Pakistan IPPs stuck in limbo

April C. Murelio

Associate Editor

Succumbing to international pressure, Pakistan`s government appears to be easing its grip on some independent power producers (IPPs). However, those involved in the dispute remain cautiously optimistic.

“As an emerging market, Pakistan shows good, long-term potential,” said Todd VanFossen of Coastal Corp. “But for the next three to five years, we`re going to closely watch both the economic and political situation.”

Last year as the country`s new Prime Minister Nawaz Sharif took the reins from Benazir Bhutto, America`s Coastal, AES Corp. and Tenaska International found themselves among several IPPs accused of corruption and misconduct.

In late June and early July, the government informed eight IPPs that it intended to cancel all existing power purchase agreements based on these allegations.

Because these agreements were signed under Bhutto, Shariff`s government couldn`t renegotiate the tariffs charged to Pakistan`s Water and Power Development Authority (WAPDA) for power. However, under an anti-corruption clause, the agreements could be cancelled if Pakistan`s Ehtesab (Accountability) Bureau found instances of wrongdoing such as bribes or kickbacks. To date, the bureau has come up empty handed.

“Sharif`s actions have clearly been intended to embarrass the former leadership,” said Kenneth Woodcock, AES senior vice president. “However, he didn`t expect the world to support the IPPs as it has.”

Already reeling from sanctions imposed after its nuclear test performed in early 1998, Pakistan`s economy desperately needs foreign aid to prevent default on its $32 billion international debt. But until the IPP dispute comes to full resolution, a proposed $5 billion International Monetary Fund loan and assistance from the World Bank and the Asian Development Bank remain on hold.

Despite these sanctions, Pakistan continues to pressure foreign IPPs, with criminal proceedings pending against directors of the Hub Power Co. (HUBCO) and a unilateral tariff reduction against it firmly in place.

In early February, tax authorities froze HUBCO`s accounts, and the government stated WAPDA, with a 1998-99 estimated deficit of $1.6 billion, would never be able to buy electricity from the IPPs and HUBCO at the rates agreed upon by the former Bhutto government. The privatized Kot Addu Power Co. (KAPCO) also remains in the fray.

The Notice of Intent to Terminate (NIT) received by Tenaska International, the IPP development subsidiary of an Omaha-based utility, remains in place. Although the company isn`t commenting on the NIT process, Jana Martin, Tenaska`s public relations director, said the Uch project is “progressing on schedule.”

The $635.5 million project was Pakistan`s first gas-fired, combined-cycle power project and plays a key role in developing the country`s bountiful supply of low-Btu gas.

However for AES and Coastal at least, the situation seems resolved. In November, the government and WAPDA cancelled all NITs against AES, which operates AES Lal Pir and AES PakGen in Pakistan`s Punjab Province.

Because of the cancellation, AES agreed to withdraw and terminate the International Chamber of Commerce arbitration it initiated after the NITs were first issued and waived its right to seek damages from the dispute.

Woodcock said no other conditions existed, and the withdrawal of the NITs and the terms of the various project agreements, including tariffs, between AES and Pakistan`s government for the time being remain unchanged.

Also, Woodcock said AES plans to assist the state-owned WAPDA with restructuring and privatization efforts. Although nothing is final, he said Sharif`s government asked AES to operate certain power plants and distribution facilities. Hoping to improve efficiency, the government also has assigned military personnel to staff WAPDA`s regional offices, a move supported by many IPPs.

“We`ve always tried to find a win-win situation in Pakistan because the country badly needs assistance,” Woodcock said. “I think we`ve found it, and now we can continue to provide the people with electricity and fuel economic growth.”

Pakistan`s government and WAPDA withdrew the NITs against Coastal in December, with no conditions. However, VanFossen said discussions continue between Coastal and WAPDA “for commercial restructuring of the power purchase agreement for the mutual benefit of all parties.”

Coastal operates Habibullah Coastal Power Co. at Quetta, a 128 MW combined-cycle, natural gas-fired plant in western Pakistan and Saba Power Co., a 114 MW residual fuel oil-fired, conventional steam power plant 40 miles northwest of Lahore.


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