4AO'1i'/'g _ /cZ _-C! D _cmet of The World Bank FOR OFFICLAL USE ONLY Rqmt No. 9004-PAK STAFF APPRAISAL REPORT PAKISTAN PROPOSED EXPANDED COFINANCING OPERATION TO PARTIALLY GUARANTEE UP TO US$:!40 MILLION OF A SYNDICATED COMMERCIAL BANK LOAN OF US$360 MILLION EQUIVALENT TO THE HUB POWER COMPANY OCTOBER 29, 1991 Private Sector Financial Operations Group Cofinancing and Financial Advisory Services This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CUIRRENCY EQUJIVALENT Currency Unit Pakistan Rupee (Rs) US$1.00 - Rs 24.04 MIPASURES AND FOIIIVAI-RNS lometer - 0.6214 miles )n - 1,000 kilograms ilovolt - 1,000 volts egawan - 1,000 kilowatts ilowatt Hour - 1,000 watt hours ABBREVIATIONS AND AC'RO)NYMf.C - Asian Development Bank - Briti.sh Electricity lntemationa! Limittd Bankers Equity Limited - Board of Investment r - Build-Operate-Transfer Commonwealth Development Corporation * Core Investment Program FACE - Compagnie Francaise d'Assurance pour le Commerce Exterieur (France) P - Canadian Utilities Power of Canada - Development Finance lnstitution - Dhabi Trading - Escrow Agreement s - Export Credit Agencies 3D Export Credit Guarantee Department (United Kingiom) ) - Expanded Cofinancing Operation .I - Energy Sector Loan I ,11 - Energy Sector Loan 11 - Fuel Supply Agreement p * Govemment of Pakistan - Hub Power Group BCO - Hub Power Company - Implementation Agreement I - Intemational Competitive Bidding - Interest During Construction -. - International .Aonetary Fund .IM - The Export-import Bank of Japan SC - Karachi Electric Supply Corporation h - Kilowatt Hour - Long Term Energy Sector Strategy I - Letter of Intent P - Medium-term Macroeconomic Adjustment Program f - Thousand Cubic Feet 11 - Ministry of Intemational Trade and Industry (Japan) I - Megawatt i'P - Ministry of Water and Power FC - National Development Finance Corporation IN Overseas Development Administration (United Kingdom) DC - Oil and Gas Development Corporation MA - Operations and Maintenance Agreement ) - Private Energy Division of National Development Finance Corporation - Policy Framework Paper - Pakistan Intemational Airlines DC - Pakistan Mineral Development Corporation - Power rurchase Agreement Private Power Cell in Ministr;y of ','Water and Power R - Project Performance Audit Report - Private Sector 'DF - Private Sector Energy Development Fund ) - Pakistan State Oil Company - Shareholders Agreement for Hub Power Company E - Sezione Speciale per PAssicurazione del Credito all'Esportazione (Italy, P - State Bank of Pakistan R - Special Drawing Rights - Sponsors/Investors in Hub Power Complex 5PL - Sui Northem Gas Pipeline Company, Ltd. - Security Package ;C - Sui Southem Gas Corporation - Trust Deed ! Tumkey Construction Contract AJD - United States Agency for International Development ,PDA - Water and Power Development Authority GOP's FISCAI YEAR July I - June 30 FOR OFFICIAL USE ONLY PAKISTAN PROPOSED EXPANDED COFINANCING OPERATION TO PARTIALLY GUARANTEE UP TO US$240 MILLION OF A SYNDICATED COMMERCIAL BANK LOAN OF US$360 MILLION EQUIVALENT TO THE HUB POWER COMPANY STAFF REPORT TABLE OF CONTENTS PROJECT SUMMARY i SUMMARY OF TERMS OF ECO ii 1. THE ECONOMY AND ENERGY SECTOR 1 A. Economy 1 13. Long-Term Energy Sector Strategy (LES) 1 C. Progress in the Implementation of LES 3 D. Seventh Plan for Energy (FY89-93) 4 E. Bank's Group Role in the Energy Sector and Experience with Past Lending 6 II. PROMOTION OF PRIVATE SECTOR IN ENERGY DEVELOPMENT 7 A. Framework for Promotion of Private Sector Participation 7 B. PSEDF's Potential Lending Operation 10 III. THE HUB POWER COMPLEX 10 A. Historical Development 10 B. Preparation 11 C. Description 13 D. Costs 14 E. Security Package for HPC 16 IV. THE EXPANDED COFINANCING OPERATION FOR HPCO 22 A. Setting 22 B . Objectives and Rationale for the Proposed ECO 23 C. JEXIM Co-Guarantee 25 D. ECO Level Over Time 26 E. Proposed Financing Plan 27 This Report was prepared by Ibrahim Elwan, Suman Babbar, Abha Joshi-Ghani, David Baughman. Jeffrey Humber (CFSPS), with contribution from Mahesh Sharma, Maria Elena Barrientos (EMIEG), Sanjivi Rajasingham, and Kyoichi Shimazaki (CFSPC), Herbert Morais (LEGOP), Akhtar Hamid (LEGEM), and Steve Lintner (EMTEN). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -ii - V. THE HUB POWER COMPANY 32 A. Corporate Development 32 B. Forecast of HUBCO's Financial Performance 34 C. Environment 38 VI. ADMINISTRATION 39 VII. RISKS 40 VIII. JUSTIFICATION 43 IX. RATIONALE FOR BANK INVOLVEMENT 46 X. SUMMARY OF AGREEMENTS 47 3.1 MEMBERS OF THE HUB POWER GROUP 50 3.2 DETAILED DESCRIPTION OF THE HUB POWER COMPLEX 53 5.1 FORECAST SOURCES AND USES OF FUNDS 59 FORECAST PROFIT AND LOSS STATEMENT 60 FORECAST BALANCE SHEET 61 NOTES AND ASSUMPTIONS OF FINANCIAL FORECAST 62 8.1 ASSUMPTIONS FOR THE INTERNAL ECONOMIC RATE OF RETURN 64 8.2 PROJECTIONS OF ELECTRICITY CONSUMPTION IN PAKISTAN 66 MAP: EBRD 22535 EXPANDED COFINANCING OPERATION (ECO) TO PARTIALLY GUARANTEE UP TO US$240 MILLION OF A SYNDICATED COMMERCIAL BANK LOAN OF US$360 EQUIVALENT TO THE HUB POWER COMPANY IN THE ISLAMIC REPUBLIC OF PAKISTAN PROJECT SUMMARY Project Des The proposed Project, with an installed capacity of 1,292 MW, comprises four conventional oil-fired power generating units of 323 MW each and associated facilities, including a 500 kV switch yard, access road, and fuei oil storage tanks The proposed Project would be undertaken by the Hub Power Company (HUBCO) on a Build-Own Operate basis. Fuel for the proposed Projecet will be supplied by a pipeline to be constructed and operated by Pakistan State Oil Company (PSO), a public sector company. Two single circuit 500 kV lines of 200 kilometers each, proposed to be constructed by WAPDA under the Transmission Extension and Reinforcement Project (Loan 3147-PAK) would connect the proposed Project to the 500 kV transmission grid. The proposed Project would be located at the mouth of the Hub River in Baluchistan Province, near Karachi. Benefits: HUBCO would add nearly 18% of existing capacity, thereby addressing critical shortages of electricity currently being experienced in the country. Since this capacity would be established in the private sector, it would release public sector resources for other critical investments. A comprehensive system of penalties and bonuses, based on internationally accepted performance standards, wnuld ensure that the plant would be operated efficiently and would serve as a benchmark for the evaluation of existing utilities in Pakistan. Riaka: Since the oil-fired generating units proposed to be installed by HUBCO are based on proven technology, there are no unforeseen risks in design and construction of these units. Risk of unforeseen geological conditions are mitigated by ensuring that all investigation work is completed prior to the start of construction and the release of any financing for the,. proposed Project. Adequate contingency provisions have been made to address any cost increases on account of changes in financing cost or other variations. Risks of damage due to fire, explosion, etc. would be covered by con- mercial insurance provisions secured by HUBCO. Adequate special financing arrangements to cover sovereign risks have been put in place under the agreements proposed to be signed by GOP and HUBCO. The major risk would be inability of the financiers to commit the necessary financing for the implementation of the proposed Project. However, construction activitv would be initiated only after commitments have been received from all financiers. - ii - Estmlated Costs of Hub Power Comllex Fstimated Cost of the Comolex and Summary of the Finanving Plan Estematedl CUMs Rs mnillion I US4 minjDo A. Project Development Costs 505 21 B. Turnkey Construction Contract Cost 21.344 888 C. Engineering aid Coordination for HPG 1,250 52 D. Pre-operational O&M Costs 457 19 E. Working Capital 336 14 Subtotal Project Costs2/ 21S29 22A F. Interest During Construction and other Finance Related Costs 8,366 348 G. Reserve Contingency Fund (Debt and new Equity) 3,605 150 H. Debt Service Escrow Reserve 1,635 68 Total Financing Requirements 3L5012 J1i Summary Financi*n Plan ToS Local 2.404 100 7 Foreign 5.61 223 14 Subtotal Equity 7,765 323 21 Q2et Local 3.606 150 8 Foreign 26.131 1.087 21 Subtotal Debt 29,737 1,237 79 Total 37,502 1,560 100 I At exchange rate of Rs 24.04/lJS$. 2 Includes the following Taxes and Duties: 1.226 51 -iii - Proposed Financing Plan folr HtJBCO Progosed Financeing Planl (VS$ Mileion) Equity Base Debt Service Contingency Total Finany*ng a2 'Jcrow jjg F inancing F2 Foreign Investors Sponsors/HPG Members 78 6 - 38 116 7 Offshore Financ;al Institutions 82 6 17 99 7 Commonwealth Dev. Corp. 8 _ I - 8- Subtotal Foreign Equity 1i6 ii 17 .1 223 15 Local Investors H1UB Convertible Bonds 100 1 _ 100Q Subtotal Equity 268 20) 17 . 21 Debt Foreign PSEDF 355 26 - 52 407 26 Svndicated Commercial Bank Loan 249 19 51 60 360 23 Export Credit Agencies 300 24 - - 300 21 Commonwealth Dev. Corp. 2Q 2 1 20 Subtotal Foreign Debt 924 21 i I 112 1087 21 Local Banks 150 9 _ _ 150 8 Subtotal Debt 1074 80 5l 1-12 i27 12 TOTAL 1342 100% 68 150 1560 100 IFigures may undergo minor adjustments. 2Taken as a percentage of the total cost of the Complex, which includes interest during construction and other finance related costs. Map NElo: IBRD 22535 SUMMARY OF TERMS OF TO PARTIALLY GUARANTEE TPT PROPOSED EXPANDED COFINANCING OPERATION (ECO) UJP TO US$240 MILLION OF A SYNDICATED COMMERCIAL BANK LOAN OF US$360 MILLION EQUIVALENT (THE LOAN) TO THE HUB POWER COMPANY TO FINANCE A POWER GENERATION COMPLEX ( THE COMPLEX) IN THE ISLAMIC REPUBLIC OF PAKISTAN Blmrrger: Hub Power Company (HUBCO). Guarantor,U Internetional Bank for Reconstrucdon and Development (World Bank) and Export-Import Bank of Japan \JEXIM) in the ratio of 2:1 (see Guarantee Provisions below). Lenders: The commercial bank members of the syndicate (the Lenders). Amoi US$360 million equivalent, consisting of four facilEties: (i) ECO guaranteed base facility of US$200 million equivalent; (i.) ECO guaranteed secondary facility of US$40 million equivalent; (iii) a JEXIM guaranteed base facility of US$100 million equivalent; and (iv) a JEXIM guaranteed secondary facility of US$20 million equivalent. Curreneies: U.S. Dollars and Japanese Yen. Use of Proceeds: To finance part of the cost of eligible goods and services required for the construction of the Complex. The balance of the costs will be financed by export credit agencies, subordinated debt and foreign and local equity. Subordinated debt consists of a sub-loan from the Private Sector Energy Development Fund (PSEDF) which is partially financed by the Bank (Loan No. 2982-PAK). Procurerne= The equipment, materials and services for the Complex will be included in the Turnkey Construction Contract which has been awarded through a competitive process meeting the requirements of economy and efficiency under the World Bank's Procurement Guidelines. - V -- Drawdov*.: Disbursements under the Loan would be for eligible expenditures for the Complex. HUBCO would maintain a special account in a bank acceptable to the Guarantors, denominated in currencies of the Loan into which the proceeds of the L.oan would be deposited 30 days prior to the start of the quarter, based on a quarterly expenditure requirement. HUBCO would provide the World Bank/JEXIM with periodic reports on the use of funds for expenditures for the Complex, including a yearly audit report of the special accounts by independent auditors acceptable to the World Bank. Term: 12 to 14 years from date of agreement including 4.5 to 5 years of availability/ grace period. Aviaabilitv 4.5 to 5 years from date of agreement. Period: Interest Rate:1 U. Dollar Tranche (a) For the base facility: (i) Three or six months London Interbank Offered Rate (LIBOR) plus 2% per annum prior to completion of the Complex; (ii) Three or six month LIBOR plus 1-7/8% after completion until the earlier of the 4th anniversary of the date of completion or the 8th anniversary of the date of the loan agreement; and (iii) Three or six month LIBOR plus 2-1/8% thereafter. (b) For the secondary facility: Three or six months LIBOR plus 2-1/4% prior to completion of the Complex; after completion, the applicable interest rate would be the same as the interest rate for the base financing facility for the U.S. Dollar Tranche. Japanese Yen Tranche For the Japanese Yen Tranche, the applicable interest rate may be one or a combination of the following: I These terms are of an indicative and preliminary nauire and will be revised at the time of receiving a firm commitmnent from the commercial banks. - vi - (a) For the base financing: if the Yen Traache is based on the Lorg-Term Prime Lending Rate (LTPLR): (i) LTPLR plus 1% per annum prior to completion of the Complex, (ii) LTPLR plus 7/8% after completion until the earlier of the 4th anniversary of the date of completion or the 8th anniversary of the date of the loan agreement; and (iii) LTPLR plus 1-1/8% thereafter. The LTPLR would be revised every 4/5 years and/or every 6/12 months. If the Yen Tranche is based on LIBOR, the applicable interest rate would be LIBOR plus the same margin applicable to the U.S. Dollar Tranche. If the Yen Tranche is based on the Short Term Prime Lending Rate (STPLR), the applicable interest rate would be STPLR plus the same or slightly higher margins as those applicable to the LIBOR-based portion, depending on market conditions. (b) For the secondary facility: The applicable interest rate for the base financing facility of the Yen tranche, plus 1/4% prior to completion of the Complex; after completion, the applicable interest rate would be the same as the interest rate for the base financing facility of the Yen Trar. he. RepaInngnt; The Loan would be repaid in 21 equal semi-annual installments commencing on the 4.5th anniversary of the date of the syndicated loan (the Agreement). Qcumentation:. The Agreement would be acceptable to the World Bank and incorporate inter alia, the following provisions: Escrow Account: A Lenders' Inte.-est Reserve Account will be established off-shore. It will be required that an amount equivalent to approximately one year's interest payments to the Lenders be reserved in the account, from the time principal repayments start. - vii - Cross-Default Causes: As in the case of other cofinancing agreements, the generally broad cross-default provisions of commercial loan agreements would be limited, Cross-default remedies based upon indebtedness to the World Bank may be taken by a majority of the lenders only if the World Bank has accelerated its loan for the Private Sector Energy Development Project (Loan 2982-PAK) or if thcre is a payment default bv Pakistan under its World Bank loans in a material amount (to be specified) and which default persists for more than 45 days. Information Sharing: Non-confidential information concerning the Complex, normally exchanged in World Bank cofinancing transacdons, would be shared by the World: Bank and JEXIM with the designated Agent (see Agent below), for the benefit of the Lenders. All information regarding the Complex and HUBCO given to the Agent for the benefit of the Lenders would be shared by the Agent with the World Bank and JEXIM. Amendment: Any material amendment to the terms of the Agreement which would affect the Guarantee would require the prior consent of the World Bank and JEXIM. Coudiflop The Loan Agreement and the Guarantee will be effective only Prgcedent when: to Effectiveness: (i) an irrevocable letter of credit in favor of the sponsors covering their total equity contribution has been opened and agreements for all remaining equity and debt financing including Export Credit Agencies as specified in the financing plan have been executed and all conditions precedent for their effectiveness have been fulfilled; (ii) all agreements required in comnection with the construction of the Complex (including but not limited to the Implementation Agreement, the Power Purchase Agreement, the Fuel Supply Agreement, the Construction Contract, O&M Agreement, Escrow Agreement, etc.), have been executed and are effective; and all conditions precedent for their effectiveness have been fulfilled; (iii) HUBCO has been capitalized and staffed in a manner satisfactory to the Bank. Guarantee =Scoe: Provesions; 2 (1) The partial guarantee of the Loan is expected to oe provided by the World Bank and JEXIM in the ratio of 2:1. The World Bank Guarantee and the JEXIM Guarantee will be callable on a 2 The gumantee provisions described (except under "Scope") reflect World Bank requirements. - viii - pari passu and pro rata basis. The portion of the loan to be guarantee,d by JEXIM is limited to JRpanese Yen Tranche to be provided by Japanese banks including Japanese branches of non- Japanese banks. The Yen portion of the syndicated loan would be at least one third of the total amount; (2) The World Bank Guarantee and the JEMM Guarantee will cover the panQipA payments due under the Loax. and remaining unpaid. (3) The Escrow Agent of the Lenders' Debt Service Escrow Account will be designated with the authority to call the guarantee upon the occurrence of the following specified 'events", which will be properly "certified" by the Escrow Agent: (i) HUBCO (through the Escrow Agent) has failed to make a principal payment or a portion thereof due and payable to the Lenders either on a scheduled payment date or on acceleraeon; ad (ii) The failure of HUBCO (through the Escrow Agent) to make the payment is the result of the failure of the Government through the State Bank of Pakistan to make available the equivalent foreign exchange at the agreed rate upon receipt of the local currency funds from HUBCO (through the Escrow Agent); and /or (iii) The failure of HUBCO (through the Escrow Agent) to make a principal payment or a portion thereof is tne result of a shortfall in the receipt by HUBCO (through the Escrow Agent) of local and foreign currency amounts payable by the Government under the Implementation Agreement. A^ccleralon: The Guarantee wWI not be callable/accelerable during the grace period of the Loan, i.e., until the 4.4th/5th anniversaxy of the date of the Agreement, except in the event of termination (as defined in the Implementation Agreement). If the Loan is accelerated during this period for reasons other than termination, the Guarantee will lapse. Subrogation: Upon any payment by the World Bank under the Guarantee, the World Bank would immediately become entided to recover from HUBCO and GOP the amount so paid and would have the immediate right of sutrogation against HUBCO and GOP in respect of such amounts regardless of whether the Lenders have been fully repaid by HUBCO and GOP in respect of other amounts due the Lenders under the Loan Agreement. Requisite Authorizations: All authorizations and approvals required to make the Guarantee effective would be obtained and be in full force and effect. - ix - Option to Release: Provisions expressly enabling the Lenders to release the Guarantee would be included. Guarantee Fee: A guarantee fee of 50 basis points per annum, less any applicable waivers, will be payable by HUBCO on the outstanding guaranteed amount in line with the Bank's current guarantee pricing policies. Fees: Management, Commitment, Arrangement and Agency Fees to be specified. Taxes and Other All payments to be made under or in connection with the Loan to Deductions-, be free and clear of any taxes, withholdings or other deductions whatsoever. Indemnit. bv The Islamic Republic of Pakistan (Pakistan) and HUBCO would Pakhstan and enter into an Indemnity Agreement with the World Bank in respect Borrowers of its Guarantee. Under such Indemnity Agreement, Pakistan and/or HUBCO would undertake to reimburse and indemnify the World Bank on demand, or as the World Bank may otherwise determine, for any payment made by the World Bank under its Guarantee. GoverninogLaw The Agreement would be governed by Japanese and English law and Jurisdiction: as appropriate and provide for the non-exclusive jurisdiction against the World Bank of the Japanese and English courts. The Indemnity Agreement would follow the legal regime, and include dispute settlement provisions which are customary in agreements between member countries and the World Bank. Agwento The Agent for the Lenders is to be appointed. 1. THE ECONOMY AND ENERGY SECTOR A. Economy 1.01 In spite of impressive growth performance for most of the 1980s, Pakistan, in recent years, has developed a large fiscal deficit, and more recently, serious balance of payments problems. Progress in the implementation of the Government's Medium-term Macroeconomic Adjustment Program (MAP) covering FY88-91, which was aimed at correcting these imbalances, had been less than satisfactory, particularly regarding efforts to reduce the fiscal deficit. The country's problems have been aggravated by the Gulf-crisis, which has led to a critical foreign exchange reserves situation. The Gulf Crisis has demonstrated once again the country's vulnerability to external shocks, which have weakened Pakistan's external resource position. Most of this is due to higher oil prices and the reduction in remittances from Pakistani workers in the Gulf area. The new Government, which took office in November 1990, has moved swiftly in certain areas to reactivate the adjustment effort. Investment and import licensing have been virtually eliminated; the financial sector reform program has been reactivated; and major enterprises in energy, telecommunications and highways are being granted increased autonomy. Important progress has also been made in two long-standing issues: provincial disputes over allocation of the Indus waters have been resolved with the recent agreement of the four riparian provinces to a water apportionment scheme; and the National Finance Commission has recently announced new revenue sharing arrangements between the Federal Government and the provinces. 1.02 The Government's policies place a particular emphasis on industrial deregulation and privatization. The principal aim is to shift from the public to the private sector those functions and operations which can be more efficiently and cost effectively carried out by the latter. A significant part of this effort is the recently initiated public enterprise privatization process. The first phase of this program aims at privatizing about 115 production units, of which bids have already been invited for four. In the financial sector, two of the nationalized commercial banks have been privatized in 1991, one of them to that bank's employees, while bids are expected to be invited for two of the remaining such banks very soon. In addition, the Government has initiated the privatization of the Telecommunication Corporation and the Sui Northern Gas Pipelines Limited (SNGPL). In May 1991, the national electricity utility, the Water and Power Development Authority (WAPDA), has been asked to prepare proposals to divest some or all of its thermal stations and the distribution system to the private sector. 1.03 The Government has also confirmed its intention to address the country's fiscal constraints. Initially, the actions taken on this front were insufficient, contributing to delays in agreeing on the third-year Structural Adjustment Facility; and in the release of second tranches under the Bank's sector loans in energy and finance. However, GOP recently implemented price adjustments for electricity and natural gas in the energy sector and undertook other measures in support of the adjustment program. As a part of its efforts to address the fiscal constraints in the medium-term, however, the Government of Pakistan (GOP) will continue to place a major emphasis on increasing private sector investment in the energy sector to increase the flow of private risk capital for a energy investments identified as part of the least cost investment program for the sector. The proposed Hub Power Complex (paras. 3.01-3.13) represents the first such private sector investment in the power sub- sector. B. Long-Term Energy Sector Strategy 1.04 Pakistan's commercially exploitable energy resources consist of hydropower, natural gas, oil and ccal. The hydropower potential is estimated at about 30,000 MW. Probable and proven reserves of natural gas are estimated at about 16 trillion cubic feet (TCF) and 6.3 TCF, respectively. Oil reserves, both probable and proven, are estimated at about 58 million tons. Coal and lignite deposits are estimated at about 900 million tons, of which 175 million tons are proven. In addition, fuelwood and agricultural and animal waste provide a major share of rural consumers' energy needs. Despite Pakistan's endowment of energy resources, its dependence on energy imports has been increasing because of the under-utilization of domestic resources. Consequently, the Fifth and Sixth Plans (FY79-88) emphasized the accelerated development of domestic energy resources. However, financial and implementation constraints impeded the achievement of the targets of the two five-year plans. These setbacks prompted GOP to formulate, with assistance from the Bank, a Long-Term Energy Strategy (LES), covering the period 1986-2010. LES focuses on three key areas: (i) resource development and energy investments; (ii) pricing, resource mobilization and demand management; and (iii) institutional '-uelopment. A summary is presented below. Resource Deveyi,pWzt c6nd Energv Investments 1.05 Primary Ener: *dro: Of the country's 30,000 MW hydropower potential, only 2,897 MW have been developed, and another 1,928 MW are at an advanced stage of implementation. LES calls for the development of another 8,700 MW by the year 2010. Coal: Despite the suitability of Pakistan's coal for the production of electricity and industrial steam, its share in the supply of commercial energy has remained stagnant. This resulted from GOP's energy pricing policy prior to 1985 when the prices of competing fuels, i.e., fuel oil and natural gas, were kept low. Since 1985, prices of natural gas and petroleum products were increased and, as a result, the present price of domestic coal in terms of thermal equivalency had become competitive wi-li the prices of substitute fuels. The recent crises in the Gulf and the subsequent rise in the price of oil has altered the relative prices of competing fuels in Pakistan. This has partially been addressed with GOP's increase of the prices of petroleum products, and once the price of natural gas is also adjusted, domestic coal would have a price advantage over natural gas and petroleum products. Despite the actions taken since 1985 to correct the distortion in the relative prices of fuels and the recent boost to the competitiveness of domestic coal, its production still remains substantially below its potential because of: (a) the absence of a stable market for its use other than for the manufacture of bricks; (b) inadequacy of the laws governing coal exploration and development by PS; and (c) the inability of the Pakistan Mineral Development Corporation (PMDC) to successfully implement a program for the development of publicly-held concessions. LES calls for a program to assess the reserves held by PMDC to delineate tracts suitable for exploration and development, and to introduce a framework for allowing PMDC to enter into joint ventures with local and international private companies to overcome its technical, managerial, and financial constraints. In order to provide a stable market for coal, the construction of power plants based on fluidized bed technology of appropriate sizes would be pursued, and incentives to stimulate investments by PS in the modernization of the coal mines would be introduced. Oil a Gas: The rate at which oil and gas are being developed is slower than the resource base warrants. LES calls for a program of exploration and development to identify areas where exploration, particularly in geologically risky areas, would be undertaken through joint ventures with PS, which would provide risk capital and know-how to supplement the financial and technical capabilities of the Oil and Gas Development Corporation (OGDC), areas where OGDC would take the sole responsibility for development, and areas which would be developed through work programs or subcontracts with PS entities. LES also calls for the accelerated development ar.d utilization of dormant low quality gas fields. HousehoQdEner-g: Tle share of traditional fuels in rural consumers' energy consumption is declining because of deforestation, caused primarily by the unrestrained use of fuelwood and the absence of a comprehensive national program for afforestation to replenish supply. LES proposes a household energy survey to determine the pattem of energy consumption, the potential for substitution between traditional and commercial fuels, and the means for meeting the energy needs of the rural poor. The household survey is underway and, when completed, would provide the basis for formulating an integrated program for meeting the rural population's energy needs at least cost. LES also calls for an assessment of the potential for increased use of solar energy for meeting low- temperature hot water needs and for the formulation of a national afforestation program to be implemented as a part of thie five-year development plans. 1.06 Secondaa Energ: Power: LES calls for increased reliance on coal and hydropower, and the use of petroleum products and gas only when economic. Domestic coal production would be increased for use in power generation. In order to supplement domestic coal, future increases in the thermal generation capacity for base load plants would be based on imported coal. LES calls for the implementation of a long-term plan for the reinforcement and extension of transmission and distribution to deliver electricity efficiently. The transmission development program would involve the extension and reinforcement of the 500-kV network to evacuate electricity efficiently from the major hydropower stations in the north (Tarbela and Mangla) to the south during the rainy seasons, and transport power from the major thermal stations in the south to the north during the dry seasons. In addition, the efficient operation of the integrated power system requires a dispatch system that would optimize the operations of the power stations to meet the demand at least cost. The secondary transmission network would also be extended and reinforced to reduce technical losses. As for the distribution system, substantial investment would be undertaken to ensure its extension at least cost, to reduce losses and integrate the rural areas into a national low voltage network. Oil and Gas: As the demand for petr('leum products and production of oil irom existing fields increases, refining capacity would need to b.- expanded to meet the demand at least cost. LES calls for increasing refining capacity betweeii 1989 and 2010 by 5 million tons, of which one million tons would be in the form of secondary refining to crack fuel oil. As for natural gas, LES calls for the expansion of the gas processing capacity to meet the increased demand and the reinforcement and extension of the transmission and distribution networks in the urban areas. Pricing. Resource Mobilizatio' and Demand Management 1.07 LES calls for rationalization of energy prices to promote efficiency and resource mobilization. To achieve this objective, prices of tradeable energy sources, such as oil and petroleum products would be set, at a minimum, at their equivalent border price plus the cost of inland handling. As for electricity, lignite and gas, which in the case of Pakistan are considered non-tradeable, prices would be set to cover their economic cost of supply, including a premium for depletion when applicable, and to finance at least 40% of the investment program of each entity supplying these sources. Moreover, the structure of prices for gas, coal and electricity would reflect the structure dictated by the economic cost of supply. Institutional Development 1.08 Power: LES calls for improving the efficiency of the entities in the sector by decentralizing decision making and moving towards financial and administrative autonomy. The finances of the Karachi Electric Supply Corporation (KESC) would be restructured to ensure that revenues cover all costs and at least 40% of its investrnent program. As for the Water and Power Development Authority (WAPDA), dependence on annual allocations under the budget would be phased out through greater reliance on internally generated funds, and on the credit and capital markets for financing its development program. CoaL: PMDC would be restructured to assume a more active role in the development of its coal reserves through joint ven;ures with PS for the purpose of developing specific proven reserves. Oil and Gas: LES calls for OGDC to be restructured to achieve financial autonomy. Its exploration and development program would be financed through joint ventures, internal sources and commercial borrowings. OGDC's technical and managerial capabilities would be strengthened to support its evolution into a company whose operations are based on internationally accepted industry standards. Government involvement in Sui Northern Gas Pipeline Company (SNGPL) and Sui Southern Gas Company (SSGC) would be reduced to allow for a greater role for PS. Enhanced Rl of Erivate Sector: The implementation of investment plans in the energy sector continues to be constrained by a shortage of financial resources and, to some extent, lack of technical know-how. The implementation capabilities of the public sector and semi-autonomous entities in the sector are also taxed and, consequently, their ability to achieve the targets under the five-year development plans is hindered. LES calls for GOP to create an institutional framework aimed at providing the security and incentives for PS to increase its involvement in the development of energy to complement investments by the public sector. C. Progress in the Implementation of LES 1.09 A series of sector loans were envisaged by the Bank to assist GOP in its implementation of LES. Each loan would support a monitorable program of policy actions and priority investments which would form the umbrella for the Bank's expanded lending for specific energy investments and for more effective coordination of external financing for the sector. The first phase of these reforms was implemented successfully during the last three years (FY86-88) of the Sixth Plan under Energy Sector Loan I (ESL I - Loan 2552-PAK). Support for implementing the second phase of LES is being provided under Energy Sector Loan II (ESL II), which covers the first three years (FY89-91) of the Seventh Plan (FY89-93). The reforms outlined under ESL II constitute the energy program of MAP agreed with the IMF and the Bank (paras 1.1 1-1.12). The energy program calls for inter alia, eliminating budgetary support for revenue earning public sector entities in favor of prudent direct borrowing in the capital markets, rationalizing investments in the public sector to ensure that priority projects are implemented within the resources available, and establishing an appropriate incentive system and a framework for a more prominent role for PS in the development of energy. Agreements under ESL II regarding energy prices require price adjustments in line with movements in world market prices of petroleum products, to mobilize resources for the budget and to finance the investment programs of the energy sector entities. All the conditions for release of the first tranche were met. However, subsequent non-compliance with conditions related to pricing policies contributed to delays in the second tranche release. Following price adjustments, however, these conditions have now been substantially complied with. Electricity prices increased by an average of 29.3% from FY89 to the present as a consequence of three tariff increases in September 1989, July 1990 and April 1991. With these increases, the structure of tariffs has moved closer to that of the Long Run Marginal cost of electricity supply, while enabling WAPDA to finance from internal sources 40% of its investments. In the petroleum subsector, producer prices for domestically produced crude continue to be pegged to international prices of crude while for natural gas, the producer price is pegged to two-thirds of the border price of fuel oil less negotiated discount in order to attract risk capital for exploration; while consumer prices of petroleum products, except for kerosene, are being maintained above the corresponding import prices. To comply with ESL II agreements, consumer prices of natural gas were increased in April 1991, as a result of which gas prices for industrial and power sectors are at parity with the domestic price of fuel oil, those for commercial consumers are at 112% of fuel oil parity, and those for raw gas supplied to WAPDA are at 40% of the domestic fuel oil price enroute to achieving full parity by FY95. For residential consumers the price of gas is about 72% of the equivalent border price of fuel oil enroute to achieving full parity by FY93. In accordance with agreements under ESL II for the study to determine the impact of higher gas prices on the ex-factory prices of fertilizer after initial delay, terms of reference have now been agreed and consultants are being recruited. D. Seventh Plan for Energy (FY89-93) Physical and Investment Targets 1.10 The Seventh Plan for energy, formulated with the assistance of the Bank, was set within the constraints dictated by MAP (para 1.02) to ensure consistency between the overall targets for the economy and those of the sector. The Plan is based on a long-term forecast of the demand for energy for FY89-2003, which covers three five-year development plans. A more detailed forecast for the Seventh and Eighth Plans (FY89-98) was also prepared which provides a more exact basis for the investments needed in the current Plan and those required for the subsequent Plan to ensure smooth transition from one to the next. According to the 10-year forecast, the demand for energy is expected to increase between FY89-98 at an average annual rate of 7.0% and 6.0% for the Seventh and Eighth Plans, respectively. Based on the projected demand, a Core Investment Program (CIP) for the Seventh Plan was determined. Table 1 shows the physical targets for energy planned for the Seventh Plan. Table 1: Planned Phvsical TaeUts in Energy for the Seventh Plan (FY89.93) PLANNED ADDMONS DURING END FY88 SEVENTH PLAN END FY93 Public Private, Toal Public Priv ate Tota Public Private Tlaw Power (MW) Hydro 2897 0 2897 1728 200 1928 4625 200 4825 TheTmal 38]9 Q 3l8 3502 210 562 3212. 2100 2421 Subtotal Power 6716 Q 6716 5UL 230Q 7530 11946 2300 14246 Oil ('000 BPD) 7.4 35.6 43 11 22 33 18.4 57.6 76 Gas(MMCFD) 100 1100 1200 768 132 900 868 1232 2100 Coal (Mill.tons) 0.3 3.9 4.2 0.7 2 2.7 1 5.9 6.9 MW Megawatts; BPD = Barrels per day; MMCFD = Millions of cubic feet per day. CIP is comprised of ongoing and new projects to be undertaken by the public and private sectors between FY89 and FY93 to meet the forecast demand for energy at least cost. Given the forecast for energy demand, investments to be undertaken by the public sector, including the semi-autonomous entities, were estimated by: (i) increasing, relative to FY88, the level of expenditures on their development program during the Seventh and Eighth Plans at an average annual rate of 1%, taken as a proxy for the expected improvement in their implementation capabilities; and (ii) assuming increases in the average annual rates of energy prices, in nominal terms, between 8% and 12%, depending on the product; and (iii) maintaining the self-financing of the entities in the sector to between 20% and 40%, depending on the entity. The difference between the total investments required to meet forecast energy demand and the proposed public sector investme.its represents the investrnents to be carried out by PS to reduce potential shortages in energy supply. However, given delays in both public and private investments, it is expected that there will be slippages in the achievement of the targets planned for the Seventh Plan period. implementation of CIP for FY89-90 1.11 The overall implementation of CIP for FY89 and FY90 has been within the framework agreed with the Bank under ESL II. Increases in investment in particular areas have been accommodated through decreases in others to maintain the global level of investment at or below those agreed under MAP. Implementation of the public sector CIP for FY89 and FY90 is presented in Table 2 below: Table 2: Im2lementapion of Public Sector CIP forFyR_9-FYo (1990 US$ Million) 1989 1990 Actual Actual LIe Ac vs. CIP ZP Actual vs. CIP (i) Power 864 846 -2 955 954 - Oil & Gas 268 195 -27 251 218 -13 Coal _ _ _ 18 2 -ff Total 1132 1041 -8 1224 1174 -4 Investments by public sector energy entities in FYs 89 and 90 were slightly lower than the levels agreed under CIP, i.e. 8% and 4%, respectively. p&wer: In FY89 power subsector investments were about 2% lower than CIP while in FY90 they were in line with CIP. Increases in WAPDA's investments in generation in FY89, were offset by a reduction in KESC's generation program through the postponement of the units at Bin Qasirn (1 x 210 MW). As a result of delays in the implementation schedule for Hub Power Complex (HPC) (paras 3.01-3.08), the development of WAPDA's 500-kV transmission program covering the interconnection between the Complex and network at Jamshoro was shifted to outlying years and generation investments advanced. Moreover, in order to balance the investment program, WAPDA's investments in distribution were reduced and priority was given to KESC's distribution development program where losses are significantly higher than those of WAPDA's distribution system. PS investments in power have been pushed to FY92-93 with the delay in the implementation of the HPC, the largest PS investment in power during the Seventh Plan. Qi1 & Gas: Overall, investments in the oil and gas subsector in FY89 and FY90 were lower than levels agreed under CIP by 27% and 13%, respectively. OGDC's program in exploration was significantly reduced in both years to accommodate increased PS interest in exploration activities, while its development program was increased slightly as a result of its participation in PS joint ventures to develop already discovered fields. The expansion of SNGPL's transmission network was delayed while reaching an agreement with the Bank on corporate restructuring and privatization of the company. Consequently, as a result of delays in mobilizing the Bank's loan, the expansion of SNGPL's transmission facilities was delayed. Construction of these facilities would be launched shortly, as SNGPL's Corporate Restructuring Project was approved by the Board in August, 1990. In the interim, as a result of the decreases in SNGPL's transmission development program, investments to reinforce the gas distribution system were greater than those agreed under CIP. 1.12 PS investments in the petroleum subsector have been largely consistent with the projections of the Seventh Plan. In contrast, the implementation of the PS investment program in the power and coal subsectors have been slower than envisaged. The delays are largely due to: (a) chaages in government which required the renegotiation of key agreements for investments that would provide about 1,642 MW (Hub Power Complex-1,292 MW, and Fauji-350 MW); (b) the delays in the actions needed to maintain the implementation of MAP on track; and (c) the realization that mobilization of external financing for Pakistan under limited recourse has proven more difficult and time consuming that was originally anticipated. As a result, it is expected that the implementation of PS investments called for under the Seventh Plan would shift by about two years into the Eighth Plan. The effects of this shift may be partly offset by softening of the demand for electricity as a result of a lower rate of economic growth expected over the next two years. E. Bank Group's Role in the Energy Sector and Experience with Past Lending 1.13 The Bank Group's involvement in the energy sector in Pakistan began in 1955 with a loan to KESC for the construction of a thermal power plant. Since then, the Bank Group has participated in the Indus Basin Development and has made 26 credits/loans to Pakistan in support of specific energy investments which include: four to KESC for the expansion of power generating capacity; nine to WAPDA for the extension and reinforcement of the secondary and the extra high voltage transmission network, the rehabilitation and improvement of existing power plants, the conversion of combustion turbines to combined cycle operation and the supply of electricity to rural areas; six to SNGPL for the expansion of the infrastructure for gas transmission and distribution, with the most recent operation focussing on restructuring the ownership of SNGPL to increase private sector involvement; three to OGDC for increasing the output of oil and gas; two to refineries for restructuring product output and streamlining existing systems; and two to GOP for increasing joint venture participation in the exploration and development of oil and gas and for the establishment of the Private Sector Energy Development Fund (PSEDF) and ESL I and II (para 2.03). All of these operations have been completed satisfactorily, except for the ten that are currently under implementation. l .14 The Bank Group's involvement in the power subsector has assisted in: the formulation of a long-termn least cost generation expansion plan, reducing losses in the transmission and distribution network from 35% to about 23%, adjusting the level and structure of tariffs to rationalize consumption and mobilize resources to ensure that at least 40% of WAPDA's investment program is financed from internal sources, and improving WAPDA's administrative, technical and financing capabilities. In the oil and gas subsector, OGDC's investments have been rationalized and measures have been initiated to restructure the corporation with a view to making it financially less dependent on the budget. A gas utilization and demand management study has been completed and measures have also been implemented to reduce the imbalance between the supply and demand for gas. On the supply side a new producer price formula was introduced and the available acreages were promoted to the private sector and so far exploration contracts have been signed for 21 new concessions. On the demand side, the consumer price of gas has been increased and allocation procedures that would meet the gas requirement of the priority sectors and maximize the benefits to the economy have been adopted. 1.15 The Project Performance Audit Report and the Project Completion Report for ESL I, which was distributed to the Board on June 18, 1990, concluded that compliance under Loan 2552-PAK was good when compared with that of other adjustment loans in general, and also when compared with compliance with energy policy conditions. It further notes that ESL I generated a good deal of value added through the CIP, which provided not only a new conceptual framework for the investment program but also a new operational structure within which priorities could be more realistically identified, resources channeled to them with greater assurance, and progress monitored more easily. In addition to these substantive contributions, the CIP also generated value added as a prime forum for much of ESL I dialogue which is unquestionably real, very productive and very much an integral part of the planning and operations of both GOP and the Bank. In a similar vein, the Project Completion Report attributes much of the progress made in mobilizing private resources for energy development, including the establishment of PSEDF, to the dialogue initiated under ESL I and continued under ESL II. II. PROMOTION OF PRIVATE SECTOR IN ENERGY DEVELOPMENT A. Framework for Promotion of Private Sector Participation 2.01 The rationale for increasing the role of PS in the development of energy is to: (a) supplement public sector investments which were curtailed under MAP; (b) mobilize additional resources for the development of the sector in the form of equity and debt financing secured under limited recourse; and (c) improve the overall efficiency of the sector by tapping the technical and managerial capabilities of PS in project design, finance, implementation, and operation. In 1988, GOP requested Bank assistance in the formulation of a strategy to increase PS participation in the energy sector. The Bank's strategy called for: (i) strengthening the institutions responsible for the evaluation, negotiation and approval of PS proposals; (ii) introducing a regulatory framework for the operations of PS and a package of incentives to attract PS venture capital; and (iii) creating a vehicle to provide long-term financing to PS. These are the objectives of the Private Sector Energy Development Project (Loan 2982-PAK), which was approved by the Board in June 1988, which was made to support the implementation of the program to enhance the role of PS in energy development. Under this loan, GOP has introduced significant changes in the legal framework, the financial sector and the regulatory arrangements to enhance the role of PS in energy development. These initiatives are summarized below. 2.02 Institutional Framework: GOP has established an institutional framework to facilitate the processing and approval of PS energy projects. A Private Power Cell (PPC) has been created under a Directorate General in the Ministry of Water and Power (MWP) to promote, evaluate, and negotiate PS investments in the power subsector. PPC has been partly staffed with technical and financial experts, and is currently in the process of recruiting directors for mechanical, power and finance; a manager for management information systems; two financial analysts; and a systems analyst. PPC is also being assisted by consultants from the International Resources Group of the U.S., financed by United States -8- Agency for International Development (USAID). In addition, legal advisors to PPC have prepared standardized agreements for future PS power projects. In 1988, GOP established a Private Energy Division (PED) in the National Development Finance Corporation (NDFC) which was appointed to administer the PSEDF. PPC reviews the feasibility studies, and negotiates the principal agreements, tariffs, and implementation timetables, for all PS investments. For those requiring financing from PSEDF, PED reviews the technical and financial viability of projects on the basis of guidelines approved by NDFC's Board of Directors, the Bank, and GOP. PED has been staffed with a core group of financial and technical professionals and is currently recruiting additional staff in consultation wit:l the Bank. PED is supported by Price Waterhouse, in association with RCG/Hagler Bailly and Brown & Root as economic and technical advisors. Price Waterhouse have been appointed long-term advisers to PED under financing by USAID. In addition, vwbank Preece, Ltd., of U.K. in association with Barclays of U.K. have been selected as short-term consultants to support PED iti the appraisal of HPC. PED's operations are guided by an operations manual approved by NDFC, GOP and the Bank. NDFC would operate PSEDF under the terms of an administration agreement with GOP and would undertake independently the technical and financial appraisal of the PS projects to be financed by the Fund to ensure that they are financially and commercially viable. In the event PSEDF findings are to the contrary, projects would be rejected and financing would not be provided. NDFC would also supervise the implementation of each PS project with the assistance of internationally experienced engineering, financial and accounting firmns, whose services would be covered by USAID and the Bank. Figure 1 shows the operations of PSEDF and terms of subloans to PS subprojects. 2.03 Mobilization of Resources: The Bank and cofinanciers have committed to PSEDF a total of US$459 million. Of this, US$150 million was provided by the Bank, US$150 million by the Export- Import Bank of Japan (JEXIM) in the form of untied funds, US$46 million by the USAID, and US$13 million by the Nordic Investment Bank, while US$50 million by the Overseas Development Agency (ODA) of the United Kingdom, and US$50 million by the Government of Italy has been committed. Interest in cofinancing PSEDF has also been expressed by Germany (US$25 million), and agreement reached with GOP to include it under its bilateral support for the sector. In addition, the Government of France would provide US$20 million. It is envisaged that as funds are committed to approved PS projects, PSEDF would be replenished. The onlending interest rate of PSEDF would be set at parity with the prevailing market interest rate in Pakistan, which is currently 14%. The interest rates on loans from the PSEDF are fixed, i.e., unchanged during the life of the loan. GOP has agreed under Loan 2982-PAK to review annually the interest rates on loans from PSEDF to bring them in line with the prevailing market rates. The interest rate would cover: (i) GOP's cost of borrowing, which is equal to the weighted average interest rates of the various sources which contributed to PSEDF, as well as the payment of an exchange rate insurance premium to cover changes in the exchange rate between the Rupee and the foreign currencies supplied to PSEDF; (ii) the cost to NDFC of operating and administering PSEDF, covering the costs of personnel, administration, auditing and reporting; and (iii) a spread to accumulate reserves, to either forn equity capital for PSEDF when eventually incorporated as a self-standing entity, and to provide financing in Rupees for future PS projects, to minimize the reliance on the domestic fihtancial institutions. PSEDF would provide initial debt financing of up to 30% of each PS energy in-v-stment. Repayment terms of up to 23 years, including a grace period of up to eight years, are desigreA4 to reflect the long gestation periods associated with energy projects. Loans obtained from PSEDF would be subordinated to those obtained from commercial banks and/or export credit agencies (ECAs). In addition, PSEDF would include funds to be made available to PS companies, which are required to be incorporated in Pakistan, by way of additional financing to enable them to: (a) meet up to 25% of any additional financing needs of a project arising from an increase in the costs thereof, provided the investment company finances at least another 25% of such needs through equity investment; and (b) continue to meet its debt service payments in the event of delay in the completion of construction or the suspension of operations of the project resulting from causes beyond the control of PS companies. The combination of the financing provisions provided by PSEDF is determined by the structure of the Security Package (SP) for each investment. SP is comprised of a set of inter-related agreements and provisions aimed at providing the safeguards needed for PS to invest in projects without the direct guarantees of GOP. SP for HPC is outlined in Section E in Chapter III. FIGURE 1 PROPOSED SUBPROJECTS PRIVATE SECTOR ENERGY DEVELOPMENT FUND Hub Power Complex ........ . ......... . g I...*. .......... 1 2 ~ M THE FUND IS Fauji Oil C? ofinaniers PROVIDE LOANS ADMINISTERE: ........... TO THE E - 35M US$ MLLION GOVERNMENT NATIONAL Uch Low WORLD BANK ¶50 DEVELOPMENT TermsUhLoQait JEXrdh 11io OF FINANCE Gas Power Plant 1 USAID 46 PAKISTAN CORPORATION Covers up to 30% of total _ _PweF t__ ITALYf U 50 (NDFC) Up to 23 years rmaturity FRANCES! 20 FRUp to 8 years grace Handpor Gas GERMANY 4 25 FOR Under An _ Prevailing market interest rate Power Plant NordiclnvestmnetBmnk 1 THE PRIVATE AGRENMT HT - covers cost of borrovwing plu 100 MW TOTAL S HECTORIVENERG AGMNSREEMENT spread to cover foreign *DANKIS LEAD iNANCIER DEELTOPMENERYAREMN exchange rate risk Insurance, THEK ACIVITIESD OFINTHER DVLPETadministration, fees,________ OHE ACTIMERS RELATIVE TOPROJECT Btenreserve accumulation. HFUDARE R DBY (LOANT2982-PAK) GOP Confingencies. Lakhra Coal- THE FUND ARE GOVERNED BY (LOAN 2982-PAK) GOP ~~~Subordination to commercial Fired Fluidised THE COFINANCiERS AGREEMEN banan t credit Bed Plants 300MW 1/ Unted funds adminisbred by UNDER andbanks and export credI_ fte Bank. SOVEREIGN V Commrited. GUARANTEE NDFC 3Y Preilmirary amt for Hub Project Karachi 4/ Support for specifi potential _Hydrocracker projects agreed wth GOP. 1.6 MT I YR Spread between borrowing Refinery and lending rates for GOP 4.2 MiT YR would be about 8%. Estim- ated eamings of US$1.4 billion over a period of 30 yevArs on US$484 million or.lent. Rupee reflows would be available to cover local costs for subprojects. DEBT SERVICE TO NDrC SkdIPSEDF3 - 10- B. PSEDF's Potential Lending Operations 2.04 Currently, several proposals for investments are under review by GOP for possible debt financing from PSEDF (Figure 1). In the power subsector, proposals for a total of 2,600 MW of new capacity, which would be implemented during the Seventh and Eighth Plans, are under review or at an advance stage of preparation. HPC, which is at an advanced stage of development, would provide 1,292 MW (paras 3.01-3.08). Four other proposals for oil-fired power plants are under review, amounting to a total of about 750 MW. These include: a proposal by Fauji Foundation to construct a 350 MW power plant near HPC at Khalifa Point in Balochistan; two other proposals for power projects based on domestic coal, which would provide a total of about 300 MW; and a proposal for a 100 MW combined cycle plant, based on low quality gas from the Nandpur field being sponsored by INTRAG, Inc. of the U.S. In terms of the Fauji project, Fauji Foundation has selected a turnkey contractor who would be responsible for construction of the plant and a construction contract has been drafted and is being negotiated. A feasibility study for the plant is under preparation and drafts of the agreements comprising the security package have been completed. It is expected that construction would begin on the Fauji plant sometime in mid- 1992. In the petroleum sector, a proposal for a joint venture, involving Crescent Refining and Marketing Co. Ltd., a subsidiary of Crescent Petroleum Company International, Ltd. of Sharja, United Arab Emirates and the Pakistan State Petroleum Refining and Petrochemical Corporation, to construct, own and operate a hydrocracker complex at Karachi, has been approved by GOP and is under review for financing from PSEDF. This would involve the installation of a petroleum refining complex with the capacity to upgrade 1.6 million tons per year of fuel oil into higher value petroleum products, currently being imported. A feasibility study for the hyirocracker has been undertaken by a petroleum processing engineering firm with international experience and the sponsors have structured a security package for the project in order to provide comfort to lenders and investors, who would provide financing on a limited recourse basis. The critical agreements in the SP include product off-take agreements which are currently being negotiated with two petroleum product marketing companies and fuel oil feedstock supply agreements which are being negotiated with two refineries which will supply the fuel oil feedstock. In addition, the sponsors have identified land for the project site and have initiated its purchasc The sponsors have also shortlisted potential turnkey contractors to construct the complex, and ail the arrangements necessary to begin construction are expected to be finalized by the first quarter of 1992. GOP is also considering a proposal for the Bank to assi.t in privatizing the Pak-Arab Refinery Company through the issuance of new equity to reduce GOP's share in the ownership and finance of a new refinery in mid-country with a capacity of producing 4.2 million tons per year. Ill. THE HUB POWER COMPLEX A. Historical Development 3.01 In response to GOP's request in 1987 for PS proposals to design, finance, construct, own and operate power plants to supply the national grid, 20 proposals were submitted, ranging in capacity between 2 MW and 600 MW. Of these, Xenel Industries of Saudi Arabia, and Hawker Siddeley Power Engineering of the United Kingdom proposed the construction of two power stations of 600 MW each (4 x 150 MW for Hawker Siddeley, and 2 x 300 MW for Xenel) to supply power to WAPDA. Xenel Industries was to construct its plant at Zairat Hassan Shah Island off the port of Karachi; however, after review of the Xenel proposal, GOP decided that the location for the plant was not appropriate because of environmental considerations as the level of pollution at Karachi is already high due to a heavy concentration of industry and power plants. In addition, the Xenel plant would require 220-kV lines connecding the proposed station to WAPDA's network outside Karachi which would pass through the city's densely populated urban area. As for the power plant proposed by Hawker Siddeley, which was to be located at Nooriabad, 34 km north of Karachi, there were concerns about the higher cost of the 150 MW units relative to the cost of the 300 MW units, and more importantly, the proposed supply of fuel oil to the power plant by tanker trucks, which was deemed uneconomical. These two factors would have resulted in a tariff for Hawker Siddeley's plant higher - I I - than WAPDA's avoidable cost. Consequently, GOP decided to select a new location for both plants which would provide economies of scale in terms of the supply of fuel and the interconnection with WAPDA's transmission system. 3.02 Several sites were examined in terns of efficiency c' fuel supply, ease of interconnection with the national transmission network, and envi.vonmental consiuerations. The site at the mouth of the Hub River in Balochistan on the Arabian Sea was selected as fuel can be easily delivered to the power plant by barges or a pipeline, and linkage with WAPDA's transmission network was possible by cutting eastwards across Balochistan's virtually uninhabited desert and connecting with WAPDA's network near Jamshoro in Sindh Province (attached Map No. IBRD 22535). At this point, Xenel and Hawker Siddeley saw the merits of combining forces as sponsors and investors (SI) to: capture the economies in sharing infrastructural facilities such as fuel and water supply systems, and housing colonies; and achieve better coordination in negotiating with GOP. In order to ensure that the site for the Complex would meet environmental standards, an environmental screening study was undertaken by KBN Engineering and Applied Sciences, Inc. of the U.S., under financing from USAID. The study found environmental conditions at the site appropriate for the siting of an oil-fired power plant of about 1,300 MW. In addition, the environmental screening study outlined a program for the installation of monitoring equipment for compiling data on ground and air pollution to provide the basis for the design of the Complex in compliance with the environmental guidelines of GOP, the Bank and PSEDF (para 4.19). The agreement between SI and GOP on the tariff for sale of electricity to WAPDA allows for openers to cover possible increases in capital cost attributable to changes in plant design to comply with the recommendations of the ongoing environmental study. The costs of these changes, if any, would be automatically reflected in the tariff. B. Preparation 3.03 A pre-feasibility study by SI was submitted to GOP in May 1987. After review by the Bank, WAPDA and GOP, assisted by internationally experienced consultants, the proposal by SI was accepted and a Letter of Intent (LOI) was issued in April 1988. LOI sets the responsibilities of SI and GOP. In compliance with the guidelines set by the Bank for the preparation of PS projects, the LOI called for SI to undertake a feasibility study in accordance with terms of reference acceptable to GOP, the Bank and cofinanciers. The LOI also set an agreed average tariff for the sale of power to WAPDA of Rs 0.88/kWh (US05.0/kWh)l for the first 12 years of operatico4 of the Complex and Rs 0.68/kWh (US03.9/kWh) for the remaining 18 years. The capital cost was to be adjusted for inflation, exchange rate, and changes in design required by GOP and environmental considerations. These adjustments would be allowed until financial closure, after which tariffs based on a lump sum fixed price contract for the construction of the Complex would be agreed. Thereafter, the tariff agreed would not be renegotiated and adjustments after the commissioning of the Complex would be on the basis of agreed indices. The indices would allow for the adjustment of the tariff to reflect changes in the general domestic price level, wages, O&M costs, interest rates, and exchange rates. Changes in the domestic price of fuel would be reflected in the tariff autAmatically and passed on to WAPDA who would pass them on to consumers through the fuel surcharge _.omponent of WAPDA's tariffs. 3.04 In accordance with nminimum functional specifications for the Complex, agreed by SI and WAPDA, a consortium led by Mitsui Co., of Japan, was selected by SI for the implementation of the Complex from among four major international companies who quoted for the construction of the Complex. Mitsui & Co. was selecied for the implementation of the Complex on account of: (i) its competitive price relative to the other three bidders; (ii) its willingness to offer a fixed price turnkey contract with penalties for failure to meet the agreed date for commissioning the Complex and for the failure of the equipment installed to meet the performance criteria agreed with SI and GOP; and (iii) its past performance in the construction of Shajiao (B), a 600 MW coal-fired power station constructed in China under a Build-Operate-Transfer (BOT) arrangement where the power station was commissioned twelve months ahead of the agreed schedule. Mitsui & Co. put together a consortium of equipment I At an exchange rate of Rs 17.5/US$. - 12 - suppliers and contractors, to participate in the construction of the power station within the parameters agreed with SI and GOP. It selected Ishikawajima-Harima Heavy Industries Co. Ltd. (IHI) of Japan, for the supply of the boilers and Toshiba, also of Japan, for the overall engineering and the supply of the turbo-generators, in view of their past collaboration in the construction of Shajiao power plant in China. Kumagai Gumi, of Japan, was selected for the civil works, in view of its proven track record in the construction of major civil engineering projects under BOT arrangements, the most important of which is the harbor tunnel in Hong Kong. 3.05 The construction consortium would enter into a lump sum fixed price contract for the design and construction of the Complex which would provide for the commissioning of the plant in accordance with a timetable and penalties for delays or failure of the equipment selected to perform as agreed. All members of the construction consortium would take several and joint liabilities, contribute towards project development, and provide equity. SI selected British Electricity International (BEI) of the U.K., and Canadian Utilities Power (CUP) of Canada, for the operations and maintenance of the Complex. BEI and CUP also contributed to the development costs and agreed to provide equity. BEI was selected as the operator based on: (i) its international reputation and experience; (ii) its proven ability in the operation, maintenance and management of large thermal power stations; (iii) its willingness to provide guarantees of its performnance, and penalties for failure in its performance; (iv) its readiness to participate in the project development and in HUBCO's equity; and (v) its experience in operating the power station at Shajiao which has operated the Shajiao power station at over 90% availability since it was commissioned in 1987, a level that compares with the best plants in Europe and North America. BEI has also worked with WAPDA and has undertaken the training of personnel in power plant operations in Pakistan. BEI's early involvement in the Complex would provide additional comfort to the lenders, investors, WAPDA and GOP, because of its input in the design of the plant, the selection of equipment, and supervision of implementation to ensure adherence to the agreed standards. SI, Mitsui & Co., along with the rest of the Construction Consortium, BEI and CU Power, formed the Hub Power Group (HPG) to develop the project and negotiaLe SP. As envisaged at that time, all the obligations negoti."ed by HPG would be assumed by the Hub Power Company (HUBCO) once it was incorporated and staffed in Pakistan. The expenditures of HPG would be capitalized as part of the equity of HUBCO. 3.06 The feasibility study covering engineering, environmental, economic, finance and legal aspects, was undertaken by SI and their consultants. It was submitted to GOP and the Bank in November 1988. 'The review of the feasibility study and negotiations of the agreements were undertaken by a specially appointed GOP committee, comprised of representatives of the Ministries of Water and Power, Finance, Planning, Communications, Petroleum and Natural Reso'!rces, Law, and WAPDA and NDFC. On December 17, 1989, the committee submitted its recommendations to GOP's Board of Investments (BOI) for approval. BOI approved the negotiated package which included all the key agreements and a revised average tariff of Rs 1.036/kWh (US¢4.9/kWh) for the first 12 years of operation of the Complex and Rs 0.80/kWh (US¢3.8/kWh) for the remaining 18 years2 The BOI approved package allows for adjustments in the tariff for inflation and changes in financing terms, exchange rate, as well as adjustments due to environmental and geological considerations at the site for the Complex. 3.07 At the time the agreements were initialled, site preparation was expected to start by March 31, 1990, two years after LOI was issued and about 20 months after the construction consortium was formned. Toshiba, Kumagai Gumi and CUP, who had committed significant staff resources to the development phase of the Complex, could not renew the validity of their prices beyond March 31, 1990. Toshiba's inability to continue the high level of staff commitments was due to a change in corporate policy which shifted its emphasis for future operations away from engineering and project management. Kumagai and CUP's withdrawal was due to other contractual obligations entered into subsequently. This left HPG with the task of reconstituting its construction consortium. BEI has 2 Based on an exchange rate of Rs 21 .05/US$. HPG had offered a tariff of Rs 1.065/kWh (US$5. 1/kWh), however, it accepted Rs 1.036/kWh pending finalization of contracts and securing the financing. - 13 - accepted full responsibility for the operations and maintenance of the Complex. In order to replace Kumagai Gumi, Mitsui called for proposals for civil works and two offers were submitted and reviewed with the bidders. Campenon BernarA of Frarce was selected. HPG then asked that the contract for overall engineering and turbine generators, originally to be undertaken by Toshiba, be awarded in accordance with the Bank's International Competitive Bidding (ICB) procedures (para 6.02). Prequalification of firms was completed in June 1990, and the bidding documents were issued to the prequalified firms in July 1990. The bidding procedures provided for competition on the basis of price, and required bidders to assume joint and several liabilities for the construction and performance of the Complex, together with the other members of the construction consortium. These liabilities are limited to a predetermined level based on a framework for sharing completion and performance risks and bonuses. The bids were evaluated and the Bank approved in December, 1990 HPG's selection of Ansaldo GIE of Italy as the lowest evaluated bidder. The reconstitution of the construction consortium, and of HPG to reflect the new construction consortium, and the finalization of the construction contract were completed in July 1991 (para 3.10). Details of the members of HPG are provided in Annex 3.1. 3.08 Following the signing of the TKC, HPG held negotiations with GOP in June 1991 to agree on a revised tariff for HPC. HPG and GOP then renegotiated a tariff that reflected changes that had occurred to the TKC, the terms of finance and exchange rates since December 1989, the date of the previous tariff agreement. On July 2, 1991, HPG and GOP agreed on a tariff of Rs 1.3617 /kWh (US¢5.7tkWh) for the first 12 years of operation of the Complex and Rs.0.94/kWh (US¢3.9) for the remaining 18 years.3 The revised tariff adhered to the reopeners and indexation provisions that were outlined in the previous Tariff Agreement. C. Description 3.09 The Complex is designed as a conventional oil-fired steam power station of 1,292 MW (4 X 323 MW) which will be located at the mouth of the Hub River in Balochistan on the Arabian sea coast (para 3.02). The Complex would also include the construction of a 500-kV substation, a water desalination plant, a housing colony, an access road of about 7 kilometers to the site from the main route, and a fuel oil tank farm sufficient to store fuel for one month of operation. A detailed description of the Complex is presented in Annex 3.2. Fuel for the Complex would be supplied by a pipeline. Pakistan State Oil Company (PSO), a public sector company responsible for the supply of oil and petroleum products in Pakistan, would construct and operate the pipeline. The fuel for the Complex would be imported by GOP4 . PSO would take possession of the oil at the new terminal currently under construction at Port Qasim, east of Karachi. The pipeline would use an existing right of way around the perimezer of the city of Karachi and would traverse a barren area in Sindh and Balochistan to the power station. All necessary provisions to ensure that the pipeline meets the environmental safeguards required under the guidelines of GOP and the Bank would be put in place. Two single circuit 500-kV transmission lines of about 200 kilometers each would connect the Complex to the national 500-kV grid at Jamshoro (see map). The transmission line would be constructed and operated by WAPDA under the Bank financed Transmission Extension and Reinforcement Project (Loan 3147-PAK). 3 At an exchange rate of Rs 24.04/US$. 4 Pakistan would be a net importer of oil well into the future. - 14 - D. Costs 3.10 The total cost of the proposed Complex, including taxes and duties, development costs, engineering and coordination, capitalized O&M costs, and initial working capital, is estimated at US$994 million. These costs are based on a TKC signed in July 2, 1991, whose price is US$888 million. TKC is a lump-sum fixed price contract, whose validity would remain until December 31, 1991 by which time the mobilization payment is expected to be made (paras 4.22-4.23). Thereafter, adjustments until financial closure would be for charqes in the financing terms, and any increases in cost attributable to changes in design recommended by the environmental study (paras 5.19-5.21). In addition, there might be changes in civil works required once the geological site investigation is completed. TKC already includes allowance to cover costs normally associated with the environment and subsoil conditions. The openers provide for an adjustment of tariff on account of extraordinary costs. Under limited recourse project financing, lenders require the earmarking of a fund to meet contingencies not anticipated at the time the fixed price turnkey contract is signed. The fund is intended to ensure that delays, if any, due to unforeseen events are expeditiously addressed to minimize the adverse impact on the forecast project revenues. The use of the contingency fund would require the approval of GOP, the Bank, and the lenders, including PSEDF, prior to disbursement. The contingency fund would cover the costs of equipment and services as well as increases in financial costs including those required to remedy the effects of cost increases. These contingencies may arise from factors such as ground conditions, environmental factors, possible delays in obtaining permits, custom clearances and in cases of insurable events such as fire, tfood or earthquake, from possible delays in insurance payments. A reserve contingency fund of US$150 million has been included in the overall estimate of the cost to cover increases in costs during construction. This represents approximately 15% of the investment cost net of IDC, and is in line with normal practice for projects financed on a limited recourse basis. 3.11 A summary of the cost of the Complex is shown in Table 3 below. Total financing required for the Complex, including interest during construction (IDC), the reserve contingency fund and other finance related costs of US$498 million, would amount to US$1,560 million. Of the total financing required, about US$1,310 million equivalent would be in foreign exchange and about US$250 million equivalent in local costs. The proposed financing plan for the Complex is discussed in detail in Chapter IV. - 15 - Tabl 3: Estimated Cost of the Complex and Summary of the Financing Plan ]i;atimateSc2 Rsos rnflan US$ miliion A. Project Development Costs 505 21 B. Turnkey Construction Contract Cost 21,344 888 C. Engineering and Coordination for HPG 1,250 52 D. Pre-operational O&M Costs 457 19 E. Working Capital 336 14 Subtotal Project Costs2/ 23.R91 2' F. Interest During Construction and other Finance Related Costs 8,366 348 G. Reserve Contingency Fund (Debt and new Equity) 3,605 150 H. Debt Service Escrow Reserve 1,635 68 Total Financing Require.nents 37.502 A5 A Summary Financing Plan Ta Local 2,404 100 7 Foreign 522 m 14 Subtotal Equity 7,765 323 21 Local 3,606 150 8 Foreign 26J.131 1.08 71 Subtotal Debt 29,737 1,237 79 Total 37,502 1,560 100 I At exchange rate of Rs 24.04/US$. 2 Includes the following Taxes and Duties: 1,226 51 3.12 Project development costs include the preparation of prefeasibility and feasibility studies, site investigation, environmental impact assessment, financial and legal advisory costs, and the costs associated with the establishment of HUBCO. The local financing would cover a portion of civil works, some locally fabricated material for boiler island, IDC on local loans, and other financing costs as well as taxes and duties, which amount to about US$51 million. The amount of taxes and duties applicable to the Complex is low compared to other power projects in Pakistan because customs duties are not applicable for investments undertaken in underdeveloped areas such as Balochistan where the Complex is located. Pre-operational 0;M costs include expenditures that would be incurred during testing and commissioning, while working capital would cover inventories and other consumables. - 16 - The financing costs would be determined by the international financial market and are beyond the control of HUBCO or GOP. Provision for any variation in financing costs up until financial closure is covered under the reserve contingency fund. E. Security Package for HPC 3.13 Before proceeding to discuss the structure proposed ECO guarantee in Chapter IV, it is essential to describe the Security Package (SP) framework within which the guarantee is being proposed. This is because, unlike the previous guarantees which the Bank has provided in respect of simple principal debt service payment defaults under commercial bank loan syndications, the proposed guarantee is intimately linked to the performance by GOP and other public sector entities (WAPDA, PSO, etc.) under various agreements comprising the Security Package. The Project is to be undertaken under the build-own-operate (BOO) technique, and as the Project represents a major private sector initiative, the financing for the Project is proposed to be raised substantially on the basis of limited recourse financing, under which the commercial bank lenders (and other lenders and investors) would assume full completion and operational risks and look primarily to the expected cash flow/operating revenues of the Project, which would be placed in an Escrow Account, as the basis for the borrower to service its debt to the commercial bank and other senior lenders. There would be no direct sovereign guarantee from GOP. The distinguishing feature in this Project is that WAPDA, a public sector entity, is the sole purchaser of the Project's offtake, power. The Project's capacity to generate power, and to raise revenues from the sale of power, is also dependent on the supply of fuel by PSO, another public sector entity. In addition, HUBCO's ability to service its foreign commercial bank lenders is also dependent on at least two other important factors: first, the fulfillment by GOP of its undertaking to provide contingency funding (Special Temporary Funding, Deficit Funding or Termination Payments) in the event of non-performance by other public sector entities (WAPDA, PSO, etc.) under the Security Package, and second, the fulfillment by the State Bank of Pakistan of its obligation to make available the required foreign exchange to service debt upon the delivery of local currency funds by HUBCO through the Escrow Agent. As a substitute for a direct sovereign guarantee, GOP with the assistance of the Bank, and in consultation with the international financial community, has structured SP, comprised of a set of agreements and provisions that safeguard the interests of the lenders, GOP, WAPDA, PSO and investors. SP is presented in Figure 2 and consists of the following main elements: Status Security Package Agreement Initialled. To be signed as Implementation Agreement (IA), executed between a condition of effectiveness of GOP and HUBCO and remains in effect for 30 the proposed ECO (para years, covering the relationship between GOP and 5.06). HUBCO. It includes inter alia: (a) concession to design, build and operate the station; (b) consents required from GOP and its agencies and the timetable for their execution; (c) responsibilities of HUBCO in terms of the design and construction specifications; (d) timetable for initiation and completion of construction, penalties for delays in commissioning the plant, and for failure of the equipment to perform, as well as rewards, for early completion; (e) overall framework for HUBCO's operation of the plant, and guarantee of the performance of WAPDA who would purchase the energy, and PSO who would supply the fuel; (f) provisions for repatriation of equity and dividends and the availability of foreign exchange for servicing the foreign debt and other foreign costs; Hub Power Complex Security Package: Sovereign And Commercial Risks FIGURE 2 State Bank netr Government of S r PakistanPakista Loca' l SOVEREIGN RISK Insurers / l sIu c o mpa nyaIo GovernmeLt Trustee ConstructionT-us - 18 - (g) compensation in case of a takeover by GOP of the Complex at which time all of HUBCO's obligations would be assumed by GOP, including the responsibility to service debt to the Bank and to all other cofinanciers; (h) definition of force majeure and the actions to be taken to address the occurrence of each force majeure event; and (i) framework for insurance, access to additional loans to remedy the financial consequences in cases of force majeure, treatment of the cost of negligence, and condidons under which sustained failure by HUBCO would result in the acquisition of the asset by GOP; In addition, IA defines: (a) GOP's guarantee of the performance of certain critical public sector entities (e.g., the obligations of PSO to supply the fuel to HUBCO under the FSA, and of WAPDA to purchase and pay for the power offtake from the Complex); (b) GOP's guarantee of the State Bank of Pakistan's obligation to make foreign exchange available to HUBCO to enable it to meet inter alia its foreign currency debt service obligations to senior lenders (the commercial banks and the export credit-guaranteed lenders); and (c) GOP's obligations to make funding available to HUBCO to meet shortfalls in respect of situations of Pakistan political force majeure (Special Temporary Funding), and in the event of shortfalls in capacity/delivery of power to WAPDA or during the period of disputes (Deficit Funding). Adherence by GOP to its foreign exchange availability and funding guarantees is critical to the ability of HUBCO to service its debt to senior lenders; 19 - Initialled. To be signed as a power Purchase Agreement (PPAM, The sale of condition for effectiveness power to WAPDA will be the principal source of of the proposed ECO (para revenues for HUBCO. The provisions of the 5.06). PPA, complemented by the contingency funding obligations of GOP under the IA, are designed to provide secure and adequate revenues to HUBCO so as to meet the expectations of lenders and investors. The PPA also defines the mechanism to resolve disputes. WAPDA's perfornance under the PPA would be guaranteed by GOP. PPA is executed between WAPDA and HUBCO, is designed as a take or pay contract constituting an obligation by WAPDA to buy or pay for 6,791 Gwh per year. This represents a net capacity utilization of 60% of the 1,292 MW of gross capacity of the Hub Complex. HUBCO would be required to pay penalties for each kWh not delivered to WAPDA. PPA also provides: (a) level and structure of the tariff for the sale of electricity to WAPDA at 60% capacity utilization; (b) penalties for failure to meet the agreed production pattern, derating of the installed capacity, and rewards for generation in excess of the contracted quantities; (c) definition of forc majeure and actions of each of the signatories to remedy the consequences of these events; (d) indices for the adjustment of the elements of the tariff to compensate for inflation, changes in exchange rates not covered by GOP's insurance scheme, and changes in the price of fuel; (e) schedule for plant maintenance to accommodate WAPDA's system operation requirements; (f) dispatch schedule for the power station which would be revised on a yearly basis; and (g) billing and payment procedures, treatment of arrears in payment by WAPDA, and treatment of penalties for HUBCO; Initialled September 1990. Fuel Supply Agreement (FSA), FSA provides for To be signed as a condition the long-term supply of fuel oil to HUBCO for the for effectiveness of the Power Complex under a take-or-pay arrangement. proposed ECO (para 5.06). The performance of PSO is guaranteed by GOP under the IA. FSA is executed between PSO and HUBCO, and includes: (a) the price to be paid by the project company for fuel delivered to the power station and modalities for price adjustment; (b) quantities and specification of fuel to be delivered and penalties for deviation from the specifications agreed for the fuel; (c) definition of force maeure and the actions of each of the signatories to remedy the consequences of these events; and (d) modalities for billing and payments and penalties for delays in remuneration; - 20 - Signed July 2, 1991. Turnkey Construction Contract (TKC). to be executed between HUBCO and Mitsui and Co. and members of its consortium, provides: (a) specification and detailed description of the Hub Power Complex; (b) timetable for implementation; (c) structure of project management team, contracting arrangement, procurement arrangement, site management, and billing; (d) TKC price and the conditions for its validity, and the provisions for financing cost overruns attributable to failure by contractor and those which stem from changes in design dictated by technical factors encountered during construction; (e) penalties for delays in the completion of the project and rewards for early completion; and (f) guarantees, joint and several, for the performnance by the contractors in respect of their responsibilities; In draft. To be signed as a Operation & Maintenance Agreement (O&MA). to condition for effectiveness be executed between HUBCO and BEI provides of the proposed ECO (para for: (a) the operation and maintenance of the power 5.06). plant, including organization structure and staffing; (b) timetable for training local staff; and (c) compensation for services, penalties for failure to perform as agreec', and rewards for generation above the level agre'ed in the PPA; (d) provisions for the performance guarantee of BEI; In draft. To be revised Shareholders' Agreement (SA), to be executed following reconstitution of between the shareholders of HUBCO: (a) outlines the construction consortium the purpose for the creation of HUBCO; (b) and signed as a condition defines the types and extent of liabilities; (c) for effectiveness of the defines the authorized capital of HUBCO and the proposed ECO (para 5.06). rights and privileges of these shares; and (d) provides, inter alia. guidelines for the management of the company, the constitution of its board, the function of its chief executive officer and chairman of the board, and the declaration and distribution of dividends; To be executed before Escrow Agreement (EA), executed between financial closure (para HUBCO,WAPDA, the Escrow Agent and the 5.06). lenders, provides for the receipt by the escrow agent of payments by WAPDA for electricity purchased from the project company and the priority ianking of lenders and investors by which payments would be disbursed (Figure 3). The escrow agent would be selected by the cofinanciers, e.g. commercial lenders, ECAs and PSEDF. The funds deposited in the escrow account would earn interest which would contribute to the cost of maintaining the account; Hub Power Complex: Cash Flow PriorIties under the Escrow Agreement FIGURE 3 I PA;YI'ENT PRIORITIES I R S 8 S 2 9 S P H F 3 ; 0;~~~~......... .....i3' [1M'UES (tKCL FUEL) { OPERATOR . . . . . . . . . . . . . . .. . . .:.... .. _ _ _ _ _ _ _ _ _ _ I SENIOR 1 j LENDERS J (BANKS & ECAS) D~~OT PSEDF 4 ~~~~DEBET SERVICE_ RESERVE ESCROW INVSTORSL -22 - Signed September 1990 Land Agreement (LA), executed between HUBCO (para 5.10). and the Government of Balochistan (GOB) provides for, inter alia: (a) HUBCO to purchase land for the site of the Complex under existing rules and regulations; (b) issuance of shares to GOB in compensation for publicly owned land on which the power complex would be built; (c) improvement of access roads to the site to be undertaken by HUBCO; (d) extent of liabilities; and (e) consents and approvals required from GOB for the implementation of the Complex; and To be executed before Trust Deed (TD). executed between HUBCO, the financial closure. trustee, and the lenders, provides the framework under which the trustee would hold SP on behalf of the lenders. These agreements comprising SP would be finalized following review, revision, and approval by all parties involved, including GOP, the Bank, the cofinanciers, and HUBCO. Signature and effectiveness of all agreements under SP would be required before financial closure. IV. THE EXPANDED COFINANCING OPERATION FOR HUBCO A. Setting 4.01 The Hub Power Complex is one of the major projects to be undertaken in Pakistan by either the public or private sectors. It is critical to the successful implementation of MAP. Failure to implement the Complex would imply that, by 1995, load-shedding would increase from the projected 600 MW to 2000 MW. This level of load-shedding would be economically and politically untenable. Hence, in the absence of the Complex, GOP would have no altemative but to undertake the required expansion of power generation in the public sector which would raise public sector investment by at least Rs 25 billion spread over the Seventh and Eighth Plan periods. This would represent a substantial increase in WAPDA's investment program which would not be firanciable within the resources available to the public sector, without significantly undermining GOP's efforts at reducing the fiscal deficit. 4.02 At the inception stage, it was envisaged that financing for HPC would be mobilized in the form of equity from investors, long-term loans from PSEDF and multilateral institutions, and the balance from ECAs. Debt financing by ECAs and multilateral institutions was to be secured under limited recourse without sovereign guarantees. Although it was recognized at that time that financing under limited recourse from ECAs for infrastructure projects in developing countries was unprecedented, the participation of the BE .nk and cofinanciers in PSEDF was expected to provide the security needed by ECAs. In order to mobilize the maximum amount of financing from ECAs and other cofinanciers, the Bank concentrated its efforts on devising a security package for HPC which would minimize the risks to be assumed by ECAs and the other cofinanciers. Based on the composition of the construction consortium, the ECAs of France, Italy and Japan have undertaken to provide cover for commercial bank financing for the project, following a review of SP and the technical, financial and commercial aspects of HPC. SACE of Italy has provided a a commitment to guarantee US$180 million equivalent for commercial bank financing to cover a portion of the contract for the supply of the turbo-generators and overall engineering for the Complex, awarded to Ansaldo GIE under the Bank's guidelines for procurement (para 3.07). The financing required for the balance of this contract would be provided by the Bank, JEXIM and the Government of Italy through PSEDF. - 23 - MMTI of Japan has also provided a commitment to guarantee commercial bank financing for goods and services originating from Japan for an amount of US$70 million equivalent. The Government of France has provided a commitment to finance a total of US$70 million equivalent through a combination of export credit financing from COFACE and funds made available through PSEDF. It is currently expected that US$50 million would be provided through COFACE to finance goods and services originating from France while the balance of US$20 million equivalent would be provided through PSEDF. The commitments from ECAs, which total US$300 million equivalent, are based on the strength of SP for HPC and the involvement of the Bank, which has provided a significant degree of comfort to the ECAs. The commitments provided are far in excess of what would be provided by ECAs for a project in Pakistan under normal circumstances, and have been provided notwithstanding that many ECAs are currently off-cover for Pakistan. 4.03 Given the extent of financing for the Complex to be provided by ECAs, additional commercial bank loans would be needed to fill the gap in the debt portion of the financing plan. However, Pakistan has hitherto not been able to mobilize foreign commercial bank financing on a limited recourse basis. Even direct sovereign borrowings have been limited and GOP has not been able to secure commercial loans for over US$100 million with maturities that extend beyond six months or one year. In 1988 and 1989, foreign commercial loans to Pakistan have been primarily trade credits, characterized by both short maturities, usually six months to one year, and amounts of less than US$100 million. Longer maturities were obtained in only two exceptional cases. The first was an arrangement between a consortium of Japanese banks and the Asian Development Bank (ADB) for US$50 million for 12 years in the context of ADB's complementary financing arrangement. However, ADB, rather than the consortium of banks, is the lender of record on the transaction. The second was a US$27.5 million loan from National Westminster Bank for seven years for the national airline, Pakistan International Airlines (PIA) secured against aircraft. 4.04 Commercial banks are willing to assume completion and commercial risks, provided the security arrangements are satisfactory, but they are unwilling to assume sovereign risks on long-term loans to HUBCO. Through the IA, GOP has agreed to guarantee the performance of its agencie; and provide special funding to lenders and investors against events of political Pakistan forc majeure (para 3.13). However, in view of the magnitude of resources which need to be mobilized for HUBCO and the absence of a track record for GOP involving commercial transactions with PS companies in the area of infrastructure, commercial banks require the comfort of a recourse in the event that GOP fails to comply fully with the provisions under SP. B. Objective and Structure for the Proposed ECO 4.05 The objective of the proposed ECO is to assist Pakistan in the implementation of its strategy for enhancing the role of PS in energy development by mobilizing financing fi em the international financial markets on favorable terms. 4.06 The proposed ECO would provide a guarantee in respect of 100% of pri.; ,ij' mn the event of debt service default on the loan, if the default is due to the failure of the government to fulfill its obligations under IA, for a total amount of $240 million equivalent of an international syndicated loan of $360 million equivalent. JEXIM would guarantee debt service default due to sovereign risks along the same lines as the Bank on the remaining US$120 million equivalent of the loan. The guarantee would be accelerable at any time after the grace period (of 4.5 years). During the grace period, acceleration of the loan could only occur in the event of termination of the project for reasons of GOP default under IA; in that event, the ECO guarantee would cover any default on the acceleration payments. 4.07 As outlined in Section E in Chapter III, HUBCO's ability to service debt to its lenders is intimately linked to the timely performance by GOP, WAPDA, PSO, SBP, National Insurance Company, the Turnkey Contractor, etc. of their financial and non-financial obligations under agreements comprising SP. For a Project of this complexity, it is possible that there may be delays - 24 - arising from force majie events, disputes or contractual non-performance, which in turn, could jeopardize the flow and level of anticipated revenues and other payments into the Escrow Accounts. All of these contingencies are adequately covered by special funding arrangements (e.g. Special Temporary Funding, Deficit Funding, Liquidated Damages), some of which are obligations of GOP. However, with respect to obligations of GOP, the commercial bank lenders consider that SP does not provide them with sufficient security, given their current perception of Pakistan country risk. The banks have indicated their firm view that, in order to successfully complete this syndication for Pakistan, with a maturity and grace period necessary to finance a power plant, it will be necessary to obtain a partial guarantee from the Bank in respect of debt service due to the lender commercial banks. Specifically, a guarantee covering defaults in respect of principal payments arising from failure of GOP to fulfill its obligations under the IA, supplemented by adequate escrow arrangements to cover interest payments for a 12-month period, would be essential. 4.08 The proposed ECO covers principal of debt service defaults arising from the failure of GOP to perform the specific undertakings to the project it would underwrite in the Implementation Agreement. These consist of: (a) Special Temporary Funding, (b) Deficit Funding in the event of the occurrence of certain defined events; and (c) a guarantee for foreign exchange convertibility by the State Bank of Pakistan. The ECO w11 not support other risks of the project such as completion and operational risks which would be borne by the private sector--including the banks. Under this arrangement, a considerable amount of risk for the project is borne by the private sector and thus is not covered by the Bank or counter-guaranteed by GOP. As the Bank's past experience with public sector projects has amply demonstrated, these risks which include cost overruns, construction delays, and suboptimal performance, are significant. 4.09 The proposed structure is in line with the intent of and the guidelines for the ECO prograrn that provide for support for limited recourse project finance. A particular guideline for the ECO program requires that commercial banks assume at least 50% of country exposure on the financing. This proposal, however, requires that ECO cover all sovereign risk on the project. When the ECO guidelines were drafted (in 1988) to define risk sharing that would ensure a catalytic role for the Bank, risk sharing by allocating specific risks to different parties was envisaged but not directly addressed. Instead, the risk sharing was expressed in terrns of dividing the Iotal risk on the financing (using the proxy of the present value of the guarantee) and the ceiling for the Bank's share was set at 50%. This measure for risk sharing is appropriate to public sector projects--where all risks can be viewed as a single (sovereign) risk. The ECO guarantee in project financing, as exemplified by this project, is more akin to a partial casualty insurance rather than a comprehensive guarantee against all risks, in the sense that the ECO covers only selective risks of the project leaving the remaining risks to the private sector 4.10 Providing Bank support through a partial guarantee covering only the undertakings of GOP to the project is more appropriate than a Bank loan since the indemnity from GOP to the Bank would be limited to the risks covered by the Bank under the ECO guarantee. If the Bank were to make a direct loan to the project, it would require a full indemnity from GOP, irrespective of the cause of debt- service default. This would mean that GOP carried commercial risks on the project at least to the extent of the Bank loan. It would also weaken the government's case for not providing the same protection to other lenders/guarantors (many of whom have been pressing for a comprehensive sovereign guarantee) for this and other private sector projects in Pakistan. 4.11 This structure for the guarantee is appropriate for project financing of this type. Accordingly, it is proposed that the ECO guarantee be structured along the following lines: (a) The partial guarantee of the Loan is expected to be provided by the World Bank and JEXIM in the ratio of 2:1. The World Bank Guarantee and the JEXIM Guarantee will be callable on a pari passu and pro rata basis. The portion of the loan to be guaranteed by JEXIM is limited to Japanese Yen Tranche to be provided by Japanese banks including Japanese branches of non-Japanese banks. The Yen portion of the syndicated loan would be at least one third of the total amount; - 25 - (b) The World Bank Guarantee and the JEXIM Guarantee will cover the pdnnjicpt payrnents due under the Loan and remaining unpaid. (c) The Escrow Agent of the Lenders' Debt Service Escrow Account will be designated with the authority to call the guarantee upon the occurrence of the following specified "events", which will be properly "certified" by the Escrow Agent: (i) HUBCO (through the Escrow Agent) has failed to make a principal payment or a portion thereof due and payable to the Lenders either on a scheduled payment date or on acceleration; S (ii) The failure of HUBCO (through the Escrow Agent) to make the payment is the result of the failure of the Government through the State Bank of Pakistan to make available the equivalent foreign exchange at the agreed rate upon receipt of the local currency funds from HUBCO (through the Escrow Agent); and /or (iii) The failure of HUBCO (through the Escrow Agent) to make a principal payment or a portion thereof is the result of a shortfall in the receipt by HUBCO (through the Escrow Agent) of local and foreign currency amounts payable by the Government under the Implementation Agreement. Accelraion: The Guarantee will not be callable/accelerable during the grace period of the Loan, i.e., until the 4.4th/Sth anniversary of the date of the Agreement, except in the event of termination (as defined in the Implementation Agreement). If the Loan is accelerated during this period for reasons other than termination, the Guarantee will lapse. SubrogatioLn Upon any payment by the World Bank under the Guarantee, the World Bank would immediately become entitled to recover from HUBCO and GOP the amount so paid and would have the immediate right of subrogation against HUBCO and GOP in respect of such amounts regardless of whether the Lenders have been fully repaid by HUBCO and GOP in respect of other amounts due the Lenders under the Loan Agreement. Bequisite Authorizations: All authorizations and approvals required to make the Guarantee effective would be obtained and be in full force and effect. Qption IQ Release: Provisions expressly enabling the Lenders to release the Guarantee would be included. Guarantee Fee: A guarantee fee of 50 basis points per annum, less any applicable waivers, will be payable by HUBCO on the outstanding guaranteed amount in line with the Bank's current guarantee pricing policies. C. JEXIM Co-Guarantee 4.18 JEXIM has provided a preliminary commitment to co-guarantee the principal under the Japanese Yen portion of the syndicated loan to be extended by Japanese and foreign banks in Japan. It is proposed that the amount of the guarantee be equivalent to about one third of the foreign commercial bank syndicated loan of US$360 million amounting to about US$120 million. The Yen portion of the syndicated loan is expected to be in excess of US$120 million equivalent, and thus would fully utilize the proposed JEXIM cover. JEXIM's guarantee would be provided in conjunction with, and as a supplement to, the Bank guarantee. The guarantees from JEXIM and the Bank would apply to separate tranches of the loan and would be governed by each institution's respective policies, under - 26 - terms and conditions applicable to its guarantee operations. Each institution would negotiate and enter into separate agreements with the commercial banks regarding their respective guarantees. In addition, JEXIM and the Bank would enter into separate indemnity agreements with GOP. Disbursement of the individual tranches of the syndicated loan would be according to the Bank and JEXIM guarantee proportions at commitment. Repayment terms on the tranches would be identical. The JEXIM guarantee would follow the structure of the Bank's guarantee. D. ECO Level Over Time 4.19 The maximum size of the proposed Bank ECO would be US$240 million. This would include both base financing of US$200 million and reserve contingency funds of US$40 million from commercial banks. The commercial bank's portion of the Reserve Contingency Fund would be in the form of a standby facility. Based on the estimated repayment profile of the commercial bank loan, ECO coverage would diminish over time as the loan is repaid out of HUBCO's revenues. The coverage profile of the proposed ECO over time is given in Figure 4, which assumes maximum ECO coverage of US$240 million. Figure 4: Exposure Profile of ECO Coverage on Commercial Loan . i-rwdwi ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . arm. Pr:(inciluding Repayment ..~~in ld n ID; 1 . : : . . . . . ... ....... . .. . . .. . . . . . . . . .. . . ............ ...... :: ' : Repay.....................m........... ..... N .; ; \ wN.; .... > . .. . . . . . . . . . . . . . . . . ... I . . . . . .. . . .- .: :: . . ....... . . . . . . . . . . . . . . . . . . . . . . . . _.^ uuaie. :~~~~~~~~~~~~~~ . . . . . . . . :- . ...- rnia i;~~~~ ~~~~~~~~ ~~~~~~ - : - - - Cumulative . - . - - > 2 ~~~~~~~~~~~~~~~~~Pincipal ; - - - - n ~~~~~~~~~~~~Repayment .s .. ..... ... . : : : : : : : - e ,s s ' : ' :: ~~~~~~~~~~~~~............. . - : -|.. .... ,j ~~~~~~~~~. . . . . -. : -.s. . . . . . . . . . . . . . . . ,,.-. < 2; -- I II I IE WE _ ^ = | E | | l {^ l g~~~0 . ................ 1111111....... . i .S Y. - . t - " ............. . . . . . . . . . . . . . . . . . . . | |E s :~~~~~~~~~~~ . . : . .; . . . . :. . . 1 . . . . - . . . . . . . . . . . . . . . . . . 91 92 ~93 94 -95 --96- 97 -98 -99 - IO 1*O1- 2 . O3*04- 5. ~~~~~~~~~~. . S Ye. . . - - Y . t. . : T '.'. . , , . . . . . . . . .!. ! .!. ! .' ~~~~~~~~. :. .Y . Y. :. . . . . . . . . . . .X. . . .%979 9 i 203"0 . . .... - .....YEAR . ............................ { ~~~~~. . . . . . . . . . . . . . . . . . . . . . :. . . . . . . . . . 4.20 The Bank's exposure under the ECO would increase as the loans are drawn down over the first 4 years of project implementation, and then decrease yearly in a stair-step manner over the repayment period of 11 years. Principal repayments would be made in 22 equal semi-annual installments. The principal repayments shown in Figure 4 reflect the annual repayment amounts and, therefore, the principal shown outstanding represents the amount outstanding at the end of each year. - 27 - E. Proposed Financing Plan 4.21 As agreed under Loan 2982-PAK, PS projects in energy should be financed through long term debt from PSEDF, commercial banks and ECAs, all secured under limited recourse, and equity. The financing plan for the Complex is structured accordingly. Of the total financing required of US$1,560 million, US$1,310 million would be in foreign exchange and US$250 million in local costs. A summary of the proposed financing plan for the Complex is given in Table 4 below: Table 4: Proped Financing Plan (USS Million) Equity Base Debt Service Contingency Total Financin, .2 Escrow EinanciOn Eaing 2 Foreign Investors Sponsors/HPG Members 78 6 - 38 116 7 Offshore Financial Institutions 82 6 17 99 7 Commonwealth Dev. Corp. I I - 8 1 Subtotal Foreign Equity 168 11 12 la 22 15 Local Investorsl HUB Convertible Bonds 100 7 -- _ Subtotal Equity 2X 2Q 12 2 D 21- | Debt ~~Foreign PSEDF 355 26 - 52 407 26 Syndicated Commercial Bank Loan 249 19 51 60 360 23 Export Credit Agencies 300 24 - - 300 21 Commonwealth Dev. Corp. 2Q 2 0Q .1 Subtotal Foreign Debt 224 71 51 112 21 Jocal Banks 1is 9 _JQ -a Subtotal Debt 1Q74 BQ a 1 1232 22 TOTAL 1342 100% 68 150 1560 100 IFigures may undergo minor adjustments. 2Taken as a percentage of the total cost of the Complex, which includes interest during construction and other fiance related costs. The financing plan covers the TKC, the project's development cost, interest during construction and other financial costs, the establishment of a US$54 million debt service escrow reserve on interest payments for the commercial banks and ECAs. The total financing required for the escrow reserve account would amount to US$68 million. The plan also includes provisions for US$150 million in contingency financing to cover an increase in costs associated with project implementation, including variations in the specifications of equipment, physical contingencies, and changes in taxes or the terms of finance, debt service, etc. These contingency provisions, which amount to US$150 million would be covered by PSEDF (US$52 million), the commercial banks (US$60 million), and the sponsorsfinvestors (US$38 million). PSEDF is mandated to cover part of contingencies for expense.s - 28 - eligible under the donors' and cofinanciers' guidelines as required under the PSEDF loan agreement (Loan 2982-PAK). Mobilization Payment from PSEDF 4.22 Following the signing of the TKC, and the reconstitution of the construction consortium in July 1991, HPG initiated all activities to commence construction. However, due to the complexity of the financing package, financial closure could be delayed beyond the validity date of the contract of December 31, 1991. Currently, financial closure is expected by March 31, 1992. If the commencement of construction has to wait until financial closure, the contract's validity would expire, the project would lose momentum, and the investors would find it difficult to sustain the level of development effort which have so far cost HPG about US$21 million. Moreover, as stipulated in TKC, extension beyond December 31, 1991 would result in a price adjustment to compensate for inflation, exchange rate changes, etc., which would increase the cost of the project and financing required. If, however, the initial payment for TKC is made on or before December 31, 1991, the TKC price would be frozen. In addition, timely initiation of construction would maintain HPC's commissioning schedule. It is proposed, therefore, that in order to enable HUBCO to start construction, financing from PSEDF be made available for eligible contracts equivalent to the down payment. According to the estimates of HUBCO, about US$125 million would be required to initiate the construction of the Complex and meet HUBCO's financial obligations until financial closure. In order to maintain the debt equity ratio of the financing plan, the Sponsors would be required to contribute about US$10 million in new equity to meet the down payment, while the balance would be met through a loan from PSEDF of about US$115 million. This contribution, together with the US$21 million contributed so far by the Sponsors would maintain the equity portion of the financing at 21%. Untied funds from the Bank and JEXIM (amounting to US$35 million equivalent each) would be used to finance part of the initial payments for t& E contract for the turbine-generators under PSEDF awarded under Bank guidelines. The balance of the initial payment for this contract would be provided from the Government of Italy's contribution to the PSEDF (US$24 million equivalent) since the contract was awarded to an Italian contractor. Similarly tied French aid expected to be made available to PSEDF (US$20 million equivalent) would be used to finance the French contract for civil works and the USAID grant (US$1 million) would be used for construction supervision being carried out by an American engineering firm. 4.23 At present, the mobilization of financing for the Complex has been firmed up and by December 31, 1991 commitments are expected from all debt financiers and equity investors. However, in view of the complexity of the financing arrangements for the project, which involves a wide array of financing sources for both debt and equity, it is expected that following the receipt of firm commitments from all the financiers, at least 3-4 months would elapse to allow for the necessary coordination, cross-checking legal documentation and administrative requirements, to achieve financial closure. In recognition of the need to freeze the price for TKC and maintain the implementation schedule for the project, NDFC, as administrator of PSEDF, would enter into an agreement with HUBCO to disburse the mobilization payment, provided firm commitments have been made by all the debt and equity financiers and all agreements comprising SP have been signed. These would include the Implementation, Power Purchase, Operation and Maintenance, Fuel Supply and Escrow Agreements. Eui Fianng 4.24 Foreign &uiW The Sponsors, contractors, and institutional and private investors would contribute about US$223 million equivalent towards the financing of the Complex. Of this, US$168 million would be base financing, US$38 million would be committed for contingency financing, and US$17 million would be set aside to be utilized in parallel with the debt service reserve escrow account. Members of HPG have confirmed their irrevocable commitment to provide an equity contribution of US$78 million wherein Xenel Industries have committed US$27 million and would underwrite US$33 million, Mitsui and IHI have committed US$12.5 million, BEI have committed -29 - US$5 million and K&M Engineering have committed US$0.5 million. HPG would also be expected to provide US$38 million for the contingency reserve funds, which would be drawn down as equity in the event that either are drawn down in order to maintain a constant debt/equity ratio. Guarantee against political force mgjeum would be provided by MITI for the equity contribution of Mitsui and Co. and IHI. COFACE would provide coverage for the equity contribution of Campenon Bernard, and SACE would cover Ansaldo. Xenel Industries has applied to MIGA for coverage of up to US$22 million under the limit of US$50 million authorized under MIGA's mandate for a single project, as coverage is not available in Saudi Arabia. The remaining US$28 million of the coverage available under MIGA's ceiling would be available for equity investors provided they are not nationals of Pakistan or citizens of countries which are not members of MIGA.. MIGA intends to coordinate its coverage with the other national insurance schemes to ensure consistency in the coverage being provided. 4.25 In addition to the sponsors, US$82 million would be raised by Chartered West LB, a U.K.- based merchant bank with extensive project finance expertise and an understanding of the Pakistan investment environment, through its parent Standard Chartered Plc. Chartered West LB have entered into an agreement with HPG for the placement of offshore equity on a best effort basis. Moreover, HPG has received letters of interest for the equity from various banks and institutions including the Impact Group of the US (US$20 million), the Al Baraka Investment Company of Saudi Arabia (US$15 million), and the Investment and Securities Group, Inc. in Luxembourg (US$60 million). Citibank Pakistan has also identified off-shore investors (US$20 million). Chartered West LB would coordinate and follow up these offers. An amount of US$17 million for funding the escrow account is being sought from specific offshore institutions as a single placement. The Commonwealth Development Corporation (CDC) of U.K. has confirmed its participation in providing equity of US$8 million. While discussions are underway, definite commitments would be forthcoming once project costs and debt financing requirements are finalized, and HUBCO is in a position to release all relevant information to the potential investors. Any shortfall resulting from a failure to place the off-shore equity would be taken by HPG as sponsors and developers of the Project. In order to ensure that the foreign equity portion of the financing plan is secured. the following are proposed as conditions ot effectiveness of the proposed ECO: (i) a letter of credit for an amount eauivalent to US$116 million. comprsing US$78 million base financing. inclusive of development cost verified by an internationally reputable auditing firm. and US$38 million in ccatingency financing, shall have been opened by HPG: (ii) agreements satisfactory to the Bank to place off-shore equity for an amount ecquivalent to US$99 million, inJlusiie of US$17 million for the debt service escrow account shall have been signed by HUBCO with off-shore investors, or in the absence of such agreements a guarantee shall have been received from the parent copne f the sp2onson ineToS to subscribe to the equily for the same amount: and (iii) an equity contribution to HUBCO in an amount equivalent to about US$8 million shall have been made by CDC. 4.26 Local E-aui: The implementation of the Complex would require US$100 million equivalent as local equity to be raised in the Pakistan capital markets. Pakistan's equity market has expanded over the last ten years, as reflected in the increase in the number of listed companies and market capitalization. However, the market has capacity constraints illustrated by the fact that new equity listings issued in FY87 and FY88 amounted to Rs. 744 million (US$35.4 million) and Rs. 435 million (US$20.7 million) respectively, compared to the local equity requirement for HUBCO of about Rs 2,404 million (US$100 million). Although the resources are available in the hands of the general public and non-financial institutions, investments in corporate shares have been modest with the majority of the shares being those of the semi-government enterprises such as PSO, SNGPL, and KESC. These shares are virtually guaranteed by GOP since they provide for a minimum return to protect small investors. For example, in the case of KESC, the dividends are declared before the loans from GOP are serviced. Recently, shares for PIA were floated and oversubscribed three times; however, these were also supported by GOP. High investor interest has been evident in other public issues such as Ghandara Nissan, Otsuka Pakistan, Crescent, Masaraf Investment, Mian Textile, A.A. Textile, and Shezan International, among others. On average, shares in these companie,s were oversubscribed by about 10-15 times due to the fact that these were either joint ventures with - 30 - multinationals, companies with proven track records, or were in sectors which have shown continued profitability over the ast years. However, the amounts raised through these public issues have been small mostly in the range of US$4-5 million. As far as HUBCO is concerned, the involvement of the Bank and cofinanciers, together with the foreign investors, contractors, and operators, has provided considerable confidence in the viability of the Compl . In fact, confidence has been stimulated by SI's staying power which has continued with the project through lengthy negotiations and preparations, as well as changes in government. 4.27 According to the agreement with GOP on raising local equity for HUBCO, local equity was to be raised in the form of a new instrument, to be underwritten outside Pakistan to ensure additionality and to address the existing constraints in the local market such as limited absorptive capacity and the lack of experienced underwriters. The new instrument had to be designed bearing in mind that the effectiveness of the instrument for raising local equity in Pakistan capital markets would be contingent on it's liquidity in the market and it's treatment for tax purposes. Also, the attractiveness of the instrument would be greatly enhanced if the instrument offered a return to the investor during the construction period of the project. In view of this, the Bank undertook a study to assess the local capital markets and to determine the issues that should be addressed to ensure that the financing for the construction of the Hub Complex is not jeopardized because of a failure to design and place the instrument. Consequently, a strategy has been developed involving the mobilization of local equity by issuing HUBCO Convertible Bonds (HCB). The advantages of issuing HCBs for the local equity component of the financing plan are: (i) they are similar to the prevalent Term Financing Certificates which are known and popular instruments in the local capital markets and have been issued a number of times in a convertible form; (ii) they would not have the restriction of 20% convertibility as applicable on other convertible instruments in the market (iii) they can be traded by local commercial banks, thus ensuring secondary liquidity; and (iv) they have been structured to provide a fixed return during the construction phase of the Complex, thus enhancing their attractiveness to potential investors. 4.28 HCBs have been structured in the following manner: (i) five tranches of about US$20 million each would be issued, commencing in FY91 and maturing for mandatory conversion at intervals of four years; (ii) except for the first two tranches,which would be issued in FY91, six months apart, the remaining 3 tranches would be issued annually from FY92 to FY95 timed to match the disbursement profile of the project while accommodating the absorptive capacity of the market; (iii) each HCB would cany a coupon of 16.5% payable semi- annually to be treated as redeemable capital for the purpose of eligibility under the prevailing Islamic law which does not allow fixed income instrui-nits; and (iv) each tranche would be priced differendy to provide a yield to the investor which is commensurate with the time of investment and, hence the risk assumed. This approach to compensatirng HCB holders for risks would result in annual yields on the instrument between 18% for the first tranche and 15.5% for the fifth and last tranche, when the project would be well under operation. GOP has reviewed the proposed strategy for the mobilization of local equity and approved in general the structure of the Hub Convertible bonds as an instrurient for raising local equity. 4.29 Since all financial instruments in Pakistan are not tradeable in the secondary market, the liquidity and, therefore, the attractiveness of the instruments would be affected. The State Bank of Pakistan has confirmed that in the case of HCBs, there is no legal barrier to local commercial banks participating either as primary underwriters or as creators of secondary liquidity. The subscription to the issue would be open to all investors, including all financial institutions. The bonds would be listed on the Karachi stock exchange and would be offered in registered and bearer form and the coupons would be treated as dividend payments for tax purposes. 4.30 In an effort to eneourage PS investment and avoid the crowding out effect, GOP has lowered the return on its bonds and the bonds of public sector entities it guarantees. GOP has also barred institutional investors from investing in local high yield National Saving Scheme (NSS) deposits thus creating a climate for institutional investors to move from government backed deposits to private instruments. It is estimated that the barring of institutional investors from the NSS would release - 31 - about Rs 40 billion (US$1.7 billion) for alternative investments over a period of three years. Also, as the capital market reforms continue in light of GOP's extensive privatization program, there are indications that small investors would also be limited in terms of the amount they can invest in the NSS, thus making HCBs attractive to these investors. The coupons on HCBs would offer a higher return than the prevailing local saving schemes which offer an average yield of 13%. 4.31 In accordance with GOP's request that the local equity be underwritten by an offshore institution, Dhabi Trading (DT) of Abu Dhabi, UAE, have been appointed the lead underwriters for the US$100 million equivalent HCB issue in Pakistan, and Grindlays ANZ of Pakistan have been appointed the managers of the issue based on their experience and knowledge of the local capital markets. A marketing strategy for the convertible issue is being prepared for the issue. DT has also appointed two local banks as the co-managers for the issue namely, the newly privatized Muslim Commercial Bank (MCB) and the House of Prudential. There has been an overwhelming response for the subscription of HCBs and Dhabi Trading has been successful in placing the bonds, conditionally, with the following institutions: US$25 million with ANZ Grindlays, US$25 million with MCB, US$30 million with the House of Prudential and US$20 million with NDFC . If the off-shore underwriting of HCBs is successful, it would set a precedent and provide momentum to the development of local capital markets. Therefore. in order to ensure that the local equity potion of the financing plan is secured. as a condition of effectiveness of the proposed ECO. an underwriting agreement for the issuance of HCBs for equity in HUBCO in the Pakistan capital market for an amount equivalent to about US$100 million shall have been signed with DT. 4.32 Foreign Debt: PSEDF would finance about US$407 million equivalent, comprised of US$355 million in base financing and US$52 million for contingency financing. This represents 25% of the total financing requirement of the Complex, including financial costs and contingencies. These funds would be lent to HUBCO at a fixed interest rate of 14% with 23 years repayment, including 8 years grace (para 2.03). A preliminary commitment by NDFC, the administrator of PSEDF, in regard to this financing has been issued to HUBCO. In addition, it is expected that ECAs of Japan, France, and Italy would provide export credit guarantees for suppliers from their respective countries for a total of US$300 million. SACE has provided commitment to guarantee US$180 million equivalent of export credit financing. MM has provided a commitment to guarantee US$70 million of export credit fnancing and COFACE has provided a commitment to guarantee US$50 million equivalent of export credit financing (para 4.02). CDC has made a preliminary commitment to provide US$20 million equivalent as debt. Financing from foreign commercial banks would amount to the balance of US$360 million equivalent, which includes a reserve for the debt service escrow account of US$51 million and contingency financing for an amount equivalent to US$60 million as well as interest during construction for the first four years. The Sponsors have issued a conditional mandate to a group of commercial banks consisting of [Mitsui Taiyo Kobe Bank, The Bank of Tokyo, Ltd., Citicorp Investment Bank, Credit Lyonnais, and Union Bank of Switzerland]. Letters of preliminary commitment for the amount of US$360 million have been received from the group of banks. Indicative terms and conditions of the syndicated commercial banks loan are set out in the attached term sheet and would be negotiated following the Board's consideration of the proposed ECO (paras 4.05- 4.17). Preliminary discussions between the Bank and the group of commercial banks indicate that the loan may be structured for a 14-year maturity with a 4-year grace period. HUBCO would purchase exchange rate risk insurance for the commercial loans through SBP and the cost of such insurance is included in the total costs of the project. In order to ensure the foreign debt portion of the financing plan is secured. as a condition of effectiveness of the proposed ECO: (i) agreements for export credits/export insurance to HUBCO in an agregate amount equivalent to about US$300 million shall have been signed between HUBCO and MITT. COFACE. and SACE and all conditions precedent t the effectiveness theref shall have been fulfilled: (ii) all conditions p2recedent to the effectiveness or the loan agreement between PSEDF to HUBCO in an amount equivalent to US$407 million shall have been fulfilled. other than those for the effectiveness of the proposed Bank Guarantee. (iii) a loan agreement for a foreign syndicated commercial bank loan to HUBCO in an amount equivalent to about US$360 million shall have been signed with the consortium of commercial banks. and all conditions pcedent to the effectiveness thereof shall have been fulfilled. other than the effectiveness of the - 32 - proposed Bank Guarantee. and (iv) a loan agreement to HUBCO for an agyreeate amount equivalen to US$20 million shall have been signed with CDC. and all conditions precedent to the effectiveness thereof shall have been fulfilled. other than the effectiveness of the proposed Bank Guarantee. 4.33 Local Debt: The local debt requirement of US$150 million equivalent is of an unprecedented amount for Pakistan's credit market, and would be available with significantly longer maturities than has been available in the local credit market in the past. NDFC and Bankers Equity Ltd. (BEL), have been appointed by HUBCO as syndication managers for the local debt portion of the financing plan. This arrangement capitalizes on several positive aspects: (i) NDFC/BEL's experience in raising financing for projects in the local markets; (ii) NDFC's already extensive familiarity with HPC through its role as administrator of PSEDF; and (iii) the sharing of the risks and responsibilities between NDFC and BEL, given the size of the syndication envisaged. With the consent of the State Bank of Pakistan, the nationalized commercial banks have been authorized to extend the required financing to the project under the leadership of NDFC/BEL without breaching the credit ceiling set under MAP. The terrns and conditions remain to be finalized with the Sponsors but preliminary terns for this financing have been indicated by NDFC/BEL as 14-year maturity with a 4-year grace period. In order to ensure that the local debt portion of the financing plan is secured. as a condition of effectiveness of the proposed ECO. a loan agreement for a local syndicated commercial bank loan to HUBCO in an amount equivalent to about US$150 million shall have been signed with NDFC and Bankers' Equity. Ltd.. and all conditions precedent to the effectiveness thereof shall have been fulfilled. other than the effectiveness of the proposed Bank guarantee. V. HUB POWER COMPANY A. Corporate Development 5.01 When the Hub Power Complex is commissioned, HUBCO would be the first power generation utility in Pakistan to be wholly owned and operated by PS. Its performance would provide a benchmark for evaluating the perforrnances of WAPDA and KESC in terms of staff deployment and development, corporate organization and management, operations and maintenance practices, financial management and control, and development of new facilities. 5.02 The development of HUBCO into a utility would be undertaken in phases which correspond with the progress in the implementation of the Complex. Since the financing for the Complex is secured under limited recourse, the arrangements under SP dictate, to a large extent, the evolution of the corporate development of HUBCO. After the issuance of LOI, SI undertook the preparation of the feasibility study for the Complex, the selection of the turnkey contractor(s), and the negotiation of subsequent agreements. Following the creation of HPG (paras 3.05 and 3.07), a managing director was appointed to manage the relationship of the Group with GOP, the Bank, and the international financial community. K&M Engineering was appointed to support HPG in the area of engineering, and Morgan Grenfell continued its support in the area of finance. 5.03 The staffing of HPG evolved with the appointment of a Board comprised of the shareholders, chief executive, and a chief financial officer. Staff from BEI and K&M have been seconded to HPG, assisted by consultants with international experience whenever needed. The structure being developed for HPG is intended to be a foundation for the development of HUBCO. The initialling of agreements with GOP and the positive response of the international financial community in expressing willingness to consider financing under limited recourse, was the signal for HPG to start the development of HUBCO. As a first step, and in compliance with the guidelines for PSEDF, HUBCO was incorporated in Pakistan in April 1989 under the Pakistan Companies Ordinance of 1984. An interim Board of Directors has been appointed and a search for a permanent CEO has been initiated. A corporate development plan for HUBCO has been prepared and submitted to the Bank and GOP for review. The plan would also be reviewed by consultants with international experience in power utilities to ensuring that HUBCO's corporate structure is based on internationally - 33 - accepted standards and, that the pace for implementing the corporate development program is consistent with the proposed strategy for the construction and operation of the Hub Power Complex. The completion of a corporate development plan for HUBCO. satisfactory to the Bank. would be set as a condition for the effectiveness of the proposed ECO. 5.04 HUBCO would be wholly owned by PS. Foreign investors would hold 69% of the shares and local investors 31%. The foreign equity would be held as follows: Xenel, Hawker Siddeley, Mitsui and Co., IHI, Campenon Bernard, Ansaldo GIE, K&M Engineering, and Morgan Grenfell Investment Corporation would invest US$78 million of base financing and make a commitment for US$38 million in contingency financing, representing 52% of the foreign equity and 36% of total equity; CDC would hold US$8 million, representing 4% of the foreign equity and 2% of total equity; and the rest of the foreign -quity would be held by institutional and private investors. The local equity would be mobilized throu,n HCBs (paras 4.26-4.31). It is expected that the HCBs would be mainly acquired by private investors and by banking and financial institutions, i.e., commercial banks, insurance companies, investment companies, pension funds and the general public. 5.05 The terms for the participation of investors as shareholders in HUBCO are governed by SA (para 3.13). The SA has been signed only by the sponsoring investors, but will need to be modified as additional shareholders are inducted and to reflect the lenders' comments. The terms of the SA including any changes therein will be reflected, as appropriate, in the Memorandum and Articles of Association of HUBCO, which have already been drafted. The Bank has reviewed the draft Memorandum and Articles of Association to convert the existing company to a public limited company and advised HPG that revisions are needed to appropriately reflect the functions of the Company. Therefore. as a condition of effectiveness of the proposed ECO. the Shareholders' Ageement shall be signed by all the shareholders of HUBCO. including members of the reconstituted construction consortium, and the Memorandum and Articles of Association amended to the satisfaction of the Bank and adopted by HUBCO's Board. 5.06 The agreements under SP, were initialled by HPG and GOP. Since HUBCO would ultimately be accountable to GOP, as well as to the lenders and investors, HUBCO should be the signatory to all agreements with GOP and the lenders. In order for HUBCO to undertake commitments, provide guarantees and assume liabilities, a perrnanent Board of Directors should be constituted and its responsibilities ratified by the shareholders. In addition, HUBCO should capitalize the audited expenditures incurred by HPG and have a plan for financial management and control put in place, administered by qualified permanent staff. Therefore. as a condition of effectiveness of the proposed ECO: (i) a permanent Board of Directors of HUBCO shall be constituted in a manner satisfactory to the Bank. and the Chairman of the Board and CEO shall be appointed: and (ii) the Implementation. Power Purchase. Construction. Operation and Maintenance. Fuel Supply and Escrow Agreements shall have been signed by authorized representatives of HUBCO and GOP. and all conditions precedent to the effectiveness thereof shall have been fulfilled: and (iii) the first Annual General Board meeting of all shareholders Qf HUBCO shall be held to ratify the Implementation. Power Purchase, Construction. Operation and Maintenance. Fuel Supply. and Escrow Agreements. 5.07 HUBCO would have to provide the security and confidence normally required of utilities. This is of special significance for at least the first 14 years, during which time the debt to the senior lenders is being serviced. Consequently, HUBCO would enter into a tumkey contract for the implementation of the Hub Complex which would be executed by a construction consortium. The consortium, which is comprised of internationally reputable and experienced companies with strong financial positions, would provide HUBCO joint and several guarantees against: (a) failure in the construction of the Complex in accordance with the agreed timetable and cost; and (b) failure of performance of the equipment to meet the criteria agreed with GOP. This guarantee would be assigned to the lenders to provide the required comfort. During the implementation stage, HUBCO would depend on its own project management staff comprised of an engineering executive, assisted by a number of engineers, and supported by K&M Engineering in supervising the performance of TKC. - 34 - BEI would also assist by ensuring that the equipment installed meets the specifications and standard required for operations as agreed under PPA and O&MA, and IA. 5.08 HUBCO would be expected to administer all financial aspects relating to its operations including draw down of funds from PSEDF and other lenders. It would, therefore, require a fully staffed finance department during the construction phase, capable of contract administration, accounting, financial management and control, reporting and internal audit and disbursement. During the operations phase, the capabilities in the area of operations and management of accounts receivable and payable would need to be strengthened. In order to provide the comfort required by lenders and investors, the responsibilities for operating the Complex would be entrusted to BEI governed by an O&M Agreement (para 3.13). BEI would take the full responsibility for operating the plant, training the local staff and maintaining the facilities. Guarantees for performance would be provided by BEI to HUBCO which in turn would be assigned to the lenders and GOP under the security arrangements. Gradually, as HUBCO develops the financial strength and as its liabilities to the lenders diminish, BEI could then either relinquish its responsibilities to a fully staffed and trained operations and maintenance department at HUBCO, or enter into a joint venture with HUBCO to operate the Complex, sharing both the returns and the liabilities. Either scenario, however, is unlikely to materialize before the senior debt is retired. In addition, a legal department would be required for contract administration, reviews and negotiations when required. 5.09 The number and levels of HUBCO's staff would be increased to match the growing responsibilities of the Company and the change in the nature of its operations from supervision of construction of the Complex to its operation and ultimately the development of other power generation facilities. The staffing plan and its implementation would be an integral part of the corporate development plan. However, as a first step in the staffing of HUBCO, a permnanent chief executive officer should be appointed who would report to the Board of Directors. In addition, directors reporting to the chief executive officer should be in place and their critical staff appointed to provide for smooth operations of the Company. Therefore. in order to ensure that HUBCO has a management team and is adequately staffed to implenient the Complex. as a condition of effectiveness of the proposed ECO. adequate staffing for HUBCO shall be in place and senior management posts in financengineering. accounting. legal. administration, public relations. and project management shall be f;lled and peisonnel appointed. 5.10 The Complex would be located on land in Balochistan province that is presently both privately and publicly owned. HPG received authorization from GOB to negotiate with the provincial Government of Balochistan (GOB) for the acquisition of the required land. Subsequently, HPG signed a Land Acquisition Agreement in September 1990 with GOB which has issued a decree identifying the privately held tracts of land to be acquired under existing procedures for the acquisition of land for public interest. However, in view of the importance of having the title for the land before site preparation and construction work are initiated, title deeds for the land required for the Complex shall have been executed in favor of HUBCO as a condition of effectiveness of the proposed ECO. B. Forecast of HUBCO's Financial Performance Financial Objectives of HUBCO 5.11 HUBCO is expected to have the mandate to mobilize resources to expand its activities in the area of power generation. Consequently, the strategy for its development has been outlined with a view to transforming over time from a single plant to a multiplant utility, financed both from its own internal sources, and by using local and international capital and credit markets. The mobilization of these financial resources would be on the basis of limited recourse, supported by the utility's financial strength. Despite the autonomy envisaged for HUBCO, it is expected to remain dependent on the performance of GOP and its agencies; e.g. WAPDA, PSO, and SBP. The provisions under SP are intended to buffer the financial viability of the utility from failures by GOP and any of its entities in complying with the terms of the agreements of SP. As the utility grows, it is expected that it would set - 35 - aside portions of its net earnings into a reserve that would provide a cushion from unexpected commercial events that could adversely affect its financial viability. For the purposes of the Hub Power Complex, HUBCO would establish a one-year debt service reserve escrow account to provide commercial banks and ECAs with a buffer against such events. This offshore escrow account of approximately US$54 million would be funded with the same proportions of debt and equity as the contingency fund, and it would be drawn down immediately prior to the end of the project's fourth year. Accordingly, HUBCO's financial objective should be to ensure its development into a financially viable utility by generating sufficient revenues from the sale of electricity to cover all operations and maintenance costs, including depreciation; debt service; a competitive return on equity; an adequate level of working capital; a reasonable part of its development program; and the build-up of reserves over time to reduce its dependence on elaborate security arrangements to finance new investments. HUBCO's net revenues including depreciation should be adequate to comfortably meet its debt service obligations to ensure its creditworthiness. Assnpdtions for Forecast 5.12 The capital and development costs for the Complex correspond to the tariff agreed on between HUBCO and GOP in June 1991. In the tariff agreement, all prices and exchange rates are expressed at constant March 31, 1991 terms. The presant projections have been updated to reflect September 1, 1991 exchange rates and current terms of finance as reflected in the draft term sheets of the banks and underwriters who have provided preliminary commitments to provide debt and equity funds to the project. The tariff agreement stipulates that these adjustments apply from the date of the agreement to financial closure. Fuel prices, O&M costs, and project company cost are expressed in March 31, 1991 prices and wage levels. 5.13 The estimation of annual costs used in the financial projections do not include an annual adjustment for inflation or exchange rate changes. This allows for the evaluation of the projected performance of HUBCO without any distortions that could be introduced because of subjective assumptions about future exchange rates, inflation rates, or other factors. However, in ord-er to translate HUBCO's financial position to current prices, a set of indices has been used to adjust each component of the costs, revenues and returns on equity to compensate for changes in local and foreign inflation; exchange rate; wages and compensation packages for local and expatriate employees; corporate and employee taxation; custom duties and import taxes on equipment and material used for construction and subsequently operations; and prices of fuel and lubricants. These indices and their applicability are specified in PPA. An important feature of the financial structure of HUBCO is that the return on equity is not guaranteed. but instead it occurs only if the utility operates along ex ante efficiency parameters which are used as a basis for the tariff agreed with GOP and the forecast of financial performance. Failure by HUBCO to adhere to the ex ante parameters for performance would imply lower returns on equity and, if this failure continues, it could lead to erosion in the equity since penalties agreed to in the PPA tap the dividends furst and then the equity next. Revenues HUBCO's tariff for sale to WAPDA of 6,791 Gwh per year for 30 years, represents a narneplate capacity utilization of 60% and a net capacity utilization of 64%. Under the Power Purchase Agreement, WAPDA is obligated to take the 6,791 Gwh each year. If HUBCO is able to supply the power and WAPDA fails to take it, the latter would be required to pay for electricity as if the contracted power has been delivered. Conversely, should HUBCO fail to deliver part or all of the contracted power, it would be required to compensate WAPDA for the shortfall, amounting to its avoidable cost. Costs are determined on the basis of operating parameters negotiated between HUBCO and GOP, covering fuel efficiency, capacity derating schedule, if applicable, operations and maintenance costs, insurance, and financial cost. These are all expressed in the prices of the base year, 1991. The agreed tariff is derived to be sufficient to cover all operating costs, debt service, and the provision of an average 18% return on equity to the Company's shareholders. Once financial closure is achieved, a set of - 36 - indices will have been agreed with GOP to annually adjust the tariff to cover changes in fuel costs, labor wages, and exchange rate inflation. If the Complex operates at the contracted level of efficiency, cost structure, and parameters agreed when the tariff was set, HUBCO would achieve an average 18% return on equity for its shareholders. Otherwise, the return on equity would decline. Moreover, the tariff has been structured to allow HUBCO and WAPDA to share the benefits of the economies achieved from higher than contracted plant utilization. At capacity utilization levels higher than 64% of net generation, the benefits are split between WAPDA and HUBCO. This arrangement provides incentives for HUBCO to maintain the complex at a state to supply more than contracted levels, while at the same time it should reduce the average costs to WAPDA of purchasing power from HUBCO. Operations and Maintenance: The Hub Power Complex is expected to have a fuel efficiency of 2,210 Kcal./kWh which should be attainable with proper operations and maintenance. In addition, a plant betterment allowance has been added to the operating costs of the facility to cover the costs associated with the maintenance of the Complex and to retain the installed capacity of the Complex at 1,292 MW throughout the forecast period of 30 years. This prevents HUBCO frem derating the instal!ed capacity of the Complex on a theoretical basis and claiming bonuses for exceeding it in practice. Conversely, it prevents HUBCO from disguising it's failure to perform under the deterioration in the efficiency of the Complex because of wear and tear. These operations and maintenance costs are based on performance of similar units in developed countries, and they are consistent with industry- wide practices. The cost of fuel oil for the operations of the Complex is taken as Rs 2,350/ton (US$98/ton) which is the prevailing domestic price as of June 1991. This price reflects the recent long-term increases in the price of oil following the Gulf crises. Changes in the prices of fuel oil would be automatically reflected in the tariff once the power plant starts its operation. Consequently, if the recent increases in the international price for oil are sustained, the tariffs would be increased at the time of commissioning to reflect the prevailing price of domestic oil. The same price would also be paid by WAPDA and KESC which would maintain the relative tariffs of HUBCO, WAPDA and KESC unaltered. Ltwurance: HUBCO would arrange for insurance to be in place for both the construction and operating periods of the Complex. Insurance for the construction period would include: marine cargo insurance, covering the import of plant and equipment to the construction site; contractor's all risks, covering loss or damage to the works during the construction and testing/commissioning periods; loss of advance profits (business interruption irnsurance), covering loss of revenue and/or increased costs due to delays in the start-up of the Complex as a result of damage to the works and materials during transit to the site or during testing/commissioning; public liability, covering legal liabilities to third parties for injury or damage arising from construction, testing/commissioning and maintenance; and other local insurances, covering workmen's compensation and vehicle insurance for HUBCO's vehicles. During the operating period, HUBCO would arrange the following types of coverages: fire and perils - fixed assets insurance, covering loss or damage from fire and other specified risks; machinery breakdown insurance, covering loss or damage to mechanical and electrical equipment resulting from breakdowns; consequential loss; business interruption insurance, covering loss of revenue and/or additional costs as a result of an interruption in the operation of the plant following material damage or breakdown; public liability, covering legal liabilities to third parties for injury or damage arising from the operation of the Complex; and other local insurances, covering workmen's compensation, blanket crime, director's liability, vehicles insurance and personal insurance for expatriate employees. In addition, GOP provides a foreign exchange risk insurance scheme which is available to cover debt financing by private or public enterprises. Under this scheme, SBP freezes the exchange rate for the Pakistani Rupee relative to the currencies in which foreign loans are denominated in exchange for a premium which is determined at the time the debt is - 37 - incurred. The foreign exchange insurance scheme would cover the loans secured by HUBCO from the commercial banks, CDC, and ECAs. The loans which are secured by HUBCO from PSEDF are also covered against changes in the exchange rates, and the premium is incorporated in the interest rate of 14% on loans from the fund. This compensates GOP for assuming the foreign exchange risk in repaying the loans mobilized from the bilaterals and the Bank to finance PSEDF. Projected Financial Reuls 5.14 The financial forecast for HUBCO is summarized in Table 6 below and is provided in more detail in Annex 5.1. Table 6: Projected Financial Results of HURCO 1994 i99 9200 Electricity Sold (GWh)l 2,971 6,791 6,791 6,791 6,791 Average Tariff (Rs/KWh) 1.745 1.657 1.616 1.475 1.048 Electricity Revenues(Rs million) 5,183 11,849 11,492 10,317 7,114 Operating Expenses 2(Rs million) 3,280 5,616 5,618 5,565 5,491 Operating Income (Rs million) 1,903 6,232 5,873 4,752 1,624 Net Income 3(Rs million) 80 2,318 2,255 2,443 1,154 Financial Ratios Debt Service Coverage Ratio Senior Debt N/A 2.1 2.1 2.2 N/A Total Debt N/A 1.6 1.5 1.5 2.1 Retun on Equity (IRR) = 18% 1 At 64% utilization of net plant capacity 2 Includes depreciation * Includes net non-operating income At 64% capacity utilization, energy sales are expected to increase from 2,971 GWh after the initial commissioning of the first unit in 1994 to 6,791 GWh in 1995 after the commissioning of the remaining 3 units. The forecast net revenues and expenditures for the project show that net revenues for each fiscal year would result in a debt service coverage ratio (DSCR) above 1.5 on total debt in all the years of th.e project. A debt service escrow account providing one year US$54 million reserve on interest payments on the loans from senior lenders would be established to provide the required security for the commercial banks, CDC and ECAs. This escrow account would be funded at the beginning of 1995 at the end of the interest grace period on the senior loans, in the the same manner as the contingency fund, i.e., through an additional commitment of equity and additional drawdowns on the commercial bank (ECO) loan facilities. In addition, HUBCO would also be required to aFree to me establishment of an offshore debt service escrow account that would provide a one-year coverage on interest payments for the commercial bank and ECA loan facilities. Furthermore. HUBCO would be required to agree that declaration of dividends will be subject to payment of all debt and compliance with the agreed DSCR and debt/equity ratio. The calculations of DSCR, however, would exclude the one year's debt service requirement for senior lenders, which shall be maintained in a debt service reserve escrow and would be available to service debt in case of a shortfall in revenues due to any unforeseen circumstances. 5.15 The financial forecast indicates that HUBCO would also achieve a DSCR on senior debt of 2.1 in 1995 which would gradually improve to 2.2 by 2000, and improve steadily thereafter. The DSCR for all debt would be 1.6 in 1995 and 1.5 in the years thereafter until 2010 when it would - 38 - improve to 2.1. By 2005, the senior debt would have been retired with debt service continuing or. the subordinated PSEDF loan through 2013. Therefore. HUBCO should agree to maintain, for each year bg,inning with 1996. a DSCR of at least 1.5 for its total debt. and at least 2.0 for the senior debt. In addition, if HUBCO operates according to present expectations, it would easily meet debt service obligations and generate a return on equity of at least 18.0% on an IRR basis. The resulting average tariff to GOP for the first 12 years of the project would be Rs 1.430/kWh. Sensitivity Analysis 5.16 If HUBCO were unable to maintain the full capacity utilization of 60% (6,791 Gwh per year), and instead operated the plant at 50% (5,659 Gwh per year), debt service would continue to be covered at nearly the same levels as at full output since the reduction in revenue from reduced output would be absorbed through a reduction in shareholders' returns. The project's DSCR for senior debt would fall to 1.8, while DSCR for total debt would fall to 1.4. In addition, the average tarirf would increase to the level of Rs 1.494/kwh for years 2-12 of the project, while the reduced output would result in an erosion of average returns to HUBCO's shareholders from 18% to 9.2%. System of Accounzts 5.17 HUBCO should have a commercial system of accounts well suited to its activities as a utility during the various stages of construction, commissioning and operation of plant and equipment. The installation of such a system is beyond the capabilities of HUBCO with its limited resources of staff experienced in commercial utility accounts and, therefore, HUBCO would need the assistance of consultants in this task. In view of the urgencv of the need to introduce the commercial system of accounts. the appointment by HUBCO of consultants acceptable, to the Bank in accordance with terms of r-eference also satisfactory to the Bank. for the purpose of introducing a commercial system of utility accounts would be a condition for the effectiveness of the proposed ECO guarantee The reWcommendations of the consultants would be submitted to the Bank for review within three months of the appointment of the consultant and the approved system implemented within three months following the submission of the recommendations. Audit of Annual Accounts and Svecial Accounts 5.18 As required under the Pakistan Companies Ordinance of 1984, HUBCO would have to have its annual accounts for each year audited within six months of the close of the year. In addition, the shareholders and lenders of HUBCO would need to be satisfied that their funds are utilized for the purposes for which they were intended. Accordingly, HUBCO would be required to submit its annual accounts for each year to the Bank and other cofinanciers duly audited by independent auditors, satisfactory to the Bank, within six months from the beginning of the subsequent fiscal year. Furthermore, the proceeds of the syndicated commercial bank loan covered under the proposed co- guarantee will be deposited in a Special Account to be established by HUBCO in accordance with terms and conditions satisfactory to the Bank. Funds from the Special Account would only be utilized for eligible expenditures, i.e., expenditures incurred for the turnkey construction contract and financing related costs except direct taxes and duties. HUBCO would be required to document fully the drawing of funds and expenditures financed from the syndicated commercial bank loan covered under the proposed guarantee and have it certified by the Auditors that the funds have been used for the purpose for which they were intended. HUBCO should agree to submit to the Bank an audit report of annual receipt and expenditure of the Special Account for each year within six months of closing of the year. providing details as may be reasonably requested by the Bank. C. Environment 5.19 Environmental and social soundness assessment of the Complex was initiated in 1987 in compliance with the environmental procedures of the GOP, the Bank and USAID. Following the - 39 - preparation of an environmental screening study of the proposed site and a series of alternative sites, a two phase approach was adopted for preparation of the environmental assessment. Phase I evaluated the environmental acceptability of the proposed project based on data about the site which was available, and Phase H would provide supplemental information based on actual monitoring at the site to support final design of the project. This approach was adopted to allow for phased expenditure on feasibility studies in the context of the PS power program and the provision of adequate time for the installation of a meteorological and air quality monitoring towei ' the project area by WAPDA. 5.20 The IA includes a provision that the environmental impact assessment would be undertaken in accordance with the guidelines of the Bank, and that HUBCO will implement the final environmental mitigation plan for the Complex, approved by GOP and the Bank. The approach used in preparation of the environmental assessment conforms with the provisions of World Bank Operational Directive 4.00, Annex A, "Environmental Assessment," which was issued in October 1989. It should be noted that a "scoping session" for the Complex was held in December 1988 under the supervision of USAID. The first phase environmental and social soundness assessment for the proposed project was submitted in May 1990. Review of the document indicated that the design of the proposed project was in compliance with Bank environmental guidelines and would not result in significant adverse environmental impacts. At this time a work program was established for more detailed studies based on the latest site information which would be conducted to support finalization of the design of the Complex These studies, currently in final stages of preparation, include: (a) detailed modeling studies of thermal plume from the discharge of coo' -g water; (b) expanded air quality modeling studies using site specific data; (c) collection of additional biological investigations data at the site; and (d) socio-economic studies to provide more details concerning settlement pattems and land tenure patterns in the vicinity of the plant. The Complex also requires a final archaeological clearance from GOP. 5.21 The Phase II program of environmental studies is presently under implementation and the restlts of all studies are expected to be received by the Bank by December 1991. The preparation of thesu studies is behind schedule due to delays in project development and a delay in the installation of the meteorological and air quality tower. The Phase II studies will be used for the finalization of the project design. In addition, the oil pipeline to be built by PSO would be subject to a detailed environmental assessment which would include a review of safety standards. In order to ensure that the Hub Power Complex is constructed and operated according to the Bank's Environmental Guidelines, it would be required as a condition of effectiveness of the proposed ECO. that: (i) the Environmental and Social Soundness Assessment (Phase II) will be completed by HUBCO: and (H) HURICO widll give an undertaking to provide assistance for the preparation of an environmental impact assessment of the oil pipeline and associated terminal facilities which will be used to provide fuel to the VI. ADMINISTRATION Procurement and Disbursement 6.01 The procurement arrangements for the Complex reflect the financing available and include: (i) financing available from PSEDF which can be used to finance equipment, materials, services and other associated costs, for which expenditures have been incurred according to the guidelines of respective multilateral and bilateral contributors to the PSEDF (JEXIM and World Bank funds are untied and would be used according to Bank guidelines); (ii) commercial bank financing guaranteed by the Bank and JEXIM can be used for expenditures incurred with due regard to economy and efficiency; (iii) export credits for goods for which expenditures are incurred in the respective countries; and (iv) equity and commercial bank loans for all other expenses including taxes and duties. Table 9 summarizes the procurement arrangements for the Complex. - 40- Tabk9: ProcurementArangeme (USS Million) Item ICB LIB Other Total A. Project Development Costs before Construction - 21 21 B. Turnkey Construction Contract 439 - 429 888 C. Engineering and Coordination for HPG - - 72 52 D. Pre-operational Capitalized O&M Costs - - 19 19 D. Working Capital 14 14 Total Project Costs 439 0 S55 994 Of which PSEDF (Bank & JEXIM)l (296) - - (296) Does not include IDC and financing costs. 6.02 The selection of the turnkey construction consortium was through a competitive process (paras 3.04 and 3.07). In addition, the price for TKC agreed by HPG with the consortium compares favorably with international prices for similar power plants. As the procedure for award of the TKC meets the requirement of economy and efficiency, the proceeds of the loan, guaranteed under the ECO operation, would be used to finance equipment, materials and services included in the TKC and the associated financing cost. In order to ensure that the funds made available under the syndicated commercial loans are disbursed for the purposes of the Hub Complex HUBCO. as a conditionf effectiveness of the propsed ECO. shall open a Special Account in a bank, satisfactor to the Bank. im2lementation and Monitoring 6.03 The implementation and monitoring of the Complex would involve several entities. The responsibility for the design, construction and operation of the Complex would be with the HUBCO. HUBCO would act on behalf of the shareholders, which would include the members of HPG, whose rights and responsibilities would be spelled out in the Shareholders Agreement. The construction consortium would be responsible for constructing the Complex and would offer performance bonds to cover their liabilities as oudined in TKC. The operation and maintenance of the Complex would be the responsibility of the O&M Contractor, BEI, which would also offer performance bonds to cover its liabilities as outlined in the O&M Contract. Monitoring of HUBCO and the implementation of the Complex would be undertaken by GOP through the Private Power Cell in the Ministry of Water and Power, and the Bank through the Private Energy Division within NDFC (para 2.02). HUBCO would submit to each monitoring entity quarterly progress reports covering physical progress of the Complex, as well as annual audited financial statements. During the implementation stage, K&M Engineering would supervise the progress on behalf of the Sponsors. Figure 5 shows the implementation and monitoring arrangements of the Complex. VII. RISKS 7.01 The risks associated with the Complex can be identified over three distinct stages: the development stage, construction stage, and operational stage. These risks and the provisions put in place to midgate them pertain to the lenders, the investors, GOP and its agencies. Consequently, the - 41 - eANK L ; i - . P0 WE COMPLEgX | FIGURE 5 IMPLEMENrATION 4 MONTORING ARRANEMENS ON 8EIHALF OF COPIN.NCIEflS NAr70NAL DEVELOPMENT GOP t FINANCE CORPORATION PRIVATE POWER CE'LL F ~~ ~~(NlFC (fPPC) ND FC P CONSULTANrS CONSULTANTS: 1J BROWN el ROOT IJINTERNATIONAL (ENGINEERING) RESOURCES 2) PRICE ~~~~~~~~~~~~~~~~GROUP WA rERHO'JSE MONITORING OF HUOCO a (ENGINEERING) (FINANCE) IMPLEMENTAttION 2) EBASCO 3) OLWINE J* OF TWE COAIPLEX (FINANCE) CONNELY ~~~~~~~~~~~~~~~~~~~~3) HUNTON& (LEGAL) . . .. . 3) (WILLIAMS (LEGAL) FINANCIAL ADVISOR HUB POWER GROUP EGNEIGAVSR MORGAN GREN*ELL & CO H - OW K . .LDOMESTICWA CAM ENON SERNA O & H OPERATOR GOMITSUI& O.# LA?D - ITTO.CO LD CAMPENON BAMENN E AR : i . : -ANS4LDO GIE . ..SAGiE. . ~~~~~~~~~~~~~~~~~~~~~~~~t "' .0 ' '9 G 'n s R > 4e > 9 i CWsu s t . 9X. . .rigAND 1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~DVT -42 - analysis of the risks associated with the Complex is undertaken in accordance with the stages listed above and each of the three principal agents affected by the proposed project are considered in turn. 7.02 Development Stage: During the development stage, SI assume the risks associated with GOP's ultimate refusal to proceed with the initial proposal. The process of taking the Complex from a proposal to a concrete project based on a detailed feasibility study and extensive set of negotiated agreements constituting SP has taken close to 3 years, the cost of which has been underwritten by the Sponsors, TKC contractors, and the O&M contractors. In addition, GOP has assumed risks by foregoing public sector investments, and if the Complex does not proceed, this would imply severe load shedding during at least the first half of the Eighth Plan (FY94-98). In order to safeguard the interests of the sponsors, contractors and GOP, IA specified that failure by GOP to provide the necessary consents and required provisions would entitle the sponsors and contractors to compensation for expenditures verified by internationally reputable auditors. Conversely, should the sponsors and contractors lose interest and decide, despite all efforts by GOP, to abandon the Complex, GOP would have no obligation to compensate SI who would forfeit what has been spent. GOP would also have the right to the detailed feasibility study and all documentation relating to the Complex. 7.03 Construction Stage,: This stage refers to the period between the financial closure and full commercial operations. During this stage, the risks associated with the abandonment by SI, contractor(s) and GOP and the recourse to compensate those affected have been elaborated above. These would continue to hold until the Complex is commissioned. HUBCO is also required to adequately ensure against events which do not fall under the force majeure category. Proceeds will be available to cover the additional costs because of these events. The other risks during the implementation stage are associated with delays in the execution of the Project which could either result in cost overruns, and could require the need to service the debt before the power plant is commissioned. In the case of cost overruns, IA has outlined the responsibilities. If the increase in cost is due to failure by the contractors to perform, it would be absorbed by the contractors and SI without reflecting the increase in the tariff resulting in lower return to investors. Contingency funding of up to US$150 million has been provided under the financing plan to provide comfort to the lenders so that in the event of failure by the contractor to perform, financing would be available to ensure the project is completed. The use of this contingency fund would not be possible unless HUBCO injects new equity in the project. Financing for contingencies would come from PSEDF and commercial banks provided that at least 25% of the costs are met from additional equity. However, before the available financing for contingencies are tapped or PSEDF is approached for additional funds, the performance guarantee of the contractor would be used first. In the event that the increases in costs are due to a decision by GOP to change the specifications of the complex or because of failure by one of GOP's institutions to act as outlined in SP and hence result in higher costs, the cost of financing required would be reflected in the tariff and the return to investors would not be affected. Also, any loans by PSEDF would be extended to HUBCO but their costs would be reflected in the tariff for sale of electricity to WAPDA. The guarantee provided under the proposed ECO is not callable for five years which corresponds to the grace period of the commercial loans. During the grace period, no debt service would be paid as interest payments would be capitalized. Only in the event of delays, the contingency funding would be used to service the debt to cover a delay in commissioning of up to one year. 7.04 Operations: During operations, the risks of failure to service the debt is extremely small. Debt service to senior lenders and PSEDF amount to about 32% of the total revenues to be generated for the first 12 years of operation. This ratio would drop to about 13% during the remaining 18 years. Consequent!y, the risks associated with the operations stage pertain to the failure by the Complex to generate the revenues required either because of non-performance of GOP entities such as non- availability of transmission lines, f n majeure which would destroy the facilities partally or totally, or because of inefficient operation. Proceeds from insurance and loans frnm GOP would ensure :he power plant is returned to commercial operations. In the event this financing is required from GOP on account of inefficient operation, the loans will be paid from return on equity. Alternatively, should -43 - HUBCO and GOP decide that this is not financially feasible, the insurance proceeds would cover the outstanding debts to commercial banks. VIII. JUSTIFICATION 8.01 The guideline agreed with GOP under Loan 2982-PAK calls for PSEDF to provide financing for PS investments if they me,t a set of eligibility criteria, which are: (a) integrability; (b) competitiveness; (c) viability; and (d) additionality. a) Integrabilitv - PS invest:nent should be dictated by the least cost development plan which combines existing public facilities with new investrnents, public and private to meet the forecast demand at least cost to the economy. The plan is based on economic prices, including interest rates, to eliminate the distortions attributable to price and exchange rate controls, taxes, duties, subsidies, which could lead to uneconomic decisions. The Hub Power Complex is an integral part of Pakistan's least cost development plan for the period 1989-2010. Table 10 below shows the commissioning schedule for the Complex together with other PS investments as well as public sector investments by WAPDA and KESC. Table 10: Least Cost Development Plan for Power (FY89-VS) Unit Total Capacity Capacity EPant name Planl TI Comm, late Unit Number (MW) L IKES Ben Qasim Steam 1989 3 through 5 210 Subtotal 630 WAPDA Jamshoro Steam 1990 1 through 3 210 630 Jamshoro Steam 1991 4 250 250 Lakhra FBC1 1993 1 through 3 50 150 Muzafdrh Steam 1993-1994 1 through 3 210 630 Guddu Combined Cycle 1993 1 through 3 135 405 Taibla Hydm 1993 11 through 14 432 1,728 Mangla Hydro 1993 9and 10 100 200 KotAddu Combined Cycle 1994 11 through 14 100 400 KotAddu Combined Cycle 1995 15 100 100 Chashma Hydro 1997 1 through 10 12.3 123 Subtotal 4.59 Eyate Secto Nooriabad Diesel 1993 1 through6 21 126 Pakiand FBC1 1994 1 through 3 44 132 Intrag FBCI 1994 1 and 2 45 90 Hub Power Complex Steam 1994 1 thugh 4 323 1,292 Habibullah I Steam 1993 1 through 2 16.5 33 Habibullah 2 Steam 1993 1 through 2 16.5 33 Fauji Steam 1995 1 through 2 300 3Q Subtotal 2.06 Total 7252 IFluidized Bed Combustion (Coal). Note: Based on current implementation sched-wes. - 44 - According to the least cost plan, the Hub Power Complex would be implemented during the Seventh Plan, as it constitutes part of CIP, and commissioned in the first two years of the Eighth Plan. The four units of 323 MW each would be energized in sequence six months apart. The Hub Power Complex is part of the least cost solution for power generation in Pakistan, provided the forecast demand is robust and is to be met. Although the recent increase in the price of petroleum products caused by the Gulf crisis and the expected reflection of these increases in the tariff for electricity are expected to reduce the rate of growth in demand for electricity, viability of the ongoing development program for generation by both the public and private sector would not be altered. This is attributable to the fact that: (a) the demand for electricity is more sensitive to changes in income than changes in the tariffs (income elasticity of demand for electricity is about 1.2 compared to the price elasticity of -0.5); and (b) the existence of shortfall in the supply of power in 1990 estimated at about 800 MW which has been responsible for the prolonged power load shedding experienced during the dry season is expected to reach at least 2,000 MW by 1996, even with the full implementation of CIP. Annex 8.2 provides a summary of the forecast of demand for electricity between 1989-2009. The least cost plan for the power subsector should include the development of at least 3,000 MW of hydropower capacity by the year 2010. However, the development of Kalabagh (3,600 MW) which was prepared for implementation has been delayed because of interprovincial disputes, and the preparation of the detailed engineering for Basha (3,000 MW) has not yet been started. Consequently, the least cost development plan for 1989-1995 does not include a major hydropower scheme. Once a decision is made on which scheme would be developed first, the plan would be reformulated to determine their sequencing relative to other power generation capacities. Consequently, the options for power generation available in formulating least cost plans are hydropower stations, coal fired units, combined cycle and oil fired stations similar to the Hub comprised of smaller and larger units. In Pakistan's case none of its hydropower potential of 1,000 MW or more can be in operations before the end of the century. Only two sites with potential of 200 MW and 250 MW respectively, can be implemented and commissioned before the year 2000; however, these have also been beset with interprovincial disputes on the allocation of water for irrigation. As for coal fired stations, domestic coal can provide only limited capacity for power generation as reserves are largely not proven. Moreover, the quality of coal, characterized by exceptionally high sulfur and ash content, would limit the technology used for power generation to fluidized bed plants of less than 100 MW, which although environmentally safe, involve higher capital costs that, together with the relatively high market price of coal currently at parity or higher than the border price for imported coal, results in its rejection as a viable option for meeting all of Pakistan's future needs of thermal power. As for imported coal, the port and handling facilities currently in Pakistan would preclude its widespread use for power generation. Consequently, the Bank has financed a feasibility study to identify a site for the development of a port and coal handling facilities that would allow for the construction and operation of 3,600 MW power plant. The study identified the site of Khalifa point about 25 kilometers southwest of the site for the Hub Power Complex on the Arabian Sea in Balochistan. The bidding documents for the coal fired complex and the coal handling facilities are currently under preparation. However, construction is unlikely to start before the middle of the Eighth Plan and commissioning at the earliest in the Ninth Plan (FY99-03) as outlined by the least cost plan. Combined cycle plants provide a viable substitute for Hub, but given the inadequacy of Pakistan's natural gas relative to potential demand, these power plants would need to be operated on gas oil whose price is almost twice that of the fuel oil designated for the Hub Complex. Moreover, gas oil would continue to be imported until the currently planned hydrocracker and mid-country refinery are completed by the middle of the Eighth Plan. Consequently, in the absence of adequate supply of natural gas, the combined cycle technology is not viable as an alternative to the Hub Complex. Finally, in the cases where steam oil fired power plants are compared, the larger - 45 - units are selected because of economies of scale in both fixed and operating costs. The Hub Power Complex would be comprised of the largest units to be installed in Pakistan. In the absence of other options which would utilize cheaper fuel, namely coal or natural gas, the Hub Power Complex would still constitute part of the least cost, even when the recent increases in the price of oil are taken into consideration. Moreover, the utilization of HUBCO would not decrease with higher fuel costs, as the cost of its fuel represents a pass through which is reflected in the tariff. Additionally, as long as WAPDA and KESC face the same price for fuel, the cost structure of the two utilities relative to HUBCO's tariff would remain unaltered. However, in order to ensure that the Complex constitutes a part of the least cost, even after its commissioning, the power plant has been designed to allow for its conversion to operate on natural gas, should domestic production increase or access to imports is made available. The cost of converting the plant to operate on gas is relatively insignificant and hence it could be accommodated in the tariff without significant increases. On the other hand, should the price of oil continue to rise to the point where Pakistan finds its oil import bill unsustainable, the design of the Complex has allowed for space that would make it possible to install larger boilers needed for burning coal, once coal is available. In this event, HUBCO has the option of either undertaking the additional investments needed to convert the plant to coal and continue owning the Complex, or handing over the Complex to GOP and receive compensation for its equity with GOP assuming the outstanding debts. b) Copetitivens - According to the eligibility criteria of the guidelines for PSEDF, PS investments for power generation could be mobilized through two options: (a) proposals made in response to requests by GOP through general announcement or direct solicitation for PS to design, finance, develop and operate power plants at sites of the investors' choice to supply the national grid, provided the sites are cleared environmentally; or (b) a proposal solicited through a bidding process for projects at specific sites for which detailed feasibility and environmental impact studies have been prepared. In either case, PS investments should emerge through a competitive process. In this respect, competitiveness would be ensured under the two options if the average tariff over the expected life of the project is less or equal to the avoidable costs of the integrated power system., e.g., the tariff for the supply of electricity by PS should be equal to or less than the average long run incremental cost of supply of the power system. A study to determine the economic cost of supply for the integrated power system for Pakistan was undertaken by Coopers and Lybrand of the U.K. under financing from the Asian Development Bank, and the involvement of the World Bank and GOP in the supervision and the review of the study. According to the study, the levelized average long-run incremental cost of supply over a 30-year period adjusted for the new price of oil, following the Gulf crises, of about US$24/barrel is estimated at Rs 1.27/kwh (US¢5.5/kWh). This cost is based on economic prices and a discount rate of 11% which is used as a proxy for the opportunity cost of capital in Pakistan. The average tariff agreed between HUBCO and GOP for the supply of electricity at the 60% capacity utilization over the 30-year period is Rs 1.24/kwh (US¢5.7/kWh). This compares favorably with the economic cost supply estimated by the study. In fact, if the level of utilization of the Complex is increased to 70%, which is expected to prevail over at least the first 12 years, the average tariff offered by HUBCO is Rs 1.16/kwh (US$5.32/kWh). c) Viabilitvy- PS investments should be viable on a technological, economic and financial basis. The technological viability is assured by the fact that the Complex was selected as a part of the least cost development plan. As for the financial viabilitv, the complex when completed as projected and operated along the parameters underlying the tariff proposal agreed with GOP, would generate a return on equity of 18%. An indicator of the adequacy of the projected return is the fact that it was sufficient to secure the commitments of SI, the foreign investors, and the underwriters for local equity. The economic merit of the project lies in the fact that it was selected as part of the least cost development plan. The economic return on investment is estimated at 15% based on measurable costs and benefits. The costs include capital cost, O&M - 46 - cost and fuel cost, all net of taxes and duties. The benefits are comprised of the revenues associated with the project assuming a capacity utilization of 60% and valued at the tariff agreed with GOP. All local costs were expressed in their equivalent border value by using a standard conversion factor of 0.85 which is also used to convert the revenue of the project to their equivalent border value. The economic rate of return compares favorably with the opportunity cost of capital of 11%. Details of the calculation of the economic rate of return are provided in Annex 8.1. d) Additionalitv - The pursuit of PS involvement in the development of energy in Pakistan, in addition to improving the efficiency of the processes by which energy is generated and delivered to the ultimate consumers, is designed as a means of mobilizing financial resources over and above those that were available to the public sector. Consequently, all funding provided by lenders and investors was to be secured under limited recourse in that the government would not provide direct guarantees to the loans or equity mobilized by HUBCO. This was the principal reason behind the introduction of SP and one of the justifications for the proposed ECO. In terms of the additionality of resources, the Hub Complex would provide US$536 million to Pakistan which otherwise would not be available for Pakistan. Of these resources, the US$116 million foreign equity represents resources directly linked to the project that would be transferred to Pakistan; the US$120 million of co-guarantee from JEXIM, as it would not have been mobilized had it not been for the project, the loans provided under the guarantee schemes of France, Japan, and Italy for US$300 million, particularly in view of the fact that they would be provided under limited recourse. In addition, the support of GOP to PS has been designed through an onlending arrangement which would allow for the interest rate spread between the cost of borrowing and the onlending rate to be captured by GOP. The Bank's mobilization of cofinancing for PSEDF from bilaterals have resulted in a cost of resources made available to the fund of 4.5%. GOP would bear the foreign exchange risk in repayment to the Bank, JEXIM, ODA, and the Nordic Investment Bank, for which an average cost of 3.5% representing SBP's foreign exchange insurance premium should be added to GOP's cost of borrowing. This brings the cost to GOP of financing PSEDF to about 8%, leaving a spread of 6% to be captured by PSEDF for local currency debt financing for PS investment. In the case of HUBCO, PSEDF would provide base financing of US$355 million which would generate interest income associated with the 6% representing the difference between GOP's average cost of borrowing of about 8% and the onlending rate of 14%. This would mobilize over US$300 million over the 23-year period for loan repayment which in essence represent additionality in terms of resource mobilization through the tariff from the consumers of electricity. IX. RATIONALE FOR BANK INVOLVEMENT 9.01 The Bank has played a critical role in assisting GOP in the development of PS involvement in the energy sector in Pakistan. In the area of institution building, it has, with the assistance of the USAID and ODA of the UK, structured the framework for the solicitation, evaluation, negotiation, and ultimately financing of PS investment. In addition, the framework provides for the monitoring of project implementation, the resolution of conflicts after operation, and the orderly interaction between the private sector and the various public sector entities. The institutions created have been staffed, and extensive training as well as support in the form of long-term and short-term internationally experienced consultants was provided to ensure adherence to the highest internationallv accepted standards in terns of evaluation, negotiations, and financing of private sector investments. As a result, Pakistan has today one of the most capable local teams in the area of evaluation, negotiation and financing of PS investments in energy in the developing countries. The USAID has earmarked the equivalent of US$30 million to continue the institutional support in the form of staffing, consultants, and training to the various agencies of GOP to enhance its efforts in mobilizing PS investment for energy. ODA and JEXIM have each provided US$1 million to support the same objective and US$4 - 47 - million of the Bank's loan to PSEDF has been earmarked for technical assistance. In addition, all the bilaterals contributing to the PSEDF have agreed under the Memorandum of Understanding with the Bank to provide consultancies to support PSEDF in the evaluation and negotiations of proposals whenever the support is required. The involvement of the Bank has been critical in mobilizing the technical assistance and the institutional support needed for strengthening the institutional framework. 9.02 The Bank has also played a major role in mobilizing concessionary financing for the PSEDF which has resulted in a cost to the government substantially below the onlending rate and would generate a surplus which would be reinvested back into the private sector by providing local financing in the future and thereby avoiding the need to tap the local credit market and the likelihood of crowding out other investments or exceeding the ceiling set to achieve fiscal and external balance. The initial commitments to PSEDF of US$600 million would generate over the 30 year period a minimum of over US$700 million, representing the difference between the average borrowing rate of 8% and the onlending rate of 14%. 9.03 The Bank has been the principal financial institution in structuring SP and worked closely with Morgan Grenfell, financial advisers to HUBCO, and the international financial community to structure the Package in a manner that would enhance the likeiihood of HUBCO mobilizing financing in both equity and debt under limited recourse. The willingness of foreign investors to allocate US$116 million of equity at risk where all revenues are generated in Rupees and the unprecedented achievement of mobilizing confidence in the financial community to underwrite local equity of US$100 million represent an achievement that the Bank has been instrumental in bringing to fruition. The success of HUBCO in mobilizing US$300 million from ECA's under limited recourse uiderscores the confidence of these institutions in the robustness of SP of which the Bank has been the lead architect. The commitment of ECAs to HUBCO also represents a major breakthrough in infrastructure project financing not only in Pakistan but the developing countries in general. 9.04 The role of the Bank in providing a guarantee on principal against sovereign risk has been instrumental in mobilizing commercial bank lending for a project of this magnitude under the limited recourse arrangements. The structure of the guarantee also sets out an innovative approach to sharing risks with PS; it allows the sovereign risk to be assumed by the Bank (and counterguaranteed by the Government) but, unlike in IBRD lending, permits the commercial risk to be directly taken by parties other than the Government itself. Furthermore, the project represents the first time a co-guarantee has been mobilized, thus further leveraging the Bank's resources. The flexibility in designing the structure of the ECO to assume different roles in the various phases of project implementation and operation has been the single most important contribution in terms of financial engineering to the mobilization of commitment by commercial banks, ECAs, and investors, for the implementation of the Complex the largest PS investment to be undertaken in Pakistan. 9.05 The above arrangements are highly complex, and would require maximum collaboration and understanding among the niumerous agencies concerned during implementation for the successful completion of the project. The Bank's role will remain critical during the entire implementation period to remove obstacles, facilitate a dialogue, promote better understanding and assist GOP and its agencies in a highly onerous and innovative operation. X. SUMMARY OF AGREEMENTS 10.01 The following actions are proposed as conditions of effectiveness of the proposed ECO: (a) a letter of credit for an amount equivalent to US$116 million, comprising US$78 million in base financing, inclusive of development cost verified by an internationally reputable auditing firm, and US$38 million in contingency financing shall have been made by HPG. (para 4.32) - 48 - (b) an equity contribution to HUBCO in an amount equivalent to about US$8 million shall have been made by CDC. (para 4.32) (c) agreements satisfactory to the Bank to place off-shore equity for an amount equivalent to US$99 million shall have been signed by HUBCO with off-shore investors, or in the absence of such agreements a guarantee shall have been received from the parent companies of the sponsoring investors to subscribe to the equity for the same amount. (para 4.32) (d) an underwriting agreement for the issuance of HCBs for equity in HUBCO in the Pakistan capital market for an amount equivalent to about US$100 million shall have been signed with DT. (para 4.27) (e) agreements for export credits for HUBCO in an aggregate amount equivalent to about US$300 million shall have been signed with MITI, COFACE, and SACE and all conditions precedent to the effectiveness thereof shall have been fulfilld. (para 4.28) (f) all conditions precedent to the effectiveness of the loan agreement between PSEDF to HUBCO in an amount equivalent to US$407 million shall have been fulfilled, other than those for the effectiveness of the proposed Bank Guarantee. (para 4.38) (g) a loan agreement for a foreign syndicated commercial bank loan to HUBCO in an amount equivalent to about US$360 million shall have been signed with the consortium of commercial banks, and all conditions precedent to the effectiveness thereof shall have been fulfilled, other than the effectiveness of the proposed Bank Guarantee. (para 4.38) (h) a loan agreement to HUBCO for an aggregate amount equivalent to US$20 million shall have been signied with CDC, and all conditions precedent to the effectiveness thereof shall have been fulfilled, other than the effectiveness of the proposed Bank Guarantee. (para 4.38) (i) a loan agreement for a local syndicated commercial bank loan to HUBCO in an amount equivalent to about US$150 million shall have been signed with NDFC/BEL, and all conditions precedent to the effectiveness thereof shall have been fulfilled, other than the effectiveness of the proposed Bank guarantee. (para 4.29) (j) the Shareholders' Agreement shall be signed by all the shareholders of HUBCO, including members of the reconstituted construction consortium, and the Memorandum and Articles of Association amended to the satisfaction of the Bank and adopted by HUBCO's Board. (para 5.05) (k) a permanent Board of Directors of HUBCO shall be constituted in a manner satisfactory to the Bank, and the Chairman of the Board and CEO shall be appointed. (para 5.06) (1) the Implementation, Power Purchase, Construction, Operation and Maintenance, Fuel Supply and Escrow Agreements shall have been signed by authorized representatves of HUBCO and GOP, and all conditions precedent to the effectiveness thereof shall have been fulfilled. (para 5.06) - 49 - (m) the first Annual General Board meeting of all shareholders of HUBCO shall be held to ratify the Implementation, Power Purchase, Construction, Operation and Maintenance, Fuel Supply, and Escrow Agreements. (para 5.06) (n) the necessary staffing for HUBCO shall be in place and senior management posts in finance, engineering, accounting, legal, administration, public relations, and project management shall be filled and personnel appointed. (para 5.09) (o) title deeds for the land required for the Complex shall have been executed in favor of HUBCO (para 5.10). (p) the Environmental and Social Soundness Assessment (Phase II) will be completed by HUBCO, and HUBCO will give an undertaking to provide assistance for the preparation of an environmental impact assessment of the oil pipeline and associated terminal facilities which will be used to provide fuel to the plant. (para 5.20) (q) the completion of a corporate development plan for HUBCO, satisfactory to the Bank. (para 5.03) (r) the appointment by HUBCO of consultants acceptable to the Bank, in accordance with terms of reference also satisfactory to the Bank, for the purpose of introducing a commercial system of utility accounts. (para 5.16) (s) HUBCO, shall open a Special Account in a bank, satisfactory to the Bank. (para 6.02) 10.02 In addidon, HUBCO would be required to agree to: (a) declaration of dividends subject to payment of all debt and compliance with the agreed DSCR and debt/equity ratio. (para 5.13) (b) achieve for each year beginning with 1995, a DSCR of at least 1.5 for its total debt, and at least 2.0 for the senior debt. (para 5.14) (c) submit to the Bank an audit report of annual receipt and expenditure of the Special Account for each year within six months of closing of the year, providing details as may be reasonably requested by the Bank. (para 5.17) - 50 - Annex 3.1 (Page I of 3) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY MEMBERS OF THE HUB POWER GROUP SPONSORS 1. Xenel Industries Ltd. Xenel is a Saudi Arabian owned and registered company with corporate headquarters in Jeddah and branch offices in Riyadh and Dhahran. Xenel comprises wholly owned subsidiaries as well as joint ventures operating throughout the Kingdom of Saudi Arabia which are known collectively as the Xenel Group. Xenel Industries independently executes and co-ordinates major projects both within and outside the Kingdom of Saudi Arabia, forming associations with leading international companies as appropriate. The groups activities are covered by seven operating divisions as follows: O Construction o Systems O Operations and Maintenance ) Transport and Trading 0 Investment o Industrial o Health Care Xenel Industries has shown a strong and continual development, and in 1988 the company held over 30 joint ventures operating in various fields. The magnitude of the company's progress is illustrated by the rise of its paid up capital from 1.5 million Saudi Riyals (US$400,000)at its foundation to 50 million Saudi Riyals (US$13.3 million) in 1988. The group employs over 20,000 people and has an annual turnover in excess of 4 billion Saudi Riyals (US$1.1 billion). 2. Hawker Siddeley Power Engineering Ltd. Hawker Siddeley Group, plc is one of Britain's largest international engineering groups employing over 40,000 people and with a turnover approaching US$2.0 billion. 130 Group companies around the world offer the complete spectrum of engineering products and services to all branches of industry. Hawker Siddeley Group plc, is recognized internationally in the field of electrical engineering and supplies generation, transmission and distribution equipment to power utilities and industrial users worldwide. The Hawker Siddeley Group has developed a high level of expertise in its project engineering company, Hawker Siddeley Power Engineering Ltd. (HSPE) in the areas of:. C Electrical Power Generation 0 Transmission O Distribution CONSTRUCTION CONSORTIUM 1. Mitsui & Co. Ltd. Mitsui & Co. Ltd. is a leading international trading company with total trading transactions exceeding US$70 billion in recent years. In addition to providing basic trading services, Mitsui is - 51 - Annex 3.1 (Page 2 of 3) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY active in financing technology transfer, resource development and organization of business ventures. Mitsui has a long standing record of achievements in the field of power projects and is currently acting as the prime contractor in Pakistan for WAPDA'S 250 MW Jamshoro Thermal Power Station Unit NO.1. 2. Ishikawajima-Harima Heavy Industries Co. Ltd. (IHI) IHI has grown to be one of the leading integrated heavy industrial furms, offering a great variety of products, facilities and services, which have attained a reputation world wide for their reliability based on the company's total capability. IHI is one of the leading suppliers in Japan of large capacity IHI-FW boilers and plants to electric power utilities both at home and overseas including Australia, Singapore, Philippines and Kuwait, together with full information and service back-up. IHI's experience to date covers various kinds of boilers ranging from mini boilers to supercritical pressure boilers for 1,000 MW units. The range of fuels for which IHI has designed boilers includes coal, oil, gas and refuse. 3. Campenon Bernard: Campenon Bernard is a diversified civil engineering and construction French company. In the early 1980's, it became a member of a major international holding company, Compagnie Generale des Eaux which heads a strong group that is prominent internationally as well as in the European Common Market. Campenon Bernard's international reputation stems from its pioneering development of the concrete prestressing technique which is now largely applied worldwide. The company is very active both in France and overseas in countries including China, Morocco, Kuwait, Saudi Arabia, Burkina Faso, Singapore, Gabon and the U.S.. Campenon Bernard has diversified fields of specialization which range from office buildings, schools, hotels, roads and airports, railways and subways and military bases to waste-treatment plants, nuclear power plants, turnkey projects, tunnels, harbours, and off-shore construction. Campenon Bernard employs about 8,900 staff and in 1989 had a turnover of FRF 3.1 Billion (US$560 Million). 4. Ansaldo GIE, S.p.A.: Ansaldo GEE, S.p.A, located in Milan, Italy is one of the largest companies in the world operating as a prime contractor for the Engineering, Construction, Installation, Start-up and Service of Fossil-Fuel Power Plants as well as Hydropower and Geothermal Power Plants, both in Italy and around the world. Over its century and a half history, Ansaldo has designed and built power plants in more than 20 countries with a combined output of more than 96,000 MW of power. Ansaldo has branch offices and subsidies in 27 countries and employs over 16,000 people in engineering, manufacturing, and erection. OPERATOR 1. British Electricity International Ltd. (BEI) BEI is the overseas consultancy arm of PowerGen, which, once privatized, would be the second largest privately owned utility in the United Kingdom. BEI is currently involved in the operation and maintenance of more than 10 power stations around the world. One of these is the Shajiao (B) Power Station in the Guangdong province of the People's Republic of China, the first major Build-own-transfer Project of its kind in the world, for which BEI is providing management, - 52 - Annex3.1 (Page 3 of 3) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY operation, maintenance and training support. BEI has been responsible for the operation and maintenance of this station has been successful in achieving high availability and load factors during this time. BEI has undertaken extensive training of staff and introduced all the operations and maintenance systems necessary for the efficient functioning of this station. BEI has been involved in working in Pakistan for many years and has experience working with WAPDA. It is presently involved in a major project for the rehabilitation of steam and gas turbine power plants and the establishment of maintenance workshops and associate management systems there. BEI has also undertaken the training of power sector personnel in Pakistan. -53 - Annex 3.2 (Page I of 6) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY DETAILED DESCRIPTION OF THE HUB POWER COMPLEX PLANT DESCRIPTIION The proposed plant is an oil-fired boiler and steam driven turbine generators composed of four units with a gross output of 323MW each and a net output of 1,200MW for the station. A. Turbine-Generators and Steam Generators The essential features of the plant consist of four steam turbii.e-generators rated at 323MW each (gross) and four oil-fired steam generators capable of producing 1020 T/hr. of steam at 175 kg/cm2 and 5410C at superhearter outlet. The turbine generators will be reheat, tandom compound and regenerative type, double flow, condensing turbine with seven extractions, operating at 3000 rpm directly coupled to a hydrogen cooled stator. The generators will be rated at 380 MVA. The steam generators will be of outdoor design, drum type, pressurized furnace units consisting of economizers, primary, secondary and final superheaters and reheaters. B. Mechanical and Electrical Equipment To support the plant functions the following mechanical/electrical equipments will be used: * Condensers with titanium allow tubing and tube cleaning system. * Boiler feed Pumps 3 x 50% * Condensate Pumps 2 x 100% * Cooling Water Pumps 2 x 50% * Feedwater Heaters - 6 stages * Deaerator Heater and Storage Tank * Closed Cooling Heat Exchangers * Main Transforrner * auxiliary Transforner * Forced Draft Fans 2 x 50% * Gas Recirculation Fan - one Per Unit * Air Preheaters - 2 horizontal Shaft Type * Steam-Air Heaters - 2 Per Unit * Burners for Fuel Oil and Lightoil * Fuel Pumps and Heaters * Sootblowers Common Equipment for the Station: * Auxiliary Boiler * Reboilers * Air Compressors * Desalination Plant * Deminealizer Equipment * Waste Water Treatmnent System - 54 - Annex 3.2 (Page 2 of 6) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY * Main Fuel Oil Pumps * Diesel Generators for Emergency Power * Hydrogen Plant * Chlorination Plant * Communication and Security Systems * 500 kV Switchyard * Fuel Oil Storage Tanks * Demineralized Water and Condensate Storage Tanks The key features of the plant are as follows: * Cooling water will be seawater circulated in a once through open cooling system. * A desalination plant will produce water for plant needs from the seawater. This will be used for make-up water in the condensate cycle after demineralization. * A 500 kV switchyard will be constructed to send out electrical power through 500 kV transmission lines to be built by WAPDA. * A 200 meter high chimney will exhaust the flue gases. C. Civil Works The site is relatively flat with the intended area for construction of the plant being about 1.5 meter higher than the surrounding areas. The site will befurther raised by about 0.7 meters for protection from flooding. The proposed plant is an oil-fired steam electric generating plant composed of four units with a capacity of 300 megawatts net each, making a total of 1200 megawatts for the station. The plant will be at elevation 3.1 meters with respect to MSL. All structures will have ground floor elevation of at least 3.25 meters. The turbine generator units are arranged along an axis perpendicular to the centerlines of the units. Each one of the four boilers is located behind its respective turbine generator. To the left, coming out of the turbine generator building, the Desalination Plant, two Desalinated Water Tanks and the Cooling Water System Intake Pumphouse with the Chlorination Plant nearby have been located. The cooling water intake will be located on a lagoon to be built at the shoreline west of the plant. Most of the balance to the auxiliary buildings and equipment has been located to the right of the turbine generator-boiler complex. These are the administration building, the fire main pump house and the fire water tank, the two make-up water tanks, the demineralizing plant and two demineralized water tanks, the chemical storage building and the waste water treatment plant. Southeast and close to the administration building there is a small mosque to be used by plant personnel. Southeast of the plant there is the cooling water outfall with its seal pit and the open channel to the mouth of the Hab River, but in the sea. -55- Annex 3.2 (Page 3 of 6) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMP-ANY Centrally located and south of the turbine generator boiler complex a 4 flues stack is located. From each boiler, steel plate ducts carry the flue gases to the stack. South of the plant there are four fuel oil storage tanks, the fuel oil day tanksand two light oil tanks. The oil tank storage are is protected against spills by dykes around them. A membrane lining concrete lining will prevent the ground water contamination due to oil spills. At the site after passing the guard house, the road is coming in a westerly direction and loops twice, the north loop around the plant and the south looparound the fuel oil tanks farm. At the upper left corner of the north loop, the road branches out toward the cooling water intake. In front of the Turbine Generator building the main, auxiliary and start-up transformers are located. The bus ducts from the main and start-up transformers are connected to the 500 kV switchyard having its separate control room. The transmission line takes off from back of the switchyard to join WAPDA's power network. The plant site will be bounded by a 3-meter high fence for security purpose. The site will be protected from floods by an embankment and a ditch system which will carry flood water away from the site. The shoreline sand dunes will be protected by Gabion arrangement to prevent waves during storms from reaching the site. H. PLANT BUILDINGS AND STRUCTURES In addition to the turbine, control, boiler buildings and stack, there will be the buildings and structures listed below at the site as auxiliary components of the Plant. * Cooling Water Intake and Discharge Structures * Chlorination Plant * Demineralization Plant * Desalination Plant * Fuel Oil Pump Ho-se * Hydrogen Buildin- * Nitrogen (N2) Storage * Chemical Storage * Auxiliary Boiler House * Waste Water Treatment Plant * Fire Main Pump House * Sewage Treatment Plant o Workshop * Warehouse * Mosque * Administration Building * Gate House * Fuel Oil Storage Area * Site Fence - 56 - Annex 3.2 (Page 4 of 6) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY TURBINE, CONTROL AND BOILER BUILDING AND STACK The turbine-generator building is a multi-storey steel structure building 259 meters long, 31 meters wide with ground floor or basement at elevation 3.25 meters and top of the roof at elevation of 32.25 meters. The building will contain all four units of turbine-generators and their auxiliary equipment, switchboards, controls, etc. In line, with each unit and behind them there are the boiler buildings, four separate steel structures, 28.0 meters wide by 42.0 meters long each. In addition to the boilers there will be the heat exchangers, forced draft fans and a flue duct going from each one of the boilers to the single 4-flue stack, centered behind the turbine- building-boiler complex. The control room is part of the turbine-building complex. COOLING WATER INTAKE AND DISCHARGE STRUCTURES The cooling water system is a once-through system with the intake pump house at the lagoon. Two pumps serve each unit's condenser through steel pipes. the discharge will leave each condenser through steel pipes merging 2.1 meter in diameter into concrete conduits toward a seal put at the head of an open channel outlet into the sea. The intake structure will consist of eight concrete cells, two for each unit, containing the trash racks, coarse screens and travelling screens and pump. A travelling double girder crance will be provided to service the pumps, trash racks and travelling screens. The discharge will be through concrete conduits from the condensers to a two cell seal pit with a weir to maintain the proper water level at all times. The discharge will then be through an open channel to the mouth of the Hab River. CHLORINATION PLANT The condenser cooling water will be chlorinated using dry calcium hypochlorite mixing it with water in the proper proportion and injecting it into the circulating water system. The chlorination plant, a 5.5 meters high, one story building, 30.0 meters long by 11.0 meters wide, will contain the mixing tanks, injection pumps and control equipment, as well as storage space for the hypochlorite bags. DEMINERALIZATION PLANT The demineralization plant is located on the other side of the road, east of the turbine generator building. A 35.0 meters by 21.0 meters steel structure building, with steel cladding walls and galvanized metal sheet roofing contains all the trays, valves and equipment needed and next to it there will be two tanks to store demineralized water. DESALINATION PLANT Close tc the shore line, west of the turbine-generator building there will be the desalinaticn ,. oomposed of a 0.60 meters thick concrete slab, 25.0 meters long by 18.0 meters wide with twu package units ar.d two storage tanks next to it. - 57 - Annex 3.2 (Page S of 6) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY FUEL OIL PUMP HOUSE Between the fuel oil storage tanks farm and the boiler buildings there is the fuel oil pump house. A 20.0 meters long by 4.5 meters wide, concrete block building with a concrete slab roof. The building contains the fuel oil pumps, valves and instruments. HYDROGEN BUILDING At the center and front of the turbine-generator there will be the hydrogen buildings consisting of a 15.0 meters by 10.0 meter concrete block buiilding with a structural steel and corrugated asbestos cement sheet roof. The 3.00 meters by 9.0 meter gates will be open wiremesh and the walls will have the blocks laid on a side so the holes will provide complete and total ventilation. NITROGEN (N2) STORAGE Between the boilers for units 1 and 2 and also between boilers for units 3 and 4 there are the nitrogen (N2) gas storage buildings, each a 7.5 meters by 4 meters concrete blocks and concrete roof slab building capable of storing standard bottles of N2. CHEMICAL STORAGE Between the Demineralization Plant and the Waste Water Treatment Plant there is the Chemical Storage Building, a 20.0 meters by 7.0 meters concrete block walls and concrete slab roof building where all the chemicals to be used in the plant are stored. AUXILIARY BOILER HOUSE The Auxiliary Boiler House, a 16 x 18 meters building, is located near the fuel oil storage tanks, west of the plant, as most of the steam it produces is used in heating the fuel oil . The 16.0 m x 16.0 m building is composed of a steel structure with sandwich panel walls and steel roof trusses with steel sheets on purlings as roof deck. WASTE WATER TREATMENT The Waste Water Treatment Plant is located next to the demineralization plant and the chemical storage building across the road, east of the Turbine Generator Building. It consists of a 30.0 meters by 40.0 meters concrete structure and block wall building with a concrete slab rood and two adjacent 20.0 meters by 20.0 meters by 10 meters deep tanks. FIRE MAIN PUMP HOUSE South of the Administration Building and across the road from the Turbine Building there is a 10.0 meters by 15.0 meters concrete block and concrete slab roof building which houses the fire main pumps and equipment. - 58 - Annex.2 (Page 6 of 6) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY SEWAGE TREATMENT PLANT Southeast of the plant near the waste water treatment plant a small sewage treatment plant will be located. The sewage treatment plant will consist of the main septic tank v ith its inlet and outlet traps and an adjacent sludge removal chamber, the effluent goes to a leachmg field fonned by open joint pipes. WORKSHOP AND WAREHOUSE Near the entrance and next to each other, the workshop and warehouse buildings are located. They are two buildings 45.0 meters by 15.0 meters concrete clock wall and steel rood truss with galvanized metal sheet roofing. The buildings will be equipped with overhead cranes and the proper tools and equipment to handle the necessary repairs and move the stored materials where needed. MOSQUE Next to the administration building a 10.0 meters by 10.0 meters concrete building with a 5.0 meters diameter timber dome will house the Mosque. ADMINISTRATION BUILDING A concrete block and concrete roof slab one story high building housing the administration offices and conference rooms is lcated at the entrance of the plant site. The building is 45.0 meters long, 10.0 meters wide with an 8.0 meters by 15.0 meters addition in the rear. GATE HOUSE Just at the entrance to the site, next to the parking lot, there is a small 3.0 meters by 5.0 meters, concrete building with brick walls and a concrete roof slab. FITEL OIL STORAGE AREA There is a fuel oil storage area consisting of four 42.0 meters diameter by 24 meters high tanks with a 2.3 meters high dike around them to contain the oil in case of a rupture. Also, there are two light fuel tanks 15.0 meters diameter by 12 meters high, and next to each boiler, a day tank, 9.0 meters diameter by 8,0 meters high. Annex 5. 1 BASE CASE PROJECTIONS - 60% PLANT UTILIZATION (Page 1 of 5) PAKISTAN EXPANDED COFINANCING OPERATION -- HN POWER COMPANY FORECAST SOURCES AND USES OF FUNDS (RUPEES MILLION) YEAR 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 SOURCES OF ruNS: .UN DS .... ---- ---- .... --- .... ---- ---- Net Operating Income 0 0 0 1,903 6,232 5,873 5,549 5,175 5,016 4,752 Cash Brought Forward 0 0 0 0 1,950 928 823 824 819 812 Depreciation 0 0 0 1,109 1,108 1,108 1,108 1,108 1,108 1,108 Withdrawl to Pay HKCO Bond Coupon 0 156 230 330 397 0 0 0 0 0 Interest Received on Cash 0 0 0 0 234 111 99 99 98 97 -- -- ----- .. ..... - - - .- - - - .. ... -- - - - - - . ..... Subtotat - Internal Cash Generation 0 156 230 3.341 9,921 8,021 7,579 7,206 7,042 6,769 EQUITY DRAMS 1,074 951 1,192 313 1,344 451 601 406 0 0 BORROWINGS Coonweatth Devel. Corporation 39 26 33 384 0 0 0 0 0 0 PSEDF 2,253 2,781 2,536 961 0 0 0 0 0 0 ECO 1,349 1,631 2,055 976 1,196 0 0 0 0 0 V and US$ Export Credits 1,855 2,460 2,183 711 1 0 0 0 0 0 Local Loans 1,130 985 1,153 336 0 0 0 0 0 0 Drawdown of HUBCO Bonds 946 451 601 406 0 0 0 0 0 0 ..-- . ........ . .......... ------ ......... ---- ---- ---- ---- ----- SUBTOTAL - BOROWINGS 7,573 8,334 8,561 3,775 1,197 0 0 0 0 0 TOTAL SOURCES OF FUNDS 8,647 9,440 9,984 7,429 12,462 8,471 8,180 7,612 7,042 6,769 1 ~ = ==, .,==== _=== ====== ====== ====== ==_=== ====== ====== ====== i,, APPLICATION OF FUND0S: CONSTRUCTION PROGRAM 6,149 7,864 7,242 1,771 0 0 0 0 0 0 DEST SERVICE Interest Payments 432 1,091 2,076 2,766 2,985 2,827 2,640 2,454 2,261 2,047 Ccupon Payents On HUBCO Bonds 0 156 230 330 397 241 166 67 0 0 Principal Repayments 0 0 0 0 2,797 2,301 2,452 2,257 2,037 2,065 Interest Due On Cash Overdraft 0 0 0 0 0 0 0 0 0 0 Allocation to UBCO Account 340 101 238 270 0 0 0 0 0 0 ..-- ------ ------ ...... . .. ------ ...... . .. ...... ...... . .. ------ ......... ........ .... SUBTOTAL - DEBT SERVICE 772 1,347 2,545 3,366 6,179 5,369 5,259 4,778 4,298 4,112 FINANCING FEES Debt and Equity Fees 617 229 197 97 50 5 3 3 3 3 ExCredit and Exchange Risk Insurance Premium 1,108 0 0 0 3,166 746 661 575 490 405 .....- -- -- -- - - - - -.-- - - - - - - - - - - - - - - - - SUBTOTAL FINANCING FEES 1,725 229 197 97 3,216 751 663 578 493 408 OTHER APPLICATIONS Divldend Payments 0 0 0 0 1,008 1,751 1,647 1,643 1,631 1,621 Net Allocation To Escrow Account 0 0 0 0 1,094 (225) (215) (205) (195) (184) Redenption of Share Capital 0 0 0 0 0 0 0 0 0 0 Change In Uorking Capital 0 0 0 245 38 2 2 (2) 2 2 SUBTOTAL - OTHER APPLICATIONS 0 0 0 245 2,140 1,528 1,434 1,437 1,439 1,439 TOTAL APPLICATION OF FUNDS 8,647 9,440 9,984 5,478 11,534 7,648 7,356 6,792 6,230 5,959 CHANGE IN CASH: (0) 0 0 1,95 f0 928 823 824 819 812 810 09-Oct-91 Annex 5.1 BASE CASE PROJECTIONS -- 60X PLANT UTILIZATION (Page 2 of 5) PAKISTAN EXPANDED COFINANCING OPERATION -- HUB POWER COMPANY FORECAST PROFIT AND LOSS STATEMENT (RUPEES MILLION) YEAR 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 REVENUES 0 0 0 5,183 11,849 11,492 11,143 10,797 10,610 10,317 OPERATING EXPENSES Fuel Costs 0 0 0 1,581 3,614 3,614 3,614 3,614 3,614 3,614 Fixed Costs 0 0 0 387 558 529 503 526 498 469 Variable Costs - Output 0 0 0 18 43 50 50 55 55 55 Variable Costs - Conmited Hours 0 0 0 54 132 154 156 156 156 156 IORA Costs 0 0 0 4 11 13 13 13 13 13 Insurance 0 0 0 39 84 84 84 84 84 84 Fixed Fuel Charge 0 0 0 0 0 0 0 0 0 0 Other Project Company Costs 0 0 0 90 66 66 66 66 66 66 Provision for Depreciation 0 0 0 1,109 1,108 1,108 1,108 1,108 1,108 1,108 ~~...... -- -- ...... -- -- -- - - - - - . - - - - - - - - - - - - TOTAL OPERATING EXPENSES 0 0 0 3,280 5,616 5,618 5,594 5,622 5,594 5,565 1 NET OPERATING INCOME 0 0 0 1,903 6,232 5,873 5,549 5,175 5,016 4,752 O INTEREST EXPENSE Interest Paid 0 0 0 1,823 4,246 3,819 3,470 3,099 2,754 2,455 Interest Rec'd(Due) on Cash Balances 0 0 0 0 331 201 178 168 157 146 ...... . ...... ------ ------ -- -- -- -- ----- ----- -- - - - - - NET INTEREST EXPENSE 0 (0) (0) 1,823 3,914 3,618 3,292 2,931 2,597 2,309 NET PROFIT 0 0 0 80 2,318 2,255 2,257 2,244 2,419 2,443 --... .--. ====== ====== ====== ====== ====== ====== ====== ====== ====== =_===== Less: Dividends DecLared 0 (0) 0 (80) (1,856) (1,646) (1,648) (1,639) (1,623) (1,620) RETAINED EARNINGS 0 0 0 (0) 462 609 609 605 796 823 .... ..... ... ... ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== CUFULATIVE RETAINED EARNINGS 0 0 0 0 462 1,071 1,680 2,285 3,081 3,905 ELECTRIC:TY SALES (GWh) 0 0 0 2,971 6,791 6,791 6,791 6,791 6,791 6,791 AVERAGE TARIFF (Rs/kWh) 0.000 0.000 0.000 1.745 1.657 1.616 1.580 1.562 1.519 1.475 09-oct-91 Annex 5.1 AE CASE PIOJECTIONS -- 60S PLANT UTILIZATION (Page 3 of 5) PAKISTAN EXPANDED COFINANCING OPERATION -- HWB POWER COIIANY FORECAST BALANCE SHEET ASSETS YEAR ---------------------- max= (RUPEES MILLION) 1991 1992 1Q93 1994 1995 1996 1997 1998 1999 2000 FIXED ASSETS Gross Fixed Assets 8,861 18,890 29,378 33,258 33,235 33,235 33,235 33,235 33,235 33,235 Les: Depreciation & Amortization 0 0 0 1,109 2,216 3,324 4,432 5,540 6,648 7,756 NET FIXED ASSETS 8,861 18,890 29,378 32,149 31,019 29,911 28,803 27,695 26,587 25,480 WRRENT ASSETS Cash - Escrow Accowit 0 0 0 0 1,191 1,055 920 784 648 512 Batlnce of HLC Bond AccoLnt 299 339 389 374 (0) 0 0 0 0 0 Inventories 0 0 0 336 336 336 336 336 336 336 Accounts Receivable 0 0 0 322 392 395 395 396 396 396 Ccsh - et Cash Flo 0 0 0 1.950 928 823 824 819 812 810 TOTAL CWRRENT ASSETS 299 339 389 2,983 2,847 2,610 2,475 2,336 2,192 2,055 TOTAL ASSETS 9.161 19;229 29;767 35.132 33;866 32,521 t1,278 30,031 28,779 27,534 =s = .== ==_ = 2== 2==== === = = ==,=== . ,=== ====== ====== ====== I CAPITAL AND LIABILITIES CURRENT LIABILITIES Creditors 0 0 0 414 445 446 444 447 444 442 Advance Tariff Receipts 0 0 0 0 0 0 0 0 0 0 Accrued Liability For Exchange Risk Premim 0 784 1,568 2,352 0 0 0 0 0 0 Declared Dividend Not Yet Distributed 0 0 0 80 928 823 824 819 812 810 ..-- --- -- -- -- ...... . .. -- - - - - - . - - - - - - - - - - - - TOTAL CURRENT LIABILITIES 0 784 1,568 2,846 1,373 1,269 1,268 1,266 1,256 1,252 LONG-TERM LIABILITIES Long Term Borrowings 6,627 14,510 22,470 25,W8 25,185 23,335 21,484 19,634 17,596 15,532 NtNICO Bonds 946 1,397 1,998 2,405 1,459 1,008 406 0 0 0 TOTAL LONG-TERN LIABILITIES 7,573 15,907 24,468 28,243 26,644 24,343 21,891 19,634 17,596 15,532 EQUITY AND RETAINED EARNINGS Share Capital 1,588 2,538 3,731 4,043 5,387 5,838 6,439 6,846 6,846 6,846 Retained Profits 0 0 0 0 462 1,071 1,680 2,285 3,081 3,905 ... ... ...... - -- ---- ...... ---- ...... ...... ...... .. ------ TOTAL SHAREHOLDER CAPITAL 1,588 2,538 3,731 4,043 5,849 6,909 8,119 9,131 9,927 10,750 TOTAL LIABILITIES AND SHAREHOLDEI CAPITAL 9,161 19,229 29,767 35,132 33,866 32,521 31.278 30,030 28,779 27.534 09-Oct-91 - 62 - Annex 5.1 (Page 4 of 5) PAKISTAN Expanded Corinancing Operation Hub Power Company Notes and Assumptions for Financial Forecasts Sales of Electricity 1. The forecast sale of electricity to WAPDA is based on a phased in generation schedule in which the first unit would begin generating electricity in the 38th month after the beginning of construction and each of the subsequent 3 units would begin generation of electricity at three month intervals thereafter. HUBCO would generate 2,971 GWH of electricity in FY94 and 6,791 GWH of electricity every year thereafter. Interest Received on Cash 2. Interest on cash is received on cash balances resulting from net cash flow, the debt service escrow account, and balances on the HUBCO bond account. Interest rates used to estimate interest revenues are set at 7.5%. Electricity Tariff to WAPDA 3. The annual tariff to WAPDA would reflect the project's annual operating costs including fuel as well as an annual return to the project's equity shareholders sufficient to provide them with an 18% internal rate of return on the project. The financial projections yield a Rs 1.43 KWh annual average tariff for years 2-12 and Rs .969 KWh annual average tariff for years 13-30. :?uel Costs 4. An April 1991 cost of fuel oil of Rs 2350/tonne has been assumed for the financial projections, which is a component of HUBCO's tariff to WAPDA. A fuel burn efficiency of .2265 tonnes per MWHR has been estimated for the facility by BEI, who will be the operators of the plant. Maintenance Exienses 5. Projections of detailed maintenance expenses have been provided by BEI for the life of the project. These estimates have been increased annually by 10% in years 4- 12, and 12% from year 13 onward to incorporate a plant betterment allowance that would ensure that the facility would be operated at a 60%o gross capacity factor throughout the life of the project. Dgprecanti 6. The financial projections assume a 30 year straight line depreciation of the company's fixed assets. - 63 - Annex 5.1 (Page 5 of 5) Debt Service Escrow 7. A debit service escrow reserve account sufficient to cover one year's interest payments on loans from CDC and senior foreign commercial banks would be, established using offshore equity and drawdowns from commercial banks in the first month of FY95. Shareholder Returns 9. The project's equity shareholders would receive an average 18% internal rate of return on their equity invested. Exchange Rates 10. The financial projections use September 1, 1991 exchange rates to translate the project's multi-currency costs to US dollars and Pakistani rupees. The following exchange rates have been used: Currenz v Curren,cy/US Dollar Japanese Yen 136.647 British Sterling .593 French Francs 5.930 E.CUs .850 Italian Lira 1301.480 Pakistani Rupees 24.036 - 64 - Annex 8.1 (page 1 of 2) PAKISTAN EXPANDED COFINANCING OPERATION HUB POWER COMPANY ASSUMPTIONS FOR THE INTERNAL ECONOMIC RATE OF RETURN 1. Cpital Costs: Local and foreign investment expenditures incurred by HUBCO for the construction of the Complex, the establishment and operation of the project company and plant start-up, net of IQRA (surcharge on imports), import taxes, license fees, working capital, interest during construction and other financial fees, amount to US$924 million in June 1991 prices, with the foreign component comprising 90% of the total cost. 2. Local Costs: Local costs have been adjusted by a standard conversion factor for Pakistan of .85. 3. Operations and Maintenance Costs: Both the fixed and variable costs are based on March 31, 1991 prices and exchange rates. The non-labor components of the local fixed and variable costs, have been adjusted by a standard conversion factor for Pakistan of .85. 4. Fuel Costs: Fuel costs are based on a border price of fuel oil of Rs. 2,350 per tonne (US$97.75 per tonne) which prevailed as of March 31, 1991. 2m e 5. Generatign: Generation for the proposed Complex assumes a 64% plant factor on net capacity, with the first unit being commissioned in month 38 and subsequent units coming on- line every three months thereafter. 6. Tariff: The electricity tariff is based on the tariff agreement signed between HPG and GOP in July 1991. Based on September 1991 exchange rates, the tariff is Rs.1.43/kWh for the first 12 years, and Rs. 0.969/kWh for the remaining 18 years. CFsps 10.09.91 Anne I. (pege 2 of 2) 8ASF. CASE PROJECTIONS -- 60X PLANT UTILIZATION PAKISTAN ECONOMIC INTERNAL RATE OF RETURN = 18.32 HUB POWER COMPANY INTERNAL ECONOMIC RATE OF RETURN 1> ------------- Capital Costs ------ ------------------------------ Operating Costs -------------------------------- Total Total Total Arvnual Net Fixed Costs Variable Costs Non-Fuel Non-Fuel Fuel Operating Average Total Cash Electric Foreign Local Total Total Foreign Local 2> Foreign Local 2> Insurance Costs Costs Costs Costs Tariff Revenues Flow Year Generation (MMSS) (.JSS)2> (MUSS) (MRS) (Rs/kWh) (Rs/kWh) (Rs/kWh) (Rs/kWh) (Rs/kWh) (Rs/kWh) (MRS) (MRS) (MRS) (Rs/kWh) (MRs) (MRs) .... ..... .... ...... ---- .. .... .... .............. ... ..... ... ...... ----- ------- ------ ------- -------- --------... -------- --------.. -------- --------.. ----- ----- ----- 1988 0 10.4 0.00 10.40 250.02 (250) 1989 0 7.5 0.00 7.50 180.30 (180) 1990 0 3.5 0.00 3.50 84.14 (84) 1991 0 220.6 27.80 248.40 5971.42 (5,971) 1992 0 278.3 24.23 302.53 7272.70 (7,273) 1993 0 250 29.07 279.07 6708.84 0.000 0.000 0.000 0.000 0.000 0.000 0 0 0 (6,709) 1994 2971 63.3 8.84 72.14 1734.25 0.057 0.033 0.014 0.012 0.012 0.129 383 1,581 1,964 1.711 5,083 1,385 1995 6791 0.0 0.00 0.00 0.00 0.054 0.032 0.016 0.015 0.012 0.130 881 3,615 4,496 1.623 11,022 6,526 1996 6791 0.00 0.00 0.051 0.032 0.016 0.015 0.012 0.126 854 3,615 4,469 1.584 10,757 6,288 1997 6791 0.052 0.034 0.017 0.015 0.012 0.131 887 3,615 4,502 1.553 10,546 6,044 1996 6791 0.048 0.033 0.017 0.015 0.012 0.126 854 3,615 4,468 1.537 10,438 5,969 1999 6791 0.045 0.032 0.017 0.015 X.012 0.122 827 3,615 4,441 1.495 10,153 5,711 2000 6791 0.041 0.032 0.017 0.015 0.012 0.118 800 3,615 4,414 1.455 9,881 5,467 O 2001 6791 0.038 0.032 0.017 0.015 0.012 0.114 7M 3,615 4,387 1.413 9,596 5,208 U' 2002 6791 0.038 0.030 0.017 0.015 0.012 0.112 760 3,615 4,374 1.375 9,338 4,963 2003 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.336 9,073 4,705 2004 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.036 7,035 2,667 2005 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.038 7,049 2,681 2006 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2007 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2008 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2009 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2010 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2011 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2012 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 1.040 7,063 2,695 2013 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.844 5,732 1,364 2014 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.844 5,732 1,364 2015 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.844 5,732 1,364 2016 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.844 5,732 1,364 2017 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.844 5,732 1,364 2018 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.834 5,664 1,296 2019 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.815 5,535 1,167 2020 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.795 5,399 1,031 2021 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.777 5,z77 909 2022 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.757 5,141 773 2023 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.738 5,012 644 2024 6791 0.038 0.029 0.017 0.015 0.012 0.111 753 3,615 4,368 0.738 5,012 644 Totals 834 90 924 22,202 1> Fixed, variable, and insurance costs are estimated at March 31, 1991 levels of inflation and exchange rates. 2, Incorporates a local currency shadow price of .85 on ion-labor component of cost. - 66 -Annex 8.2 Projecdons of electricity consumption in Pakdstan to 2009 (Milions Kwh.) Projected Demand (FY1981-2009) Actual Demand (FY1981-8S) Base Load Seenar-io Fngrnlan WAPDA WAPI)A KSFIC Sheddin2 Total 1981 11059 8830 2116 41 10987 1982 12939 10088 2455 219 12762 1983 14745 11368 2547 421 14336 1984 16325 12511 2756 391 15658 1985 18297 14348 3040 1681 19069 1986 20543 1987 23000 1988 24900 1989 26913 28400 29582 1990 29184 30700 32724 1991 31513 32800 35973 1992 34187 35300 39233 1993 36985 37800 42781 1994 39876 40600 46917 1995 41723 43300 51491 1996 45643 46200 56487 1997 48756 49400 61965 1998 52081 52800 67976 1999 55283 56400 73413 2000 58851 60300 79289 2001 62688 64400 n.a. 2002 66840 68800 n.a. 2003 71367 73500 n.a. 2004 76226 78500 n.a. 2005 81390 84000 na. 2006 86932 89700 n.a. 2007 92947 95900 n.a. 2008 99263 102500 n.L 2009 105994 109600 na n.a.: not available KC.: Kalabagh Consutancs Load Shedding esdmaes wer provided by WAPDA. MAP SECTION PmW ManVe LAHORE RING U s s R /t 'INA 1 X ;KLA SHAH KAKU k.r y- I. I, f LSO -C70- 4 AM ISALABAD RING sb _ -i 4 TM,o or \ .~Ns K HMI - z os d ; 84,' - ,' INDIA I - r7/ I- - *N** - - -" - . /A / \ /' o' b ½. LA°HPAT \A >, , ' o P A KISTANJAMMU ISALABAD RING KASHMIR 'o~~~~~~~~~~~~~~~~~A o o ' u v - , >,. 8 v MAIN POW R STATIONS0AND RANSLISAION0LI NIS HATAAD II RAINALABAD 4 C~~~~~~~D O 6 e ' 'N l -- i j s q-.eSO 4ItF OADU J - - *1 t _ ___ -UDOU 1V X 3) A ) 06 132 hV w vt ~ ~ x t- 05Gk PA KO S T A N KAAY ISHCLEKP I 6 4NHJLRA# RHIRARPAR I >jEXPANDED COFINANCING OPERATIOt POWER PL..TIp n 5 - -- ~~~~~~~~~~~~~~~~~INTERNATIONAL BOUNDARIES C BC 200 300 KILOMETERS At BA' XC'~~~~~~~~~~~~~~~~~~~~~~~~~~18 IE 6p'I. p P l