the five year trend of installed generation capacity of Pakistan:

Table 1.2: Installed Generation Capacity

(Capacity in MW)

Year ending June 30

FY2005

FY2006

FY2007

FY2008

FY2009

Thermal Power GENCOs IPPs (connected with PEPCO system) IPPs (connected with KESC system) KESC Total Thermal Capacity

4835

4900

4900

4900

4900

5570

5560

5560

5560

5725

262

262

262

262

262

1756

1756

1756

1756

1955

12423

12785

12785

12785

12842

Hydel Power WAPDA IPPs Total Hydel Capacity

6464

6444

6444

6444

6444

35

35

35

36

37

6499

6474

6474

6480

6481

Nuclear Power CHASNUPP (connected with PEPCO system) KANUPP (connected with KESCL system) Total Nuclear Capacity

325

325

325

325

325

137

137

137

137

137

462

462

462

462

462

Total Installed Capacity of the Country

19384

19450

19420

19420

19786

 

13

Source: Pakistan Energy Yearbook 2009

With the growing energy demand, the country is currently facing a power shortage of approximately
With the growing energy demand, the country is currently facing a power shortage of approximately

With the growing energy demand, the country is currently facing a power shortage of approximately 2500 to 3000 MW, and some analysts predict the demand will exceed supply by 5000 MW during the summer peak of 2010. The present electricity demand-supply gap, coupled with a consistent growth in demand clearly indicates the fundamental need for enhancing the country’s power generation capability. The PPIB projects the demand-supply gap to be as follows:

Figure 1.1: Demand and Supply Projections (MW)

45 40 35 30 25 20 15 10 5 0 FY09 FY10 FY11 FY12 FY13
45
40
35
30
25
20
15
10
5
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Expected Available Generation (MW)
Demand (Summer Peak) (MW)
'000 MW

1.3.2 Regulatory and Institutional Framework

The regulatory and institutional framework of the power sector in Pakistan can be summarized as shown in adjacent figure.

The regulation of the electricity sector is governed by the NEPRA Act 1997 which replaced the provisions of the Electricity Act, 1910. NEPRA was constituted under this Act as an independent regulatory authority for regulating the provision of electric power services. It is exclusively empowered to regulate the generation, distribution and transmission of

Federal Government

distribution and transmission of Federal Government Provincial Governments and AJK Provincial representation
Provincial Governments and AJK Provincial representation
Provincial Governments
and AJK
Provincial
representation
Provincial Governments and AJK Provincial representation Provincial Private Power Cells Investment review Ministry

Provincial Private

Power Cells

Investment

review

Provincial Private Power Cells Investment review Ministry of Water & Power Cabinet Division
Provincial Private Power Cells Investment review Ministry of Water & Power Cabinet Division
Ministry of Water & Power Cabinet Division Regulatory guidelines Tariff and advisor PPIB Tariff NEPRA
Ministry of
Water & Power
Cabinet
Division
Regulatory
guidelines
Tariff
and
advisor
PPIB
Tariff
NEPRA
advisor
Investment
Licensing,
facilitation
Tariffs
WAPDA (and successors) Power KESC Sector IPPs
WAPDA
(and successors)
Power
KESC
Sector
IPPs

Policy

legislative

framework

14

electrical power in Pakistan with respect to determining tariff rates, prescription and enforcement of performance
electrical power in Pakistan with respect to determining tariff rates, prescription and enforcement of performance

electrical power in Pakistan with respect to determining tariff rates, prescription and enforcement of performance standards and codes of conduct, issuance of licenses and other terms and conditions to encourage safe, efficient and reliable service.

1.4 The Project

GPL was incorporated on March 25, 2008, and received its certificate for commencement of business on May 13, 2008. The purpose of the Company is to build, own and operate a modern power generation plant, for onward sale and supply of electricity to NTDC.

The Project is a brand new dual-fired Combined Cycle power generation plant, having a gross capacity (at ISO conditions) of 163.353 MW, and a dependable capacity at site of 146.5 MW. The primary fuel for the power plant is Residual Fuel Oil with High Speed Diesel as the back-up fuel. GPL was granted a generation license on July 8, 2009 for a period expiring on December 30, 2035.

The site for the Project is an area of 30 acres located at Kamair at 15-km Arifwala-Sahiwal Road, in Tehsil and District Pakpattan. The allocated land was acquired and duly transferred to GPL on August 7, 2009. Load flow studies have been carried out to ascertain the technical viability of the location and its vicinity to a 132 kV grid station. The area has the necessary infrastructure in place and is easily accessible through a newly constructed metal road. Environmental Impact Assessment studies, topographical survey and considerable land development has been carried out in preparation of the civil works.

The Company signed an EPC Agreement with CMEC as the Lead E&P Contractor and its subsidiary CERIECO, as the Construction Contractor in November 2008. A comprehensive EPC contract is expected to be finalized and signed by April 2010, and work on engineering, procurement and civil works is expected to commence immediately afterwards and be completed over a period of 26 months.

NEPRA determined the final tariff for GPL on December 30, 2009 at US¢ 12.4778 per kWh (levelized basis), applicable for a period of 25 years from COD, summarized as follows:

Table 1.3: GPL Tariff Determined by NEPRA

Tariff Components

Year 1-10

Year 11-25

Total Capacity Charge (PKR/ kWh)

3.0969

1.0059

Energy Charge based on RFO (PKR/ kWh) Fuel Cost Component (RFO)

5.4625

5.4625

Variable O&M (Foreign)

0.4691

0.4691

Levelized Tariff (at 60% Plant Factor)

US¢ 12.4778/ kWh

15

The current shareholding structure of GPL is provided in the table below: Table 1.4 :
The current shareholding structure of GPL is provided in the table below: Table 1.4 :

The current shareholding structure of GPL is provided in the table below:

Table 1.4 : GPL Shareholding Structure

Shareholders/ Sponsors

Shareholding

No. of

 

Shares

Grange Holdings Group

96%

421,291,825

Albario Engineering (Pvt.) Ltd

1%

4,388,457

Mr Assad Sheikh

1%

4,388,457

Mr. Shuja Hussain

1%

4,388,457

Mr. Amjad Faquir

1%

4,388,457

Total

100%

438,845,651

Grange Power Ltd has engaged and/or is in the process of finalizing contracts with the following advisors and contractors:

Table 1.5: GPL’s Advisors, Consultants and Contractors

Company

Role

Status

CMEC *

E&P Contractor

Agreement signed. Contract expected to be signed in April 2010. Agreement signed. Contract expected be signed in April 2010.

CERIECO*

(CMEC’s

Construction Contractor

subsidiary)

KPS

O&M Contractor Terms agreed.

Scott Wilson

Project/ Construction Manager Co-Lead Arranger for onshore debt component Legal Counsel Project Advisor Auditors

Commercial negotiations at final stage. Negotiations at advanced stage.

Arif Habib Bank

Negotiations at advanced stage.

Haidermota & Co AbacusConsulting KPMG Taseer Haid & Co

Negotiations in final stage Current Negotiations in final stage.

* CMEC and CERIECO have signed a tripartite agreement with GPL for providing turnkey EPC services. They are referred together as “Contractors” to GPL.

1.5 The Financials

Financial projections have been prepared based on the information provided by the Management of GPL and the NEPRA Tariff Determination of December 30, 2009. The costs, rates, indexation and other assumptions approved by NEPRA have been used to make the 25-year projections, the term duration allowed for GPL based on the expected life of the Project. A summary of key findings is as follows:

of the Project. A summary of key findings is as follows: The Project reflects an internal

The Project reflects an internal rate of return (“IRR”) of 16.24 percent, in real terms. This becomes more attractive in view of the assured 25-year tariff and sale of capacity and generation output.

16

Debt-to-Equity ratio is a maximum of 64% : 36% at the end of the first
Debt-to-Equity ratio is a maximum of 64% : 36% at the end of the first

Debt-to-Equity ratio is a maximum of 64% : 36% at the end of the first year of operations, tapering down to 0% : 100% in the 9 t h year - towards the end of the ten year repayment term. th year - towards the end of the ten year repayment term.

In terms of ability to meet financing obligations, the Debt Service Coverage Ratio (“DSCR”) remains at a constant of 1.34 over ancing obligations, the Debt Service Coverage Ratio (“DSCR”) remains at a constant of 1.34 over the debt servicing period.

Earnings provide sufficient coverage for making interest payments, as demonstrated by the Times Interest Earned (“TIE”) which does not drop below 1.3 at any time throughout the 25 Interest Earned (“TIE”) which does not drop below 1.3 at any time throughout the 25 years, with an average of 2.02. During the first ten years, over the tenure of the loan, the average remains at 2.57.

In terms of return on equity, the tariff is built to allow GPL a ROE of 15 percent. The various measures used in the financial model reflect these returns as: Dividend IRR of 14.88 percent, Equity IRR of 14.53 percent and an Actual ROE of 16.61 percent.over the tenure of the loan, the average remains at 2.57. The cumulative closing cash balances,

The cumulative closing cash balances, after dividend payout and debt-servicing, remains a healthy positive throughout the 25-year period.IRR of 14.53 percent and an Actual ROE of 16.61 percent. The table below briefly highlights

The table below briefly highlights the financial results for GPL:

Table 1.6: Financial Analysis- Project Base Case

Financial Indicators

Project Results (Base Case) IRR NPV at 15% (USD) NPV at 13% (USD) ROE (approx.) Payback (based on Cumulative Net Cashflow) Payback (based on Cumulative Discounted Net Cashflow) Debt Service Coverage during loan period Average Times Interest Earned Average Times Interest Earned (EBITDA) Average Net Margin

16.24%

6,782,687

21,303,067

15%

6 th Year 12 th Year

1.34

2.02

5.43

7.81%

Equity Results (as per NEPRA) IRR NPV at 15% (USD) NPV at 13% (USD)

15.07%

187,067

5,663,151

17

2. TRANSACTION OVERVIEW

2.

TRANSACTION OVERVIEW

2. TRANSACTION OVERVIEW
2. TRANSACTION OVERVIEW

2.1 Introduction

Grange Power Limited has been formed with the objective of setting up a state-of-the-art power generation plant in Arifwala, Pakistan, with a gross ISO capacity of 163.35 MW. This independent power project (“IPP”) is being developed under the Government’s ‘Fast Track’ initiative which allows the Project to pass certain otherwise necessary procedural steps and achieve completion in a much shorter time period (see section 4.3.1 for details).

2.2 Project Status

As of February 2010, the following steps have been completed by the GPL’s Management:

Table 2.1 Milestones Achieved

Milestones

Dates

Expression of interest to PPIB for setting up an IPP under their recently introduced Fast Track policy initiativeManagement: Table 2.1 Milestones Achieved Milestones Dates December 12, 2007 Registration with PPIB under the Fast

December 12, 2007

Registration with PPIB under the Fast Track initiative (PPIB Registration No. 1052)February 25, 2008

February 25, 2008

Public Limited Company ‘Grange Power Ltd’ incorporated (Certificate of Incorporation No. 0064883) (Certificate of Incorporation No. 0064883)

March 25, 2008

Firm of Chartered Accountants engaged as auditors for GPL:(Certificate of Incorporation No. 0064883) March 25, 2008 KPMG Taseer Hadi & Co. Application Proposal submitted

KPMG Taseer Hadi & Co.

Application Proposal submitted to PPIB as per policy requirementsengaged as auditors for GPL: KPMG Taseer Hadi & Co. Site approval and allocation by PEPCO

Site approval and allocation by PEPCO and NTDCProposal submitted to PPIB as per policy requirements EPC Agreement signed on a turnkey basis with

EPC Agreement signed on a turnkey basis with CMEC and CERIECO, a subsidiary of CMECrequirements Site approval and allocation by PEPCO and NTDC Petition to NEPRA for tariff determination Application

Petition to NEPRA for tariff determinationa turnkey basis with CMEC and CERIECO, a subsidiary of CMEC Application to NEPRA for Generation

Application to NEPRA for Generation Licenseof CMEC Petition to NEPRA for tariff determination Load-flow studies completed by NTDC/PEPCO EIA Report

Load-flow studies completed by NTDC/PEPCOdetermination Application to NEPRA for Generation License EIA Report submitted to Environmental Protection Department,

EIA Report submitted to Environmental Protection Department, Government of Punjab (awaiting NOC)Generation License Load-flow studies completed by NTDC/PEPCO Tariff determination by NEPRA Review petition to NEPRA for

Tariff determination by NEPRAProtection Department, Government of Punjab (awaiting NOC) Review petition to NEPRA for revised tariff Generation

Review petition to NEPRA for revised tariffof Punjab (awaiting NOC) Tariff determination by NEPRA Generation License granted by NEPRA Acquisition of land

Generation License granted by NEPRAby NEPRA Review petition to NEPRA for revised tariff Acquisition of land and transfer to GPL

Acquisition of land and transfer to GPLNEPRA for revised tariff Generation License granted by NEPRA Topographical survey conducted by Berkley Associates O&M

Topographical survey conducted by Berkley Associatesgranted by NEPRA Acquisition of land and transfer to GPL O&M contract terms agreed with KPS

O&M contract terms agreed with KPSto GPL Topographical survey conducted by Berkley Associates Law firm engaged as legal counsel to oversee

Law firm engaged as legal counsel to oversee the implementation process, and agreements with government and third parties. Currently Haidermota & Co.by Berkley Associates O&M contract terms agreed with KPS 18 In negotiation April 21, 2008 May

18

In negotiation April 21, 2008 May 2008 November 7, 2008

December 15, 2008 December 16, 2008 February 2009 June 4, 2009

June 26, 2009 July 7, 2009 July 8, 2009 August 7, 2009 October 2009 November 2009 December 2009

Milestones Dates Revised tariff determined by NEPRA December 30, 2009 Layout plan developed by CMEC
Milestones Dates Revised tariff determined by NEPRA December 30, 2009 Layout plan developed by CMEC

Milestones

Dates

Revised tariff determined by NEPRADecember 30, 2009

December 30, 2009

Layout plan developed by CMECJanuary 2010

January 2010

In-Principle Agreement with Arif Habib Bank Ltd to arrange a syndicated loan, covering at least the onshore cost componentFebruary 2010

February 2010

Firm of Management Consultants engaged for financial and strategic advice. Currently AbacusConsultingFebruary 2010

February 2010

Terms agreed with Scott Wilson, the proposed project and construction management firm.In negotiation

In negotiation

2.3 Current Status

The PPIB, in its letter dated January 18, 2010, has requested the Management of GPL to make the necessary payments with respect to the Processing Fee and also submit the requisite Performance Guarantee at the rate of USD 5000 per MW. The Management is currently in the process of arranging such guarantee, subject to detailed discussions with their bankers.

2.4 Way Forward

The next key steps and milestones in the implementation process up to the Commercial Operations Date (“COD”) are envisaged as follows:

Table 2.2 Milestones until COD

Milestones

Expected Completion Dates

Submission of Performance Guarantee (in process)April 2010

April 2010

EPC Contract signed with CMEC and CERIECO (agreement signed)April 2010

April 2010

LOS Issued by PPIBApril 2010

April 2010

PPA signed with CPPA/NTDCJune 2010

June 2010

FSA signed with PSO (in negotiation)June 2010

June 2010

IA signed with the Government of PakistanJune 2010

June 2010

Commencement of civil worksJune 2010

June 2010

Financial CloseJuly 2010

July 2010

T r i a l R u n Trial Run

August 2012

Commercial Operations DateAugust 2012

August 2012

19

2.5 Capital Structure The total project cost is estimated to be approximately USD 218.20 million,

2.5 Capital Structure

2.5 Capital Structure The total project cost is estimated to be approximately USD 218.20 million, of

The total project cost is estimated to be approximately USD 218.20 million, of which 25 percent or about USD 54.55 million is planned as equity and the remaining USD 163.35 shall be arranged as long term loan.

The major shareholder in GPL is Grange Holdings Group (“GHG”) which currently holds 96 percent of the total number of shares outstanding. The remaining 4 percent are equally held by Albario Engineering (Pvt.) Ltd, Mr. Shuja Hussain, Mr. Assad Sheikh and Mr. Amjad Faquir.

The EPC and equipment costs together constitute more than 75 percent of the total project cost, almost equivalent to the debt portion of total capital. Of this USD 164 million, USD 28 million is estimated as the onshore component and is planned to be arranged through local banks, whereas the offshore cost of USD 136 million shall be organized through foreign banks and financial institutions.

Fig 2.1. Capital Structure

25% Equity 75% Debt (USD 54M) (USD 164M) GHG 96% (USD 52M) 83% Offshore EPC
25% Equity
75% Debt
(USD 54M)
(USD 164M)
GHG 96% (USD 52M)
83% Offshore EPC cost
(USD 136M)
Others 4% (USD 2M)
(Assad Sheikh, Shuja
Hussain, Amjad Faquir,
and AEPL)
17% Onshore EPC cost
(USD 28M)

20

2.6 Communication with the Company All questions on this transaction should be directed to Mr.

2.6 Communication with the Company

2.6 Communication with the Company All questions on this transaction should be directed to Mr. Shuja

All questions on this transaction should be directed to Mr. Shuja Hussain as key point of contact, at either of the following addresses:

Mr. Assad Sheikh Chairman

Mr. Shuja Hussain Chief Executive

Grange Power Ltd. Unit 7, The Quadrant, Upper Culham Farm Cockpole Green

Grange Power Ltd. 2 nd Floor, 65-Z Commercial Area, DHA Lahore Lahore Cantt., Pakistan

Berkshire R610 8NR

Tel:

+92(0) 42 3702 9285

Tel:

+44 (1) 1491 576544

Fax:

+92(0) 42 3589 2743

Fax:

+44 (1) 1491 576194

Mobile: +92(0) 300 8436999

Mob:

+44 (0) 7703123252

email: grangepower@grangeholdings.com

21

3. INVESTMENT ENVIRONMENT IN PAKISTAN

3.

INVESTMENT ENVIRONMENT IN PAKISTAN

3. INVESTMENT ENVIRONMENT IN PAKISTAN
3. INVESTMENT ENVIRONMENT IN PAKISTAN

3.1 Introduction

The Government of Pakistan is in the process of political, economic and institutional reform, with a view to strengthening the economy of the country, eliminating corruption from the government and improving the investment environment in Pakistan.

The economy of the country has been affected by the tensions on the border and the security situation, however, the economic policies and reforms of the Government of Pakistan (“GoP”) and the support given to the international campaign against terrorism are expected to restore political and economic confidence in the country. Recent economic policies designed under the watchful eye of the International Monetary Fund (“IMF”) along with some monetary support extended by the Western powers in-lieu of the country’s role as a front line state in the global war against terrorism have started to bear some fruit.

Investment in any country brings about growth and prosperity for the people of that country, and Pakistan bears no exception to this fact. GoP has also actively sought to encourage foreign direct investment in Pakistan to the extent that over 600 foreign companies have now established operations in Pakistan in addition to the flow of hot money witnessed in the Karachi Stock Exchange in recent years. It has adopted a policy of openness to foreign investment; it offers a range of incentives to attract foreign investors; and it has welcomed foreign interest in its wide-ranging privatization program, which, after a lull, is now resuming. China, UAE, Saudi Arabia, USA, UK and others remain amongst the leading countries responsible for inward FDI flow to Pakistan. Chinese investment in Pakistan according to analyst estimates tops USD 20 billion, and there are currently more than 120 projects initiated by China in Pakistan. Thereby China remains at the helm of the country’s foreign investment portfolio.

The current democratically elected government has ensured continuation of the investment policies initiated by the previous government in order to attract and retain interest of investors both from home as well as outside Pakistan.

3.2 Political Situation

Pakistan operates under a parliamentary system of governance, with a bi-cameral legislature, including the National Assembly and the Senate. The National Assembly is composed of directly elected representatives of the people on adult franchise basis. The Senate is composed of members elected by the Provincial Assemblies (and in some cases the National Assembly) with equal representation of all the four Provinces of the federation. As a result of the elections held on February 18, 2008, a coalition government has been formed by the PPP which emerged as the largest party. The present Prime Minister, Mr. Yousuf Raza Gilani, was sworn in on March 25, 2008, after earning a unanimous vote of confidence from the parliament.

22

3.3 Legal System The current legal system in Pakistan is a mixture of codified law

3.3 Legal System

3.3 Legal System The current legal system in Pakistan is a mixture of codified law based

The current legal system in Pakistan is a mixture of codified law based on English legal principles and common law, post-independence legislation (based on the common law system) and the relatively recent introduction of certain laws based on Islamic principles, referred to as the “Shari’ah”. Broadly, the Courts of Pakistan consist of city/ district courts, the Provincial High Courts, the Federal Shariah Court and the Supreme Court of Pakistan which is the highest court in Pakistan at the Federal level. Generally, an appeal from a decision of the High Court lies to a superior (Divisional Bench) of such High Court and then to the Supreme Court. Most issues affecting business do not fall under the jurisdiction of the Shariah Court. Generally, most commercial activities are regulated by codified law based on English legal principles and common law practice and by civil courts.

3.4 The Economy

Pakistan is the sixth most populous nation in the world, with approximately 164 million people as of 2009. The major sectors of Pakistan’s economy are agriculture (6%), industry (21%) and services (73%), with the services sector recording solid growth over the past few years. The following table illustrates key economic indicators for Pakistan over the last five years:

Table 3.1: Pakistan Economic Indicators

Economic Indicator

FY05

FY06

FY07

FY08

FY09*

Actual

Actual

Actual

Actual

Provisional

Macroeconomics Real GDP Growth Agriculture Growth Manufacturing Growth Population (Million) Per Capita Income( USD) Financial Conditions External Debt Outstanding ( USD Billion) Debt Servicing as % of GDP Forex Reserves ( USD Billion) Budget Surplus/ (Deficit) (USD Billion) Inflation (CPI) Exchange Rate (PKR : USD) KSE-100 Index (as of yearend June 30) Trade Total Exports Current Price (USD Billion) Total Imports Current Price (USD Billion ) Export Growth % Import Growth %

9.0%

5.8%

6.8%

4.1%

2.4%

6.5%

6.3%

4.1%

1.1%

4.7%

15.5

10.0

8.4

4.8

(3.3)

151

153

156

159

163

733

833

925

1,042

1,046

34.04

35.68

37.36

46.3

50.1

4.7

4.8

3.8

1.1

0.8

10.9

13.1

12.9

15.8

11.4

(5,649)

(4,556)

(6,212)

(11,173)

(8,547)

9.3%

7.9%

7.7%

12%

22.3%

59.8

59.8

60.6

62.5

78.0

7450.12

9989.41

13772.46

12289.03

7162.18

14.3

16.4

13.9

19.0

14.7

20.5

28.5

24.9

39.9

28.9

16.8%

14.3%

3.2%

12.2%

-3.03%

32.1%

38.7%

6.8%

30.8%

-9.78%

*Note: Provisional Results Source: Economic Survey of Pakistan 2008-09

23

The performance of economic growth of Pakistan remained outstanding from FY2002 to FY2007. Pakistan transformed
The performance of economic growth of Pakistan remained outstanding from FY2002 to FY2007. Pakistan transformed

The performance of economic growth of Pakistan remained outstanding from FY2002 to FY2007. Pakistan transformed into a stable economy through good macroeconomic policies along with structural reforms. Average real GDP growth during this period was the best of many decades. However following global and domestic shocks, the economy came temporarily off its rails in FY2009. The economic growth at 2 percent in FY2009 whilst stable has been severely undervalued since earlier estimates of around 4 percent. Nevertheless the positive growth figure is still reflective of the relative resilience of the economy to global phenomenon, including the slowdown in the world economy and rapid increases in the prices of petroleum products and other natural resources. Pakistan’s real GDP has been growing at an average rate of approximately 5.5 percent per annum over the last five fiscal years (FY2005 to

FY2009).

Pakistan, until recently, has been considered as one of the fastest growing economies of the region which includes heavyweights such as China, India, and Vietnam. This performance was a result of a combination of generally good economic policies and dynamic structural reforms. The last two years have been difficult for Pakistan and the economy has lost significant momentum. One of the prime contributors to this is the country’s proactive role in the war on terror. Pakistan, being a frontline state, has had to bear the brunt of the events that have unfolded after 9/11. Conservative estimates place the cost of this war at approximately USD35 billion since 2001 with this cost intensifying in the last fiscal year as the situation in Afghanistan deteriorated. However, GoP has initiated a host of macroeconomic policies and Pakistan is expected to weather the storm, improve the economic outlook and come out of this challenging phase in the near term.

3.4.1 Key Highlights of FY2009

Economic reform has, in recent years, become a priority for the GoP. The key achievements of FY2009, despite the regional and global challenges, include:

A steady economic growth of 2 percent despite the pursuance of tight monetary policy resulting in interest rate increases, and the global financial turmoilFY2009, despite the regional and global challenges, include: Stellar overall agricultural growth at 4.7 percent. Major

Stellar overall agricultural growth at 4.7 percent. Major crops accounting for 33.4 percent of agricultural value-added registered an impressive growth of 7.7 percent. Livestock sector grew at 3.7 percent.in interest rate increases, and the global financial turmoil Small and medium manufacturing sector maintained a

Small and medium manufacturing sector maintained a healthy growth of 7.5 percent;growth of 7.7 percent. Livestock sector grew at 3.7 percent. The overall services sector maintained solid

The overall services sector maintained solid pace of expansion at 3.6 percentsector maintained a healthy growth of 7.5 percent; With strong average economic growth of 6 percent

With strong average economic growth of 6 percent during the last six years, Pakistan continues to maintain its position as one of the fastest growing economies in the Asian regionsector maintained solid pace of expansion at 3.6 percent Per capita income in current dollar terms

Per capita income in current dollar terms rose to USD 1,046as one of the fastest growing economies in the Asian region Real private consumption grew by

Real private consumption grew by 5.2 percent as against negative growth of 1.3 percent attained last yearPer capita income in current dollar terms rose to USD 1,046 Trade balance improved by 15.9

Trade balance improved by 15.9 percent as the trade deficit declined from USD16.8 billion to USD14.2 billion as compared to previous year figures;as against negative growth of 1.3 percent attained last year Despite monetary policy tightening, the credit

Despite monetary policy tightening, the credit to private sector continued with a net disbursement of PKR 26.8 billionpercent as the trade deficit declined from USD16.8 billion to USD14.2 billion as compared to previous

24

Weighted average lending rate has witnessed a decline from 15.5 percent in October 2008 to
Weighted average lending rate has witnessed a decline from 15.5 percent in October 2008 to

Weighted average lending rate has witnessed a decline from 15.5 percent in October 2008 to 14.3 percent in March 2009The overall fiscal deficit is estimated to have been restricted to 4.3 percent sharp decline

The overall fiscal deficit is estimated to have been restricted to 4.3 percent15.5 percent in October 2008 to 14.3 percent in March 2009 sharp decline in inflation from

sharp decline in inflation from 25 percent in FY2008 to 17 percentdeficit is estimated to have been restricted to 4.3 percent reduction in the current account deficit

reduction in the current account deficit from as high as 8.5 percent of GDP to around 5.3decline in inflation from 25 percent in FY2008 to 17 percent A A percent Build up

A

A

percent

Build up of foreign exchange reserves beyond USD 14 billionfrom as high as 8.5 percent of GDP to around 5.3 A A percent Workers’ remittances

Workers’ remittances totalled USD 6.4 billion in FY2009, depicting an increase of 19.5 percent over previous year USD 6.4 billion in FY2009, depicting an increase of 19.5 percent over previous year

3.4.2 Exchange Rate

Exchange rates between the Pakistan Rupee (“PKR”) and other major world currencies are under a free exchange rate system, with the US Dollar being used as an intervention currency to determine rates with other currencies. As of February 15, 2010, the interbank rate for USD 1.00 stood at PKR 84.9712 1 .

3.4.3 Credit Rating

Standard and Poor’s outlook on Pakistan’s sovereign local and foreign currency ratings are as follows:

Table 3.2: S&P Credit Ratings

Country

Sovereign local

Sovereign foreign

Sovereign foreign currency recovery rating

Transfer and

currency ratings

currency ratings

convertibility

(LT/Outlook/ST)

(LT/Outlook/ST)

assessment

Pakistan

B-/Stable/C

B-/Stable/C

3

B-

Source: Standard & Poor’s (Sovereign Ratings and Country T&C Assessments as of 26 th January 2010 2 .

3.5 Capital Markets

Pakistan has three active stock exchanges, namely the Karachi Stock Exchange, the Lahore Stock Exchange and Islamabad Stock Exchange. Karachi Stock Exchange (“KSE”) is the country’s largest and oldest exchange, established in 1947, with more than 85 percent of the total trading volume being routed through it. KSE’s profile is summarized in the table below.

1 As per State Bank of Pakistan

25

Table 3.3: KSE Profile KSE Profile FY05 FY06 FY07 FY08 FY09* Number of Listed Companies

Table 3.3: KSE Profile

Table 3.3: KSE Profile KSE Profile FY05 FY06 FY07 FY08 FY09* Number of Listed Companies New

KSE Profile

FY05

FY06

FY07

FY08

FY09*

Number of Listed Companies New Companies Listed Fund Mobilized (PKR billion) Listed Capital (PKR billion) Turnover of Shares (billion) Average Daily Turnover of Shares (million) Aggregate Market Capitalization (PKR billion)

659

658

658

652

652

15

14

16

7

8

54

41.4

49.7

62.9

42.3

438.5

496

631.1

706.4

770.7

88.3

79.5

54

63.3

17.1

351.9

348.5

262.5

238.2

80.2

2068.2

2801.2

4019.4

3777.7

2057.1

*During FY2009, the stock market remained frozen for 110 consecutive days as a result of floor imposition on KSE-

100

Source: Economic Survey of Pakistan 2008/09

KSE remained one of the best performing stock exchanges in the global emerging markets, during the most part of this past decade. It continues to show resilience even in the aftermath of the global financial meltdown. This is due to the liberalized policies and reforms initiated by the previous government, which have been continued by the current government in order to strengthen the financial markets in Pakistan. The trend over the past one year up to January 2010 can be seen in the following graph:

Figure 3.1: KSE-100 Index Movement - 2009

12000 10000 8000 6000 4000 2000 0 KSE-100 Index
12000
10000
8000
6000
4000
2000
0
KSE-100 Index
2009 12000 10000 8000 6000 4000 2000 0 KSE-100 Index At the end of February 16,

At the end of February 16, 2010 session, the KSE-100 index gained 67.87 points to close at 9769.68 points. Trading volumes whilst on the lower side at 120.588 million shares, remain amongst the highest since the stock exchange’s recovery, indicating growing confidence among investors. The overall market capitalization was up by PKR 23 billion as compared with the previous session and traded at PKR 2.812 Trillion.

26

Figure 3.2: KSE-100 Index Volume as of February 16, 2010 Source: Market Watch 3.6 Policy

Figure 3.2: KSE-100 Index Volume as of February 16, 2010

Figure 3.2: KSE-100 Index Volume as of February 16, 2010 Source: Market Watch 3.6 Policy Incentives
Figure 3.2: KSE-100 Index Volume as of February 16, 2010 Source: Market Watch 3.6 Policy Incentives

Source: Market Watch

3.6 Policy Incentives for Foreign Investors

Government of Pakistan’s industrial policy is designed to encourage foreign and local investment in the private sector. Full safeguards are provided to protect lawful investment. The government’s role in the management of industry is to rapidly shift to a regulatory role in order to encourage private investment. Emphasis will be on expanding competition and creating new opportunities for the private sector by an encouraging government to phase out controls over prices and investment decisions, reduce subsidies and other special incentives which prevent competition from spurring efficiency and innovation. A key step in this regard has been the establishment of the Board of Investment (BOI), which is headed by the Prime Minister and constitutes of members from both the government and the private sector in order to boost foreign investor interest in the nation’s economy.

Analysing the investment policies of the GoP it is found that foreign investment is permitted in all sectors of the economy without prior approval of the BOI except in those industries involving arms and ammunition, security, printing currency and mint, high explosives, and radioactive substances. State Bank of Pakistan’s (“SBP”) permission is no longer required for the issuance of shares in a service company. The foreign investment is however required to be registered with the SBP to facilitate the payment of dividend, if any. Multinational joint ventures are encouraged to improve foreign investment. Establishment of export-oriented industries is given preference.

Pakistan's policy trends have been consistent with liberalization, deregulation, privatization and facilitation with incentives specifically designed to fulfil the needs of investors. Previously only the manufacturing sector was open to foreign investment. Now, the Policy Regime is more liberal with most other economic sectors open for foreign involvement and with significant efforts towards mobilizing domestic financial resources towards long term investment.

Key features of Pakistan’s foreign investment policy instrument for most manufacturing, non- manufacturing, infrastructure and social sectors are:

27

Liberal investment policy Equal treatment to local and foreign investors Sectors open for Foreign Direct
Liberal investment policy Equal treatment to local and foreign investors Sectors open for Foreign Direct

Liberal investment policyEqual treatment to local and foreign investors Sectors open for Foreign Direct Investment 100 percent

Equal treatment to local and foreign investorsLiberal investment policy Sectors open for Foreign Direct Investment 100 percent foreign equity allowed in the

Sectors open for Foreign Direct Investmentpolicy Equal treatment to local and foreign investors 100 percent foreign equity allowed in the manufacturing

100 percent foreign equity allowed in the manufacturing and non manufacturing sectorsforeign investors Sectors open for Foreign Direct Investment No Government sanction required Attractive incentives

No Government sanction requiredallowed in the manufacturing and non manufacturing sectors Attractive incentives package Remittance of royalty,

Attractive incentives packagenon manufacturing sectors No Government sanction required Remittance of royalty, technical and franchise fee; capital,

Remittance of royalty, technical and franchise fee; capital, profits and dividends allowedGovernment sanction required Attractive incentives package Foreign investment fully protected under: Foreign Private

Foreign investment fully protected under:and franchise fee; capital, profits and dividends allowed Foreign Private Investment (Promotion & Protection) Act,

Foreign Private Investment (Promotion & Protection) Act, 1976dividends allowed Foreign investment fully protected under: Protection of Economic Reforms Act, 1992 Foreign Currency

Protection of Economic Reforms Act, 1992Private Investment (Promotion & Protection) Act, 1976 Foreign Currency Accounts (Protection) Ordinance, 2001

Foreign Currency Accounts (Protection) Ordinance, 2001Act, 1976 Protection of Economic Reforms Act, 1992 Bilateral Agreements: Investment Protection to 48 countries

Bilateral Agreements:1992 Foreign Currency Accounts (Protection) Ordinance, 2001 Investment Protection to 48 countries Avoidance of Double

Investment Protection to 48 countriesAccounts (Protection) Ordinance, 2001 Bilateral Agreements: Avoidance of Double Taxation to 51 Countries 3.6.1

Avoidance of Double Taxation to 51 CountriesBilateral Agreements: Investment Protection to 48 countries 3.6.1 Investment Incentive Package According to the BOI,

3.6.1 Investment Incentive Package According to the BOI, the Government has provided an attractive incentive package for investors, as highlighted below:

Table 3.4: Investment Incentive Package

Policy Parameters

Manufacturing Sector

Non-Manufacturing Sectors

Agriculture

Infrastructure

Services incl.

Social

IT and Telecom Services

Govt. Permission

Not required except for

specified industries

Not required except specific licenses from

concerned agencies

Remittance of capital, profits, dividends, etc.

Allowed

Allowed

Allowed

Allowed

Upper Limit of foreign equity allowed

100%

100%

100%

100%

Minimum Investment Amount (USD)

No

0.3

0.3

0.15

Customs duty on import of PME

5%

0%

5%

0-5%

Tax relief (IDA*, % of PME cost*)

50%

50%

50%

50%

Royalty & Technical Fee

No restriction for payment of royalty & technical fee

Allowed as per guidelines Initial lump sum up to USD100,000 Max Rate 5% of net sales Initial period 5 years

* PME: Plant Machinery and Equipment; Source: Board of Investment

IDA: Initial Depreciation Allowance

28

3.6.2 Exchange Control Repatriation of capital, capital gains, dividends and profits, is allowed. The facility

3.6.2 Exchange Control

3.6.2 Exchange Control Repatriation of capital, capital gains, dividends and profits, is allowed. The facility for

Repatriation of capital, capital gains, dividends and profits, is allowed.3.6.2 Exchange Control The facility for contracting foreign private loans (which does not involve any guarantee

The facility for contracting foreign private loans (which does not involve any guarantee by the Government of Pakistan) is available to all those foreign investors, who make investment in sectors open to foreign investment, for financing the cost of imported plant and machinery required for setting up the project. However, loan agreements should be registered/ cleared by the State Bank of Pakistan.capital, capital gains, dividends and profits, is allowed. Foreign controlled manufacturing concerns are allowed

Foreign controlled manufacturing concerns are allowed unlimited domestic borrowing according to their requirements for working capital.should be registered/ cleared by the State Bank of Pakistan. For foreign controlled semi-manufacturing concerns, the

For foreign controlled semi-manufacturing concerns, the borrowing entitlement is 75 percent of paid-up capital including reserves and for foreign controlled non-manufacturing concerns (trade/services) it is 50 percent.according to their requirements for working capital. 3.7 Tax Regimes The Federal Board of Revenue (“FBR”)

3.7 Tax Regimes

The Federal Board of Revenue (“FBR”) is the tax administrative authority in Pakistan, which carries out taxation policies and administers all taxes (income tax, sales tax, central excise duty and customs duty). Pakistan’s tax system is irregular, with a narrow tax base covering a relatively small section of income earners.

3.7.1 Tax Rates

Corporate Income Tax:

According to the Income Tax Ordinance 2001 (updated October 2009), the rate of tax imposed on the taxable income of a company shall be 35 percent.

Personal Income Tax:

Personal income tax rates applicable for FY2010 are given in the following table:

29

Table 3.5: Personal Income Tax: Income Range Tax Rate* Where taxable income does not exceed

Table 3.5: Personal Income Tax:

Table 3.5: Personal Income Tax: Income Range Tax Rate* Where taxable income does not exceed PKR

Income Range

Tax Rate*

Where taxable income does not exceed PKR 100,000 Where the taxable income exceeds PKR 100,000 but does not exceed PKR 110,000 Where the taxable income exceeds PKR 110,000 but does not exceed PKR 125,000 Where the taxable income exceeds PKR 125,000 but does not exceed PKR 150,000 Where the taxable income exceeds PKR 150,000 but does not exceed PKR 175,000 Where the taxable income exceeds PKR 175,000 but does not exceed PKR 200,000 Where the taxable income exceeds PKR 200,000 but does not exceed PKR 300,000 Where the taxable income exceeds PKR 300,000 but does not exceed PKR 400,000 Where the taxable income exceeds PKR 400,000 but does not exceed PKR 500,000 Where the taxable income exceeds PKR 500,000 but does not exceed PKR 600,000 Where the taxable income exceeds PKR 600,000 but does not exceed PKR 800,000 Where the taxable income exceeds PKR 800,000 but does not exceed PKR 1,000,000 Where the taxable income exceeds PKR 1,000,000 but does not exceed PKR 1,300,000 Where the taxable income exceeds PKR 1,300,000

0%

0.50%

1.00%

2.00%

3.00%

4.00%

5.00%

7.50%

10.00%

12.50%

15.00%

17.50%

21.00%

25.00%

* Provided that the salary is less than 50% of total annual taxable income A second bracket for individuals with salaries constituting more than 50% has also been added as an update to the Income Tax Act 2001. Source: Federal Board of Revenue

3.7.2 Withholding Tax

The following withholding tax rates are prescribed for every resident assessee:

Table 3.6: Withholding Tax

Description

Tax Rate

Execution of contract Payment on account of supplies

6.0% of gross amount payable 3.5% of gross amount payable

Source: Federal Board of Revenue

3.7.3 Inter-Corporate Dividend Tax

In general, dividends paid by a company resident in Pakistan are taxed at 10 percent of the gross amount of the dividend. Furthermore, the tax rate on dividends paid by the purchaser of a power project privatised by WAPDA is reduced to 7.5 percent. Also the taxation rate shall be reduced to 7.5 percent in case of dividends declared or distributed, on shares of a company set-up for power generation.

3.7.4 Unilateral Relief

A person resident in Pakistan is entitled to tax relief on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower.

30

3.7.5 Tax Treaties The Government has an agreement with fifty-seven countries to avoid double taxation

3.7.5 Tax Treaties

3.7.5 Tax Treaties The Government has an agreement with fifty-seven countries to avoid double taxation and

The Government has an agreement with fifty-seven countries to avoid double taxation and also lays down basic principles of taxation, which cannot be modified unilaterally. These countries include among others, China, France, Korea, UAE, UK and USA.

3.7.6 Capital Gains Tax

The current exemptions from capital gains tax (“CGT”) are on any dealings in shares, investment in redeemable capital listed on a registered stock exchange in Pakistan and Pakistan Telecommunication Corporation Vouchers issued by the Government of Pakistan. These exemptions have been extended further up to June, 2010. Gain on sale of shares of companies located in the export processing zones is exempt from CGT unconditionally.

31

4. PAKISTAN ENERGY SECTOR

4.

PAKISTAN ENERGY SECTOR

4. PAKISTAN ENERGY SECTOR
4. PAKISTAN ENERGY SECTOR

4.1 Energy Sector Overview

The Government of Pakistan has identified the energy sector in Pakistan as playing a pivotal role in the development and growth of the Pakistan economy. GoP has stated the main objectives of its policy for the Pakistan energy sector as ensuring:

Adequate, secure and cost effective suppliesof its policy for the Pakistan energy sector as ensuring: Efficient utilization of resources Minimization of

Efficient utilization of resourcesas ensuring: Adequate, secure and cost effective supplies Minimization of negative environmental impacts The key

Minimization of negative environmental impactscost effective supplies Efficient utilization of resources The key primary sources of energy in Pakistan are

The key primary sources of energy in Pakistan are oil, gas and hydroelectricity. Petroleum products and natural gas account for almost 80 percent of commercial energy, hydroelectricity for about 11 percent and the rest is made up by coal, liquefied petroleum gas (“LPG”) and nuclear energy. Major energy sources are discussed in more detail in later sections.

The Government’s actions have focused on promoting private investments in all the sub-sectors of the energy sector, establishing regulatory agencies, and facilitating gradual movement towards competition and free market mechanism. The GoP asserts its long term goal as creating a competitive, efficiently run, financially viable, and largely privatised energy sector maximizing service outreach to the population.

4.1.1 Oil

About 30 percent of commercial energy consumption in Pakistan comes from oil. Pakistan produces 60,000 to 70,000 barrels per day (“bbl/d”) of crude oil annually. However, Pakistan’s annual consumption of petroleum products (petroleum energy and non energy products combined) is in excess of 370,000 bbl/d requiring net annual oil imports of over 300,000 bbl/d. GoP has encouraged the development of domestic production and refining capacity by the private sector.

According to records, 11 companies are currently active in oil and gas exploration and production in Pakistan including global giants such as BP (British Petroleum) and Malaysia’s Petronas. This number is expected to increase as more and more local and foreign companies are showing interest in the sector.

Pakistan's net oil imports are projected to rise substantially also in the coming years as demand growth exceeds increases in production. Demand for refined petroleum products also significantly exceeds domestic refining capacity, so nearly half of all imports are refined products.

A summary of crude oil production in Pakistan is set out in the following graph:

32

Figure 4.1: Crude Oil Production (bbl/d) 80 70 60 50 40 30 20 10 -

Figure 4.1: Crude Oil Production (bbl/d)

80 70 60 50 40 30 20 10 - FY04 FY05 FY06 FY07 FY08 FY09
80
70
60
50
40
30
20
10
-
FY04
FY05
FY06
FY07
FY08
FY09
'000 bbl/d

Years

Source: Pakistan Energy Yearbook 2009

'000 bbl/d Years Source: Pakistan Energy Yearbook 2009 PPL Dewan Petroleum BP Petronas OMV OPII OGDC

PPL'000 bbl/d Years Source: Pakistan Energy Yearbook 2009 Dewan Petroleum BP Petronas OMV OPII OGDC MOL

Dewan Petroleumbbl/d Years Source: Pakistan Energy Yearbook 2009 PPL BP Petronas OMV OPII OGDC MOL ENI POL

BPSource: Pakistan Energy Yearbook 2009 PPL Dewan Petroleum Petronas OMV OPII OGDC MOL ENI POL BHP

PetronasSource: Pakistan Energy Yearbook 2009 PPL Dewan Petroleum BP OMV OPII OGDC MOL ENI POL BHP

OMVEnergy Yearbook 2009 PPL Dewan Petroleum BP Petronas OPII OGDC MOL ENI POL BHP Pakistan has

OPIIEnergy Yearbook 2009 PPL Dewan Petroleum BP Petronas OMV OGDC MOL ENI POL BHP Pakistan has

OGDCYearbook 2009 PPL Dewan Petroleum BP Petronas OMV OPII MOL ENI POL BHP Pakistan has a

MOLYearbook 2009 PPL Dewan Petroleum BP Petronas OMV OPII OGDC ENI POL BHP Pakistan has a

ENI2009 PPL Dewan Petroleum BP Petronas OMV OPII OGDC MOL POL BHP Pakistan has a total

POL2009 PPL Dewan Petroleum BP Petronas OMV OPII OGDC MOL ENI BHP Pakistan has a total

BHPPPL Dewan Petroleum BP Petronas OMV OPII OGDC MOL ENI POL Pakistan has a total refining

Pakistan has a total refining capacity of 12.95 million tonnes per year. Nearly 82 percent of this capacity is utilized to meet the consumption while the rest of the processed crude oil is imported. This refining process results in a total of about 10.7 million tonnes of various petroleum products - meeting around 60 percent of the local consumption. There are seven oil refineries in the country with the latest addition being Bosicor Refinery which commenced production in FY 2004. Other major ones include Pak Arab Refinery Corporation (“PARCO”), National Refinery Ltd (“NRL”), Pakistan Refinery Limited (“PRL”) and Attock Refinery Limited (“ARL”). The refineries produce a full range of products, however only 30 percent of their energy products production is furnace oil (also referred to as fuel oil or residual fuel oil) which means that to satisfy national demand nearly 55.5 percent has to be imported.

Residual Furnace Oil (“RFO”) and High Speed Diesel (“HSD”) are amongst the most dominant sources of energy production in the country, and account for an average of 36 percent and 49 percent respectively of the aggregate petroleum energy products consumed in the country 3 . The demand for RFO has seen average growth of around 17 percent over the five years spanning FY2004 to FY2009. Much of the demand has come from the power sector, which is the primary user of the RFO fuel. With the supply of natural gas becoming increasingly unreliable, and the ever increasing prices of the HSD (the primary alternative), focus has been on installing RFO based plants in order to ensure a smoother flow of electric power to the national grid. The graph below shows the consumption trends over recent years for RFO and HSD against total national consumption of petroleum products.

3 Pakistan Energy Yearbook 2008 and OCAC 2010.

33

Figure 4.2: Consumption of Furnace Oil and HSD (Million Tonnes) 22.5 20.0 17.5 15.0 12.5
Figure 4.2: Consumption of Furnace Oil and HSD (Million Tonnes) 22.5 20.0 17.5 15.0 12.5

Figure 4.2: Consumption of Furnace Oil and HSD (Million Tonnes)

22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 - FY03 FY04 FY05 FY06 FY07
22.5
20.0
17.5
15.0
12.5
10.0
7.5
5.0
2.5
-
FY03
FY04
FY05
FY06
FY07
FY08
FY09
HSD
Furnace Oil
Total
Million Tonnes

Source: Pakistan Energy Yearbook 2008, OCAC Province Wise Fuel Consumption 2009

Until 1999, the government tightly controlled the oil and gas industries of Pakistan. Since then, however, an ambitious pro-market reform program has been initiated. This includes setting up of the Regulatory body (Oil and Gas Regulatory Authority or “OGRA”), deregulation of furnace oil price and a move towards transparency and proposed sector reforms including privatization in order to promote competition.

Furnace oil prices have been completely deregulated since July 2000, while the HSD market was partially deregulated in 2002. Altogether, these two products constitute about 86 percent of the petroleum products market). Prices are adjusted every fortnight in accordance with changes in international market prices. The fortnightly petroleum products price revision is carried out by the Oil Companies Advisory Committee (“OCAC”), in accordance with a government approved framework. OCAC is an industry group with membership of five refineries, ten oil marketing companies and one pipeline distribution company.

Sale price information for furnace oil for the period spanning from July 2007 to June 2009 is provided below. The current price with effect from February 1 st 2010 stands at 41,634 Rupees/Tonne 4 .

4 Sourced from: Pakistan Refinery Limited at http://www.prl.com.pk/products/

34

Figure 4.3: Deregulated Furnace Oil Sale Price (PKR/Tonne) 70000 60000 50000 40000 30000 20000 10000
Figure 4.3: Deregulated Furnace Oil Sale Price (PKR/Tonne) 70000 60000 50000 40000 30000 20000 10000

Figure 4.3: Deregulated Furnace Oil Sale Price (PKR/Tonne)

70000 60000 50000 40000 30000 20000 10000 0 Total Price Rupees/Tonne Jul-07 Aug-07 Sep-07 Oct-07
70000
60000
50000
40000
30000
20000
10000
0
Total Price
Rupees/Tonne
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09

Source: Pakistan Energy Yearbook 2009

Pakistan has ten 5 oil marketing companies (“OMC”s), with two largest being Pakistan State Oil and Shell Pakistan, holding approximately 85 percent of the white oil market share. The others constitute primarily of Admore Gas (Pvt.) Ltd, Askar Oil Services (Pvt.) Ltd, Attock Petroleum Ltd, Chevron Pakistan Ltd and Total Parco Pakistan Ltd.

4.1.2 Gas

Natural gas meets about 50 percent of the country’s current demand for commercial energy, which at present rate of sectoral penetration, is likely to exceed in the next five years. Pakistan has 28.90 trillion cubic feet (“Tcf”) of proven gas reserves, and currently produces around one Tcf of natural gas per year, all of which is consumed domestically. Natural gas producers include Pakistani companies Pakistan Petroleum Limited (“PPL”), Oil and Gas Development Company Ltd (“OGDC”), Mari Gas Company Limited (“MGCL”) and Dewan Petroleum among others, as well as international companies such as Petronas, Tullow, ENI,, British Petroleum and BHP Billiton. The largest currently productive fields are Sui with largest original recoverable reserves of 12.62 Tcf, whereas Mari and Kandanwari (with a combined 8.68 Tcf) are also among the country’s major natural gas fields.

A summary of natural gas production in Pakistan is set out in the graph below:

5 Sourced from: http://www.ocac.org.pk/members.html

35

Figure 4.4: Natural Gas Production (MMCF) 4,500 BP 4,000 Tullow 3,500 PPL 3,000 POL Petronas

Figure 4.4: Natural Gas Production (MMCF)

Figure 4.4: Natural Gas Production (MMCF) 4,500 BP 4,000 Tullow 3,500 PPL 3,000 POL Petronas 2,500
4,500 BP 4,000 Tullow 3,500 PPL 3,000 POL Petronas 2,500 PEL 2,000 OPII 1,500 OMV
4,500
BP
4,000
Tullow
3,500
PPL
3,000
POL
Petronas
2,500
PEL
2,000
OPII
1,500
OMV
1,000
OGDC
500
MOL
-
MGCL
FY05
FY06
FY07
FY08
FY09
ENI
Dewan Petroleum
Years
BHP
Million CFt

Source: Pakistan Energy Yearbook 2009

Distribution and retail supply services are provided by the predominately government owned businesses of Sui Southern Gas Company (“SSGC”) and Sui Northern Gas Pipelines Limited (“SNGPL”). The two companies own 3200 km and 7347 km of transmission system, respectively and there is one major interconnected network providing gas, owned and operated by the two Suis. Both organisations transport gas to and distribute gas within, separate geographic regions and hence there is no competition between the two Suis. In addition, the Mari Gas Company also provides a limited system.

Given the huge pressure on demand for natural gas, estimates indicate demand to rise substantially in the next few years. An estimated 53 percent demand growth is expected to be recorded over the period spanning from 2009-2019, which would require imports from regional natural gas giants such as Central Asian States, Iran and Gulf states. We understand that SNGPL and SSGC have refused to commit gas supplies beyond five years in view of the non-availability of gas. In order to preempt a potential crisis the government has decided to temporarily suspend accepting raw-site proposals for power plants based on pipeline quality gas. The Private Power Infrastructure Board has so far received about 24 unsolicited proposals for gas-based power plants with a total capacity of 3,548 MW and it is expected that only a small proportion of these July be eligible for serious government consideration.

4.1.3 Coal

Coal currently plays a minor role (7.6 percent) in Pakistan's energy mix, but with compounded growth of about 15 percent per annum, it is expected to gain significance in the sector, quite rapidly. Estimated reserves of coal in Pakistan are around 187 billion tonnes, with 175 billion tonnes of these reserves being low-ash, low-sulphur lignite in Thar Desert of the Sindh province. The majority of coal production is used in the manufacture of coal bricks, with only about 1 percent used for power production.

36

4.2 Power Sector Historically, the power sector in Pakistan has consisted of two major state-owned

4.2 Power Sector

4.2 Power Sector Historically, the power sector in Pakistan has consisted of two major state-owned utilities:

Historically, the power sector in Pakistan has consisted of two major state-owned utilities: Water & Power Development Authority (“WAPDA”) powering the entire country except for the metropolitan city of Karachi and adjacent southern areas, which are powered by Karachi Electric Supply Corporation (“KESC”). These two utilities have operated independently of each other, except for a 220 kV double circuit and two 132 kV links.

Following the power crisis of the 1980s and 1990s, the GoP announced certain measures to encourage private sector participation in the power sector in anticipation of a demand supply gap. A host of policy initiatives under the Power Sector Policies of 1994, 1998 and 2002, along with transmission and hydel policies, liberalized the power sector to a great degree. In 1994, the power sector was opened up to private investors through the formation of Private Power and Infrastructure Board (“PPIB”). So far PPIB has been able to successfully commission more than 15 power plants responsible for generating 5,987 MW of electricity. These policy initiatives also allowed foreign investors greater market access and autonomy in operations, resulting in the power sector becoming a front runner for securing FDI for Pakistan.

4.2.1 Installed Generation Capacity

Pakistan has over 19,786 MW of installed generation capacity as of end FY2009. Thermal plants comprise about 64 percent of this capacity, with the rest made up of hydroelectricity (about 32%) and nuclear power (about 2%). In terms of ownership, 11,344 MW (56%) is owned by WAPDA: 1,955 MW (9%) by KESC; 6,024 MW (30%) by IPPs and 462 MW (2%) by the Pakistan Atomic Energy Commission (“PAEC”). Approximately 95 percent of the grid system is operated by WAPDA through NTDC, and the balance by KESC.

Largely due to foreign investments, Pakistan's total generation capacity has increased rapidly in recent years (more than doubling since 1990). Total transmission and distribution system losses, however, continue to be high also (around 25 percent according to some estimates), with a significant level of power theft. Seasonal reductions affect the availability of Pakistan’s hydropower capacity.

With much of the country’s rural area lacking electrification, and less than half of the population connected to the national grid, a significant power demand growth is expected in the long term. The growth of power generation in recent years has come primarily from new independent power producers, many of which have been funded by foreign investors, as well as from a few WAPDA hydroelectric dam projects.

Reform of the power sector through restructuring and deregulation is high on the Government’s agenda. The Government is committed to the pursuit of a far-reaching reform program to help meet the country's future power needs.

An analysis of installed generation capacity is summarized in the following table:

37

Table 4.1: Installed Generation Capacity in Pakistan (Capacity in MW) Year ending June 30 FY2005

Table 4.1: Installed Generation Capacity in Pakistan

Table 4.1: Installed Generation Capacity in Pakistan (Capacity in MW) Year ending June 30 FY2005 FY2006

(Capacity in MW)

Year ending June 30

FY2005

FY2006

FY2007

FY2008

FY2009

Thermal Power GENCOs IPPs (connected with PEPCO system) IPPs (connected with KESC system) KESC Total Thermal Capacity

4,835

4,900

4,900

4,900

4,900

5,570

5,560

5,560

5,560

5,725

262

262

262

262

262

1,756

1,756

1,756

1,756

1,955

12,423

12,785

12,785

12,785

12,842

Hydel Power WAPDA IPPs Total Hydel Capacity

6,464

6,444

6,444

6,444

6,444

35

35

35

36

37

6,499

6,474

6,474

6,480

6,481

Nuclear Power CHASNUPP (connected with PEPCO system)

325

325

325

325

325

KANUPP (connected with KESCL system)

137

137

137

137

137

Total Nuclear Capacity

462

462

462

462

462

Total Installed Capacity of the Country

19,384

19,450

19,420

19,420

19,786

Source: Pakistan Energy Yearbook 2009

4.2.2 Structure of Power Sector

Following the government’s pro-privatization stance initiated in the Power Sector Policies, WAPDA has been restructured into four thermal generation companies, nine regional distribution companies, and a national transmission and dispatch company. Pakistan Electric Power Company (Pvt.) Ltd (“PEPCO”) has been created as a distinct entity within WAPDA as a holding/ managing company for the fourteen new unbundled companies. As per policy, the Water Wing and therefore the hydroelectric capacity remains unbundled and with WAPDA. The following table illustrates the unbundling of WAPDA into specialized entities:

38

Table 4.2: Unbundled Entities of WAPDA Power Sub-Sectors Unbundled Power Entities Generation Unbundled WAPDA

Table 4.2:

Unbundled Entities of WAPDA

Table 4.2: Unbundled Entities of WAPDA Power Sub-Sectors Unbundled Power Entities Generation Unbundled WAPDA

Power Sub-Sectors

Unbundled Power Entities

Generation

Unbundled WAPDA generation companies (“GENCO”s):

 

1. Southern/ Jamshoro Power Generation Company (GENCO-1)

2. Central Power Generation Company Ltd. (GENCO-2)

3. Northern Power Generation Company Ltd. (GENCO-3)

4. Lakhra Power Generation Company Ltd. (GENCO-4)

Distribution

Unbundled WAPDA distribution companies (“DISCO”s):

 

1.

Lahore Electric Supply Company (LESCO)

2.

Gujranwala Electric Power Company (GEPCO)

3.

Faisalabad Electric Supply Company (FESCO)

4.

Islamabad Electric Supply Company (IESCO)

5.

Multan Electric Power Company (MEPCO)

6.

Peshawar Electric Supply Company (PESCO)

7.

Hyderabad Electric Supply Company (HESCO)

8.

Quetta Electric Supply Company (QESCO)

9.

Tribal Electric Supply Company (TESCO)

Transmission

1.

National Transmission and Despatch Company Ltd (“NTDC”)

4.2.3 National Transmission and Despatch Company

Incorporated in November 1998, the National Transmission and Despatch Company (“NTDC”) was licensed in 2002 to engage in the exclusive transmission of electricity to the national grid for a period of 30 years. The NTDC links the power generating units and load centers across the entire country, as shown in the adjacent figure. NTDC is responsible for the transmission and interconnection facilities and for the economic dispatch of all generation facilities connected either directly or indirectly. NTDC system consists of a large network of transmission lines and grid stations of voltage capacities from 220 kV to 500 kV. The NTDC operates and maintains nine 500 kV grid station, 4,160 km of 500 kV transmission line and 4,000 km of 220 kV transmission line in Pakistan. This national grid connects hydel stations located in the North and thermal units installed mostly in

39

line in Pakistan. This national grid connects hydel stations located in the North and thermal units
the Central and Southern region with the load centers. Under NTDC, dispatch functions and co-
the Central and Southern region with the load centers. Under NTDC, dispatch functions and co-

the Central and Southern region with the load centers. Under NTDC, dispatch functions and co- ordination of supply and operation of the system are undertaken by the National Power Control Center (“NPCC”).

NTDC has been given the task of market and system Operator. On December 31, 2002, NTDC was granted the transmission license by NEPRA whereby NTDC became the sole buyer of bulk power being produced in Pakistan for a period of 30 years for onward transmission/sale to the distribution companies. Under the regime set out in the license, the NTDC is entrusted to act as:-

Central Power Purchasing Agency, to procure electric power in bulk from GENCOs, IPPs and other power stations on , to procure electric power in bulk from GENCOs, IPPs and other power stations on behalf of DISCOs

System Operator, to provide a secure, safe and reliable operation of distribution facilities, and control and , to provide a secure, safe and reliable operation of distribution facilities, and control and dispatch of generation facilities

Transmission Network Operator, to conduct operation and maintenance, planning, design and expansion of the 500kV and 220kV , to conduct operation and maintenance, planning, design and expansion of the 500kV and 220kV transmission network

Contract Registrar and Power Exchange Administrator, to record and monitor contracts relating to the bilateral trading system , to record and monitor contracts relating to the bilateral trading system

As per policy governing IPPs, CPPA/NTDC shall be GPL’s sole purchaser of power generated by the plant.

Figure 4.5: Structure of CPPA as Part of NTDC

Board of Directors Consultant Finance Dir. CPPA Board TNO/ TECH Other Admin. Dir HODs GM
Board of
Directors
Consultant
Finance Dir.
CPPA Board
TNO/ TECH
Other Admin.
Dir
HODs
GM Services
GM (Sys. Op.)
Internal
Div.
NPCC
Audit
CE Coord. &
Monitoring.
Operational
Officer
GM P Purchase
(WPPO)
GM Power
Sale
Dy. GM
Finance

Source: NTDC

40

4.3 Independent Power Producers The burgeoning electricity demand coupled with generation capacity issues has resulted

4.3 Independent Power Producers

4.3 Independent Power Producers The burgeoning electricity demand coupled with generation capacity issues has resulted in

The burgeoning electricity demand coupled with generation capacity issues has resulted in the need for greater private sector involvement in the country’s power sector. Around 30 percent of the cumulative power generation of the country equating to 5,987 MW is sourced from the IPPs. Successive governments have highlighted the importance of IPPs in the nation’s economy and through various policy initiatives tried to attract private and foreign investors into power generation.

Resultantly there are more than 15 active IPPs currently operating in the previously largely public sector dominated power sector. These include:

Table 4.3: Installed IPPs

Project Name

Gross Capacity (MW)

1 AES Lalpir Limited

362

2 AES Pak Gen (Pvt.) Limited

365

3 Attock Gen

165

4 KAPCO

1,466

5 Fauji Kabirwala Power Company

157

6 Gul Ahmed Energy Ltd. (GAEL)

136.17

7 Habibullah Coastal Power (Pvt) Limited

129

8 Japan Power Generation (Pvt) Limited

136

9 Kohinoor Energy Limited

131.44

10 Rousch (Pakistan) Power Limited

450

11 Saba Power Company Limited

134

12 Southern Electric Power Company Limited

117

13 Tapal Energy Limited

126

14 TNB Liberty Power

235

15 Uch Power Limited

586

16 HUBCO

1,292

 

Total

5,987

Source: Pakistan Energy Yearbook 2009

Furthermore, there are about 37 IPPs in the pipeline according to the PPIB, expected to come on line by December 2017 with an additional capacity of 10,242MW. These include a host of thermal IPPs as well hydel and alternate energy IPPs (see table on next page).

41

Table 4.4: IPPs in the pipeline Project Location Capacity (MW) Expected COD 1 AttockGen Power

Table 4.4: IPPs in the pipeline

Table 4.4: IPPs in the pipeline Project Location Capacity (MW) Expected COD 1 AttockGen Power Morgah,

Project

Location

Capacity (MW)

Expected COD

1 AttockGen Power

Morgah, Rawalpindi

156

COD (Mar 2009) COD (Aug2009) COD (November 2009 Jan 2010 (NYC)* Jan 2010 (NYC)* Jan 2010 (NYC)* Jan 2010 (NYC)* Feb 2010 (NYC)* Mar 2010 Mar 2010 Decr 2010 Dec 2010 Dec 2011 Jun 2012

2 Atlas Power

Sheikhupura

213.6

3 Nishat Power

Lahore

195.26

4 Saif Power

Sahiwal

209

5 Orient Power

Balloki

212.7

6 Fauji Mari Power

Daharki

176.66

7 Engro Power

Qadirpur

216.8

8 Sapphire Power

Muridke

209

9 Nishat Chunian

Lahore

195.26

10 HUBCO-Narowal

Narowal

213.6

11 Bhikki (Halmore) Power

Bhikki

209

12 Liberty Power Tech

Faisalabad

195

13 Grange Power Limited

Arifwala

146.5

14 Radian Power

Pasrur

150

15 Engro ICB Power

Near Bhikki

527

Dec2012

16 Star Thermal Power

Daharki

125.84

Dec 2012

17 Uch II Power

Dera Murad Jamali,

375.2

Dec 2012

18 Green Power

Dadu

170.95

Dec2012

19 Kandra Power

Kandra near Sukkur

120

Dec 2013

20 New Bong Escape Hydel

Jehlum River, Near Mangla

84

Dec 2013

21 Rajdhani Hydro Power

Poonch River, Near Mangla

132

Dec 2014

22 Gulpur Hydro Power

Poonch, River/Gulpur

100

Dec 2014

23 Patrind Hydropower

Kunhar River

150

Dec 2014

24 Kotli Hydel

Poonch River

100

Dec 2014

25 Sehra Hydel

Poonch River

130

Dec 2014

26 AES Imported Coal

Gadani, Karachi

1200

Jun 2015

27 Karot Hydel

Jehlum River

720

Aug 2015

28 Madian Hydropower

Swat River

157

Dec 2015

29 Asrit-Kedam Hydel

NearKalam/SwatRiver

215

Dec2015

30 Azad Pattan Hydel

Jehlum River/Sudhnoti

222

Aug 2016

31 Kalam-Asrit Hydel

Swat River

197

Dec 2016

32 Shogosin Hyderopower

Luthko River/Chitral

127

Dec 2016

33 Shushgai Zhendoli Hydel

Turkho River/Chitral

102

Dec 2016

34 Gabral-Kalam Hydropower

Gabral/Swat River

101

Dec 2016

35 Suki Kinari Hydropower

Kunhar River/ Mansehra

840

Jun 2017