Friday, October 1, 2010

Does Pakistan’s macroeconomic situation stable?

"The macro-economic situation of the country is a risk, but the conditions are improving under the IMF/WB supported programme. Energy sector's financial viability is a key to macro-economic stability and relevant policy measures which are part of the program. The second risk is that credible private investor may not be willing to take on the RROT for Genco -1. To mitigate the risk, much of the risks faced by the investors such as financing risk should be addressed by tapping financing from the IFIs to a large part, especially the non-sovereign type," said the Bank in its report sent to Secretary, Privatisation Commission.
The World Bank has portrayed Pakistan's macroeconomic situation as 'risky', but maintained that conditions are improving under an International Monetary Fund (IMF) and Bank-supported programme. The Bank made these comments on a draft concept note for a 'Rehabilitate, Operate and Transfer' (ROT) approach, which has been considered for genco-1 (Jamshoro and Kotri thermal power plants).
The report states that, essentially, what is being structured is an independent power producer (IPP) project. Given the long track record of Pakistan in realising private sector IPP, the institutional, legal and decision making framework largely exists. Accordingly, the Privatisation Commission and the Ministry of Water and Power (through the Private Power & Infrastructure Board (PPIB) and Pepco) would be responsible for the preparation.
Plans are to recruit transaction advisors comprising technical, financial and legal skills. These transaction advisors would be funded by the Bank's ongoing Electricity Distribution and Transmission Improvement Project (EDTIP). Recruitment of the transaction advisors is being initiated. The transaction advisors would carry out the preparation in two parallel tracks - first is to make the techno-economic assessment of Genco-1's plants, the gas availability, and define in functional terms the needs for reconstruction and rehabilitation and the length of the concession period. This assessment would include assessment of environmental and social issues as well. In parallel, the Transaction Advisors would initiate the selection of the possible investor(s).
This would include preparation of the financial assessment of the concession, the legal framework (including draft agreements) and pre-qualifications of the investors. The final bidding for the investor would be conducted once the techno-economic assessment as well as the commercial legal framework is ready. This process is expected to take roughly 12 months.
According to the Bank estimates, which are quite preliminary, reconstruction and rehabilitation of genco-1's plants would cost about $600 million--$400 million for the replacement of some units, and the remaining for rehabilitation
This possible financing plan does reflect the wishes of GoP to make it a PPP in which Pepco will hold 30 percent of the equity whereas the entire debt would be funded by international financial institutions, predominantly IFC and World Bank (IBRD), and other IFIs could also participate.
While the project preparation responsibilities would initially rest with the GoP and its entities, the Bank has recommended that concept clearance be secured immediately and all the legal and environmental and other permits, etc, be obtained by Genco-1, before participation by the private investor upon selection.
The Bank expects that with the help of the Transaction Advisors, the investor would be selected through a multi-stage international selection process. Accordingly, the expectations at the moment are that procurement would be as per guidelines noted in "Procurement under BOO/ BOT/ BOOT, Concessions and Similar Private Sector Arrangements".
Disbursements are expected to be along those in private sector projects - an agent bank (also known as an account bank) that would be appointed under specific agreement, would hold all the funds in escrow and release them upon meeting disbursement criteria being met.
Under the concession, Genco-l will be operated like a private company, and is expected to have appropriate accounting and financing management systems. The company will be subject to international standards audit.
The Bank is of the view that availability of natural gas should be immediately re-committed by the GoP. In view of the severe shortages of natural gas, pressures are being put on GoP to take away the gas from Genco-1 and give it to alternative uses (eg, fertiliser production).
To avoid these pressures, GoP should re-confirm immediately that the currently available gas would continue to be available to Genco-1. The Techno-Economic Assessment as part of the Transaction Advisory would carry out the due diligence to confirm for how many more years the gas would be available from the fields that are currently supplying, which would in turn determine the length of the concession, the Bank added.
This suggests that the GoP's focus should be on obtaining an investment commitment to reconstruct and rehabilitate Genco-1 as opposed to trying to generate funds for the budget by attempting to privatise the plant.
In view of the weak macro-economic situation, there are pressures to privatise possible state assets and Genco-l could be viewed as a possible candidate. However, in view of the current local and global conditions, outright sale may not be possible--as was proved by GoP's previous failed attempts to privatise Jamshoro and Kotri thermal power plants.
At the same time, failure to structure the reconstruct/rehabilitate transaction urgently would also negatively affect the power situation in the country especially since at least part of the asset base of Genco-1 is in bad condition and all of it is operating at low efficiencies which will only deteriorate with time.

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