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Sahar Iqbal
Akhund Forbes Hadi, Karachi
sahar.iqbal@akhundforbes.com
 

Introduction

According to the 2018-2019 Pakistan Economic Survey, conducted by the Federal Ministry of Finance (MoF), the power sector is ‘an integral part of the economic order of Pakistan’^[1] and, as a whole, is of vital importance to the country’s economic performance. The MoF also notes that the severe energy crisis which had gripped Pakistan over the past decade or so is being overcome.

Although cautious, the MoF’s summary of the sector’s present state indicates significant improvements. In recent years Pakistan’s power sector has shown itself to be dynamic, having recently witnessed sizeable investment in terms of capital and the initiation of privatisation schemes. In both cases our firm has been at the forefront of these ground-breaking developments.

Pakistan’s power sector

As this article seeks to examine recent developments in Pakistan’s power sector, we first provide an overview of the basic structural framework within which the sector operates.

The power sector is regulated by the National Electric Power Regulatory Authority (NEPRA). By law, the NEPRA is required to regulate the sector in a way which protects the interests of both investors and customers, and helps move the sector towards a more competitive environment.^[2] The Federal Ministry of Energy (Power Division) oversees the sector from a strategic vantage point, in consultation with other stakeholders.

The actual business of Pakistan’s electric power cycle can be outlined by identifying the three core phases in the production cycle:

1. The upstream part of the sector is called the generation stage. Pakistan employs a variety of technologies and fuel sources in power generation, ranging from thermal to renewable sources.

2. The transmission stage is the intermediate stage where high-voltage electricity reaches the grid and high-voltage transmission lines transmit the electric power to power distribution companies long distances across the country.

3. The distribution stage occurs when electric power has been distributed to the various power distribution companies, and subsequently transferred to distribution power lines on having the voltages reduced and onto the consumer.

Historically, the power sector has been dominated by state-owned entities, which controlled all three stages. However, on account of production and supply inefficiencies, since the 1990s, each of the three stages have been liberalised to varying degrees. The private sector has seen significant involvement in the generation and distribution stages respectively, through the introduction of independent power plants since 1994 and the privatisation of one of the largest distribution companies in Pakistan, the then Karachi Electric Supply Corporation (now K-Electric), in 2005.

However, the transmission stage largely remained within the exclusive domain of the state-owned National Transmission and Despatch Company (NTDC) which maintained an important role in regulating the supply of electric power.^[3] It must be pointed out that several editions of the Pakistan Economic Survey have mentioned inefficiencies in the transmission line network as one of the key components in power loss.^[4]

In recognition of the advantages of private sector engagement, the Federal Government introduced the Transmission Line Policy in 2015 (the Policy). This policy takes a considerable step towards a more competitive and liberalised market at the transmission stage through the introduction of public-private partnerships (PPPs) in establishing key high-voltage transmission lines across Pakistan.

The Transmission Line Policy

Under the Transmission Line Policy ('the Policy'), private sector investment was anticipated for the enhancement of the transmission network by developing reasonably sized financeable packages which would comprise one or more transmission lines along with the associated grid infrastructure.^[5] The Policy envisages all projects formulated thereunder as being premised on a PPP framework along the build-own-operate-transfer (boot) model for a 25-year period. Thereafter, each project would be transferred to the control of the NTDC.

The Policy specifies that the bidding process shall be on international standards and outlines the manner in which bids are to be received. Pursuant to the Policy, once a bid has been accepted, the NTDC conducts a number of performance and compatibility studies on the detailed designs before the commencement of the construction for the power transmission line. The charges for these studies shall be reimbursed to the NTDC by the bidder, on granting the award. The Policy states at length the allocation of responsibility between the various stakeholders. In relation to financing arrangements, the Policy stipulates that only limited recourse financing will be possible. Therefore, the policy is designed to protect the assets of any independent transmission company (ITC) and from the outset is clear that any financing arrangements would depend on the charges and fees raised through the provision of the ITC’s services.

Incentives

The Policy outlines a number of incentives for private sector investors, including the repatriation of equity along with dividends, subject to related existing rules and regulations. The ITC is granted a number of benefits under customs and taxation law. A ten-year exemption period is granted regarding corporate income tax, payments of tax on turnover and alternate corporate tax. Moreover, reduced customs duty would be available for a three-year period. Additionally, wherever sales taxes on machinery and equipment is not exempted, a reduced rate shall be available.

As a security package, in brief, the Federal Government has elaborated a number of levels of protection for foreign or private investors in the transmission sector, including protection against political force majeure risks, guarantees for securing payment obligations of the NTDC under the Transmission Service Agreement.

The impact of China Pakistan economic corridor (CPEC) on Pakistan’s power sector

As the Federal Government unveiled the Policy, projects were identified in Pakistan for their inclusion in the CPEC programme, which is part of China’s historic Belt and Road Initiative. On account of the importance of the power sector to Pakistan’s economy, energy related projects are a major aspect of the CPEC programme. According to the Federal Government of Pakistan’s official website, there are currently more than ten ongoing power projects.^[6] The power generating stations include thermal and renewable projects, and are collectively a massive sign of Chinese investor confidence in Pakistan’s power sector.

Our law firm has advised on two key projects:

1. The Matiari – Lahore Transmission Line Project is the first high-voltage transmission line established under the auspices of the Policy and is the China State Grid’s first major electricity transmission grid project of its kind in Pakistan. The project is focused on constructing an 878-kilometre transmission line from Matiari to Lahore. The main sponsor of the project is the China Electric Power Equipment & Technology, which itself is a subsidiary of the State Grid Corporation of China, which has established a special purpose company in Pakistan to carry out the transaction. The project, as a whole, entails an investment of $1.65bn and after fulfilling mandatory prerequisites, the project achieved financial sign-off in February 2019.^[7] The project is expected to commence commercial operations by March 2021.

Our firm was engaged by the project’s primary lender, the China Development Bank as Pakistan’s legal counsel. To date, this is the largest bilateral loan facility by an international bank to a non-sovereign Pakistan borrower.

2. The China Power Hub Generation Company (CPHGC) is a joint-venture between a Pakistan power company and the renowned China Power International Holding Ltd (CPIH).^[8] This company is establishing a coal-fired power station in Balochistan and has an estimated total cost of approximately $2bn. Our firm has been extensively involved in advising and counselling CPHGC on all legal matters following the project’s financial sign-off and on commencement of commercial operations in August 2019.^[9]

The privatisation of power stations

In addition to the above, Pakistan’s power sector is also undergoing a major privatisation programme in which the Federal Government is offloading a number of power stations to balance its fiscal deficit. According to official sources,^[10] private sector participation in power generation increased from around 53 per cent of total electricity produced in 2014 to around 61 per cent in 2018, demonstrating a considerable growth in investor confidence four years. Such trends suggest wider favourable trajectories.

The most important privatisation scheme to date is the ongoing transaction relating to the state-owned company, National Power Parks Management Company (Private) Ltd (NPPMCL), which involves the sale of two RLNG power stations with a combined output of over 2,400MW. The aggregate output of the two power stations together represents seven per cent of Pakistan’s energy requirement. These power stations are some of the most efficient power generation plants in the word.

According to official estimates,^[11] the value of the transaction is set to be approximately $2bn and the transaction will be the largest power privatisation in Pakistan’s history. As part of the winning consortium led by Credit Suisse (Singapore) Ltd, our firm is advising the Privatisation Commission of the Government of Pakistan on this transaction.

Conclusion

Pakistan’s power industry is a rapidly changing and transforming sector for the country and its economy. As successive governments have attached increasing importance to economic growth, they have also been focused to enhance the efficiency and vitality of the power sector. Over the past 30 years, Pakistan’s governments have created increasing opportunities for private sector investment and maintained a liberal investment policy for foreign investors.

In the recent Economic Survey from 2018-2019, the MoF has continued to express the opinion that further growth is needed in the transmission sector. Moreover, according to the Survey, the Federal Government is starting to prepare for a wider role of renewable energy in the power sector. According to the Integrated Energy Plan which has been proposed by the current Imran Khan-led PTI government, administrative and institutional reforms are also envisaged across the power sector. When taken as a whole, it is reasonable to assume the power sector is will see further investment opportunities for years to come, and Pakistan’s authorities are committed to making the sector a competitive market, linked with wider economic ambitions of economic recovery.