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POLICY FRAMEWORK AND

PACKAGE OF INCENTIVES

FOR PRIVATE SECTOR

POWER GENERATION  PROJECTS IN PAKISTAN

 MARCH 1994

GOVERNMENT OF PAKISTAN

FOREWORD

 Shortage of electrical power is one of the most crucial issues facing Pakistan today. Supply has been unable to keep pace with the growing demand for electrical power, with the result that consumers have been subjected to force power cuts or load shedding on a routine basis. Our Government is keenly conscious of this challenge. Electrical energy is the prime engine of national development. Without it all efforts for fast-track industrial development and economic progress cannot succeed.

 The power sector has our highest priority. Immediately on ascension to power in October 1993 the Government constituted an Energy Task Force comprising of the best professional brains in the country to devise a consolidated and comprehensive policy for revamping and rejuvenating the energy sector. I am glad to say that the policy recommendations formulated by the Task Force, which have since been approved by the Government, are fully responsive to the challenges that face us today in our quest to enter the twenty first century as a self-reliant nation, with a vibrant and resilient economy .

One of the prime thrusts of the new Energy Policy is the large scale induction of the private sector in power development. Accordingly a new policy framework and internationally competitive package of incentives has been devised in order to attract foreign and domestic entrepreneurs to invest in power generation projects in Pakistan. Procedures have been simplified, and major steps taken to eliminate bureaucratic red-tapism and delays in dealings between the Government and the private investors. Reforms of the Corporate law and regulations  have also  been initiated to facilitate and encourage the creation of a local debt securities market to meeting the local currency financing requirements  of  power projects.

 Pakistan today offers a secure, politically stable investment environment which is steadily moving towards deregulation and an open competitive market economy. The country offers a unique combination of low labour and material costs, a large market, liberal incentives, full backing and support by the Government and one of the best security· packages to prospective investors in power generation. I have every confidence that entrepreneurs from within the country and abroad will avail themselves of this opportunity, to the mutual benefits of both the investors and the Pakistani nation.

BENAZIR BHUTTO

Prime Minister of Pakistan

TABLE OF CONTENTS

INTRODUCTION.......................................................................................................... 1

CHOICE OF SITE, FUEL/ENERGY SOURCE & TECHNOLOGY.............................. 2

TARIFF FOR BULK PURCHASE OF POWER AT BUS BAR..................................... 2

Application of Bulk Power Tariff..................................................................... 3

Payment of Bulk Power Tariff.......................................................................... 3

Procedure for Application  of Bulk Power Tariff.......................................... 4

Indexation/ Adjustments of the Bulk Power Tariff............................................ 4

FINANCING   ARRANGEMENTS............................................................................... 4

FISCAL INCENTIVES.................................................................................................. 5

SECURITY PACKAGE................................................................................................. 7

ONE WINDOW OPERATION...................................................................................... 7

ISSUANCE OF SEPARATE SRO................................................................................. 8

SUPPLY AND IMPORT OF FUEL.............................................................................. 8

PROCEDURES FOR APPLICATION AND PROCESSING

OF PROPOSALS........................................................................................................... 9

Unsolicited Proposals      . . . . . . . . . . . . . . . . . . . . . . . . . . .·............ 9

Solicited Proposals  . . . . . . . . . . . . . . .· ;..................................................... 10

Projects in the Pipeline       . . . . . . . . . . . . . . . . . . . . . .·................... 10

Preferred Locations......................................................................................... 11

INTERCONNECTION OF THE PROJECT TO WAPDA/KESC

TRANSMISSION SYSTEM . . ;.................................................................................... 11

VALIDITY PERIOD OF THE BULK POWER TARIFF............................................. 11

INDUSTRIAL SELF-GENERATION PROJECTS........................................................ 11

PROCEDURE FOR CALCULATION OF BULK POWER

'TARIF'F  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ANNE){URE-I SEASONAL-CUM-TIME-OF-DAY TARIFF                                                                 . . . . . . . . . . . . ANNE){URE-II

A.                INTRODUCTION:

Presently the total installed capacity in the country is 10,800 MW. This capacity is insufficient to meet the demand on a year round basis, as such at different times of the year particularly during the period of low river flows, consumers have to be subjected to load shedding (forced power cuts). The magnitude of this shortage is around 2,000 MW during peak load hours. Electricity is available to only 40% of the population and per capita consumption of electricity per annum at 300 kWh is extremely low.

The system is characterized by a high degree of suppressed demand. Conservative projections for annual average increase in the demand are nearly 8 % per annum for the next 25 years, which means that approximately 54,000 MW  of additional generation capacity will be needed upto year 2018. Minimum annual additional capacity requirements are of the order of 900 MW in year 1994, increasing to 1,300 MW in year 2000 and 5,000 MW in year 2018.

Such an ambitious programme cannot be financed in the public sector due to ceilings on Public Sector Development Programme (PSDP), and resource mol:>ilization in the private sector is essential for meeting these development targets.

Although a policy for setting up private sector BOO (Build-Own-Operate) power plants has been in effect in Pakistan since 1986, the pace of progress in this regard has remained slow. Major factors which have discouraged prospective investors include:

1. Protracted and detailed negotiations on technical & financial aspects of the projects leading to Power Purchase and Implementation Agreements, based on 18% IRR on Equity.

1. Sale price of electricity was not internationally competitive.

1. Lack of clarity about facilities and concessions available to investors in private power plants.

1. The regime of import charges was often subject to mis-interpretation and at the same time required the potential investor to arrange large sums of money upfront for making demands of custom duties and taxes etc.

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In order to support the power development programme of the country for the Eighth Plan period (1993-98), a minimu m estimated amount of Rs 102 billion, comprising Rs 86 billion in foreign currency and Rs 16 billion in local currency, would have to be raised in the private sector. The Government of Pakistan is keenly aware that resource mobilization on such a massive scale in the face of fierce international competition for attracting foreign direct investment, and a rather limited domestic capital market, will not be achieved, unless major policy reforms and structural changes are undertaken to make the investment environment attractive for foreign and domestic investors.

Accordingly the Government of Pakistan has devised an attractive policy package for attracting overseas investment and to facilitate the tapping of the domestic capital market to raise local financing for power projects. The main characteristics of this package are internationally competitive terms, attractive framework for domestic investors, reduction in local currency investment requirements, simplification of procedures, and steps to create and encourage a domestic corporate debt securities market.

The salient features of the new policy framework and the package of incentives that have been devised to accelerate the development of generation capacity through private sector resource mobilization are presented below.

B.         CHOICE OF SITE, FUEL/ENERGY SOURCE & TECHNOLOGY:

The investors are· free to propose the site and opt for the technology and fuel including residual furnace oil, diesel oil, natural gas, LPG etc. for the project depending upon the availability of fuel, cooling water, infrastructure, environmental impacts and economics of the tariff.

Investors may also propose projects based on hydro, or other renewable and/or nonconventional sources of energy such as solar, wind, geothermal etc.

However, hydro power projects on the main river Indus will not be open to private sector because of water regulations and flood protection functions.

C.                 TARIFF FOR BULK  PURCHASE  OF POWER  AT BUS BAR:

The power shall be purchased by WAPDA/KESC under a long term contract covering the concession period.

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The Government of Pakistan offers a Bulk Power Tariff of US Cents 6.5/kWh (to be paid in Pak Rupees) as an average for first ten years for sale of electricity to WAPDA/KESC.

A levelized tariff of US Cents 5.9/kWh (Rs 1.776/kWh) over life of the project has also been calculated as a final parameter for acceptance of the tariff. It will provide flexibility to the Sponsors to work out year-wise tariff (resulting into the required levelized tariff) which match their annual debt service requirements.

A premium of US Cents 0.25/kWh based on the energy sold to WAPDA/KESC during the first 10 years of project operations, will also be allowed to the projects above 100 MW which are commissioned under this scheme by end 1997.

1. Application of Bulk Power Tariff:

The Bulk Power Tariff will apply to all BOO thermal power projects, all hydro projects upto 20 MW and all other projects based on non­ conventional/renewable energy sources. In case of hydel units, the levelized tariff will be applicable for the first 30 years of the project life.

For hydro projects exceeding 20 MW, the tariff will be decided on project to project basis on a 25 % rate of return on equity.

1. Payment  of Bulk Power Tariff:

The tariff of US Cents 6.5/kWh is an indicative tariff which has been calculated on an annual plant factor of 60% . The actual payment of the tariff will comprise two components, i.e. Capacity Price and Energy Price.

Capacity price will be paid on monthly basis and covers the debt servicing, fixed operation and maintenance cost, insurance expenses and return on equity. The payment of Capacity Price on monthly basis will keep the investors' profit insulated against variations in the quantum of energy purchased by WAPDA/KESC.

The Energy Price will be paid as Rupees per kWh based on actual energy sold to WAPDA/K....ESC. This includes an element of fuel price as a "pass-through" item. As the capacity payment is assured as per terms of the Concession  Agreements,  there  will  be  no  guarantee  for purchase  of  a specified amount of power. However, as mentioned earlier, non-purchase of electricity will not affect the smooth operations and investors' profits as envisaged in the base tariff profile.

1. Procedure for Application qf_Bulk Power Tariff:

The Sponsors of private power projects will provide their year-wise tariff profile for the life of the project. The tariff will be acceptable if:

i)                    The average tariff for the first ten years does not exceed US Cents 6.5/kWh (Rs 1.952/kWh).

ii)                   The annual base tariff does not exceed US Cents 8.33/kWh (Rs.2.5/kWh) in the first year and US Cents 6.66/kWh (Rs 2/kWh) in any subsequent year.

iii)                  The levelized tariff for the life of the project does not exceed US Cents 5.91/kWh (Rs.1.776/kWh).

1. Indexation/ Adjustment of the Bulk Power Tariff:

A mechanism has been provided for indexation/adjustment of the certain tariff components based on Rupee/Dollar exchange rate, fuel price variations and inflation, as described in Annexure-I.

1. FINANCING   ARRANGEMENTS:

1. BOO projects will involve limited recourse financing, which means that the funds for the projects will be raised without any direct sovereign guarantee of repayment. Instead, the investors in, and lenders to, the project company must look to the revenues earned by the sale of electricity; for their returns on equity and the servicing of their loans.

1. The minimu m requirement for equity investment is 20% of the total capital cost of the project.

1. The Government has established a Private Sector Energy Development Fund (PSEDF) with the assistance of the World Bank, USAID and other multi­ lateral lending agencies, which may provide upto 40% of the Capital Costs of the project, currently at a fixed interest rate of 14% per annum with a maturity period of upto 23 years including a grace period of upto 8 years.

1. To facilitate the creation and encouragement of a corporate debt securities market essential to raise local financing for power development projects, the following provisions have been made:-

i)                     Permission to power generation companies to issue Corporate Bonds, both bearer and registered.

ii)                   Permission to issue shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk.

iii)                 Permission to foreign banks to underwrite the issue of shares and bonds by the private power companies.

iv)                  Same tax facilities for private sector instruments as available to Non Banking Financing Institutions subject to approval by CLA.

v)                   Recommendation by GOP to State Bank for modification of Prudential Regulations to allow 80:20 debt equity ratio.

vi)                  Removal/reform of Section 13 of 1947 Foreign Exchange Regulation Act to enable non-residents to purchase securities issued by Pakistanis without State Bank permissions.

vii)                Abolition of 5% limit on investment of equity m associated undertakings.

viii)               An independent rating agency is being allowed to commence operations, so that individual investors can make informed decisions about the risk and profitability of the Bonds/TFCs.

1. FISCAL INCENTIVES:

1. The private power companies are exempt from corporate income tax.

1. The companies are allowed to import plant and equipment without payment of customs duties, sales tax, Iqra, Flood Relief and other Surcharges as well as Import License Fee.

1. The companies have been allowed to register anywhere in Pakistan to avail reduction in stamp tax and registration fee for registration of loan documents by Federal Government.

1. Repatriation of equity alongwith dividends is allowed freely.

1. Exemption from income tax m Pakistan for foreign lenders to such companies.

1. Although the GOP encourages participation of local investors in the power sector, it is not mandatory, and foreign companies/investors are free to set up projects without local partners.

1. The companies can obtain Foreign Exchange Risk Insurance (FERI) on standard terms from the State Bank on the foreign currency loans contracted by them. The current premium rates of FERI are included in the bulk tariff but any change in FERI will be considered as a "pass-through" item.

1. The companies have been exempted from the requirements of obtaining insurance only from the National Insurance Corporation (NIC) under NIC

• Act of 1976 if they are funded by multi-lateral lending agencies like World Bank, ADB etc. Now private power companies can get insurance as per requirements of lenders and utilities.

1. The power generation has been declared as an industry and the companies are eligible for all other concessions which are available to industrial projects.

1. Te private parties may raise local and foreign finance in accordance with regulations applicable to industry in general.

1. For local engineering and manufacturing companies, the present Statutory Revisionary Order (SRO) 555(1)/90 has been made applicable to private power plants.

1. Orders received by local engineering and manufacturing companies from private power companies will be treated as an export for refinance under the State Bank Finance Scheme for Exports.

1. SECURITY PACKAGE:

1. Model Implementation (Concessions) Agreement, Power Purchase Agreement and Fuel Supply Agreements have been prepared for private power projects to eliminate the need for protracted negotiations between GOP and Sponsors.

1. The long term Power Purchase Agreements, typically for 15 - 30 years with WAPDA/KESC are guaranteed by the GOP for performance obligations of these utilities.

1. In case the fuel is to  be supplied by a public sector organization, the performance of the fuel supplier will be guaranteed by the GOP under the terms of Fuel Supply Agreement.

..

1. For private power projects, the Government will:

i)                    provide protection against specific force majeure risk.

ii)                   provide protection against changes in certain taxes and duties

iii)                  ensure  the  convertability  of  Rupees  and  remittability  of  foreign exchange to cover necessary expenses of the projects.

1. The PSEDF loans are subordinated in certain respects to the other commercial lenders.

1. ONE WINDOW OPERATION:

Previously the GOP institutional framework to facilitate the development of private sector power projects comprised:

1. A Private Power Cell (PPC) in the Ministry of Water and Power (MWP) at Islamabad that promoted and evaluated proposals for, and concluded agreements relating to, private sector power projects.

1. A Private Energy Division (PED) in the National Development Finance Corporation (NDFC) in Karachi that administered the Private Sector Energy Development Fund on behalf of the Government and provided loans to approved projects

1. A WAPDA Power Privatization Organization (WPPO) in WAPDA at Lahore that was responsible for negotiating and administering Power Purchase Agreements.

Under the new policy, a Private Power Board is being constituted so as to facilitate one window operation. The Board will be responsible for coordinating with all the agencies and Ministries concerned and taking decisions, monitoring the performance of private sector projects in accordance with the agreements, and safeguarding the interests of the consumers.

H.                ISSUANCE OF SEPARATE  SRO:

A number of exemptions and fiscal incentives are already in existence, while certain new incentives have been proposed under the new policy. A separate Statutory Revisionary Order (SRO) is being issued for private sector power plants so that incentives and concessions given in various regulations and directives are placed together and consolidated to facilitate understanding and implementation of the incentives package.

1. SUPPLY AND IMPORT  OF FUEL:

Private investors will be responsible for arrangements of fuel for their power plants. They are free to opt either making their own importation and transportation of foel (oil, LPG and LNG) for their power plants (including development of import handling and transportation infrastructure, if needed), or enter into a Fuel Supply Agreement (FSA) with producing or marketing companis, either in the public or private sector. In any case, the fuel price will remain a "pass-through" based on the price changes made by the public sector (GOP) in the same fuel.

However, in case the FSA is made with a public sector organization, the GOP will guarantee the performance of fuel supplier.

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1. PROCEDURES  FOR  APPLICATION  AND PROCESSING  OF PROPOSALS:

1. Unsolicited   Proposals:

i)                   On receipt of a fee of Rs 5,0001= the Private Power Board (PPB), currently Private Power Cell, will register the applicants and provide them with a  set of documents comprising Brochure outlining new policy, Model IA, PPA and FSA, application  form  and  format  of bank guarantee.

ii)                  Applications will be accepted by PPB against payment of a non­ refundable application fee to be received  as follows:

iii)                In case PPB considers  that the proposal has been  found to be technically and financially viable, a Letter of Interest will be issued to the Sponsors of the project. Within six weeks of the receipt of the Letter of Interest from PPB, the applicant shall have to furnish a Performance Guarantee, valid for one year and encashable without recourse to the applicant, in the form of  an  irrevocable  bank guarantee from a scheduled local bank or from a reputed foreign bank acceptable to PPB. Insurance or Corporate Bonds shall not be acceptable as Performance Guarantee. The amount of Performance Guarantee shall  be Rs 100,000 per MW  based on the capacity for which LOS will be issued. If the Guarantee is not furnished within six weeks, the Letter of Interest will automatically lapse, and neither the Sponsor nor the project company shall have any claim for compensation or damages against the Government of Pakistan or any other Governmental  agency on any grounds.

iv)                On receipt and acceptance of Performance Guarantee by the PPB, a Letter of Support will immediately be issued to the Sponsors. The IA and PPA will be initialled/signed within a period of six weeks of the issuance of the LOS.

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The Guarantee will be encashed in case the Sponsors are unable to achieve financial close within one year of the issuance of the LOS. Under normal circumstances no extensions will be granted. However, if on the Sponsors' request for extension, PPB is satisfied that delays are due to the factors beyond the control of the Sponsors and financial close will be achieved very shortly, an extension of a maximu m of three months will be given against extending the validity period of the Guarantee and raising the Guarantee amount by 100% i.e. Rs 200,000 per MW.

1. Solicited Proposals:

In case of a solicitation for a specific project by the PPB, the pre­ qualifications of the bidders will be made through advertisement in the international press. After receipt of proposals the pre-qualified bidders will be ranked according to the bid criteria. A premiu m will be given to the minimum time indicated for achieving financial close, start of construction aild commercial operations of the project. The first ranked party will be given 15 days to submit the Performance Guarantee covering the period of financial close indicated in the bid, failing which the second ranked bidder will be invited and so on. If the Performance Guarantee of the first party is forfeited, the second ranked party will be provided an opportunity to submit the Performance Guarantee and go ahead for the financial close, and so on.

1. Projects  in the Pipeline:

The new policy will also apply to all other projects currently in the pipeline: for which LOI/LOSs have been issued. The Sponsors of such projects will be issued Letters of Invitation alongwith a copy of the new policy document and draft IA, PPA and FSA by the PPC/PPB. They will be invited to convey their acceptance, and deposit the Application Fee and Performance Guarantee in the amounts prescribed under paragraphs J.1(ii) and J.1(iii) above within three weeks of the date of the Letter. If the Sponsors decline to proceed further under the new policy, the GOP will be entitled to allocate the site to any other investor. The project's Sponsors will be expected to finalize/initial the IA, PPA and FSA within six weeks of their acceptance of the Invitation, and to achieve financial close within 8 months from initialling/signing of IA, PPA and FSA. In case the financial close is not achieved within 8 months, the guarantee will be liable for encashment/extension as stated under paragraph J. l(iv) .above.

1. Preferred Locations:

A list of preferred locations for thermal power projects alongwith desired capacity will be made available with the initial set of documents on request. GOP will prefer that the projects are located on these sites. However, any other location will also be considered subject to its feasibility from load, transmission and environment points of view.

K.        INTERCONNECTION  OF THE PROJECT  TO W APDA/KESC TRANSMISSION SYSTEM:

The power will be purchased from the private power sellers at the outgoing terminal (interconnection point) of the HV/EHV substation of the power plant and the transmission line for interconnection with the national grid will be provided by WAPDA/KESC. The cost of interconnecting facilities upto outgoing terminals of the private power projects (including step-up autotransformers, HV/EHV breakers and associated switchgear) will be borne by the private power sellers.

L.         VALIDITY  PERIOD OF THE BULK  POWER  TARIFF:

The .Bulk Power Tariff will be applicable for the projects  executing agreements between January 1, 1994 to December 31, 1994. The premium of 0-.25 Cents/kWh will be applicable to the projects commissioned before the end of 1997. The tariff will be revised on annual basis and the new Bulk Power Tariff will be announced for application from January 1 to December 31 every year.

M.               INDUSTRIAL SELF-GENERATION  PROJECTS:

The incentives offered by the Government for setting up companies for self­ generation by industries have drawn an encouraging response. In order to give further impetus to, and accelerate setting up of self-generation plants in industry, legislation along the lines of PURPA i.e. Public Utility Regulatory Policy Act of 1978, USA is being enacted to encourage small to medium scale power production in the industrial sector. The legislation will provide such industries with the following options:

1. Sale of surplus power to the power utility, subject to the guarantee that the utility will buy any and all such power offered for sale, and that the full avoided costs will be paid for such purchases. (These currently (1993-94) vary between 73 & 206 Ps/kWh depending upon time of the day & season. Details are available in Annexure- 11.). Alternatively, the producer may opt for an as-available, as-needed type of arrangement for sale at 80% of the bulk tariff rate.

1. In case of industry situated in rural areas, away from the national grid, the industry will be encouraged to set up and operate a rural distribution network in its vicinity, for which subsidies similar to those implicit in WAPDA' s rural tariffs will be provided by the Government. A package of incentives for setting industry in rural areas to promote integrated rural development will be a part of the proposed legislation.

In addition to the proposed legislation, the Government will pro-actively support and promote development of energy-efficient generation capacity in the industrial sector through preparation of feasibility reports in respect of energy-efficient generation technologies such as combined cycle gas turbine, gas-diesel plants and thermal plants using agricultural wastes as fuel.

  ANNEXURE-1

PROCEDURE FOR CALCULATION  OF BULK POWER TARIFF

  The break-up of the Bulk Power  Tariff for first  ten years  is as under:-

The tariff is based on certain assumptions which are described in para 5.

 CALCULATION   OF CAPACITY  PRICE  AS  RS./KWIMONTI!:

The Capacity Price  (CP) as Rs/kW/month  can be calculated  asfollows:

Rupees/kW/month   =  CP Rs/kWh x kWh sold at 60% plant factor   -;-  Total Capacity kW  -;- Number of months

1.301 x 525.6 x  Hf   -;-  lOO x  ld  -;-  12  =  Rs 569.8/kW!month

1. PROCEDURE FOR APPLICATION OF BULK POWER TARIFF

1. The levelized tariff over .life of the project is being offered to provide flexibility to the sponsors to match their annual debt service requirements. The sponsors of private power projects will submit their year-wise tariff profile for the life of the project.  The tariff will be acceptable if:

i)                the average tariff for first ten years does not exceed US Cents 6.5/kWh (Rs 1.952/kWh).

ii)              the annual base tariff does not exceed US Cents 8.33/kWh (Rs.2.5/kWh) in the first year and US Cents 6.66/kWh (Rs 2/kWh) in any subsequent year.

iii)            the levelized tariff for  the life of the project  does not exceed  US Cents 5.91/kWh (P'"5·

1. 776/kWh) based on the BPT assumptions.

1. The break-up of the tariff is as under:

i)                ENERGY PRICE

The energy price comprises the Fuel Component and Variable O&M Component.

Fuel component for the pU1poses of the Bulk Power Tariff has been taken as Rs.O. 621/kWh to be paid on the basis of actual energy delivered to WAPDAIKESC. If as a result of higher thermal efficiencies, depending upon the technology used , thefuel component is reduced , an equivalent increase will be allowed in the escalable component of the Capacity Price so

that the overall tariff remains unchanged.

The variable O&M component of the tariff can be adjusted within a band having afloor of Rs 0.03/kWh and a ceiling of Rs 0.10/kWh (Rs 0.20/kWh for diesel generator sets). A corresponding change will be made in the escalable component of the Capacity Price.

ii)               CAPACITY PRICE CCPJ

The CP will be paid in arrears as Rupees/Kilowatts on a monthly basis. It will be broken into thefollowing three components:-

Escalable component

Non-Escalabie  componentForeign Exchange Risk Insurance

a)                ESCALABLE  COMPONENT  (EC)

This includes the fixed operations and maintenance cost , the insurance cost, the administrative cost and the return  on equity etc.  Its  magnitude  is Rs  157/kW/month (Rs 0.359/kWh) and it is only adjustable against change, if any, proposed in the Energy Price by the investors. Once determined at the time of financial close, the basefigure will

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remain unchanged during the project life and only indexation will be provided as per procedure.

b)                 NON-ESCALABLE COMPONENT (NEC)

This component covers the Debt Servicing Charges including payments of principal, interest and otherfee to the lenders. This component will decline with the passage of time as the loans are repaid. Once adjusted at .the time offinancial close, this component will not be further indexed.

c)                 FOREIGN EXCHANGE RISK INSURANCE (FERIJ

This component covers the premium payable to the State Bank of Pakistan for obtaining Foreign Exchange Risk Insurance onforeign debts.

1. INDEXATION OF TARIFF:

1. ENERGY PRICE:

i)        FUEL  COST:

Escalation infuel component will be provided over the life of the project on the basis of changes in thefuel prices maintaining the agreed heat rate (theniial efficiency) as constant.

ii)          VARIABLE O&M:

This component is directly escalable against exchange rate variations of Pak Rupee to US Dollar and US inflation rate. For determining the Exchange Rate, State Bank of Pakistan's IT&OD selling rate will apply. For determining the inflation rate the Consumer Price Index (CPI) of the United States of America as published by the International Monetary Fund (IMF) in the International Financial Statistics (IFS) will be applied.

The base date for application of indexation will be January 1, 1994. The indexation will apply prospectively on a semi-annual basis.

1. CAPACITY PRICE:

i)                ESCALABLE   COM PONENT:

This component will be escalated on the pattern of variable O&M.

ii)         NON-ESCALABLE  COMPONENT:

This component will be adjusted at financial close, for the variation in exchange rates of Pak Rupee to US Dollar. The adjustment factor for this component will be equal to 0.7%

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for each 1 % variation in Dollar Rupee exchange rate. Once adjusted at the time of.financial close, this component will not befurther  indexed during life of the project.

iii)         FOREIGN EXCHANGE RISK INSURANCE:

This is a pass through item. The provision for this component has been made in the tariff as Rs 0.12/kWh (first ten years average) based on the prevailing FERI ratefor US$ as on January 1, 1994. It will either be paid directly to SBP after commercial operations of the project on the basis of actual invoices or it will be indexed in direct proportion for the variation in FER! rate for  US$ as on January 1, 1994 and that applicable at the time of

.financial close.

1. ASSUMPTIONS:

The assumptions for the BPT are as under:-

1. The Rupee Dollar exchange rate has been taken as 1US$=Rupees 30.03. For any changes, the SBP's TI&OD Selling Rate will be applied.

1. The import of machinery and equipment for  the power plants has been treated as exempt from whole of the Custom Duty, Iqra, Import License Fee, Flood Relief Surcharge and Sales Tax.

C.   Spare parts  @ 5% of the C&F value of Imported Plant & Equipment has been included in the capital cost, free  of all duties/taxes as mentioned inpara 5(B).

1. Thermal efficiency of 38.6% andfuel price for RFO @ Rupees 2,843.50 per tonne having calorific value of 10,200 kilocalories per Kg (gross) have been assumed.

1. The Companies incoryorated in Pakistan for the sole puryose of Power Generation have been treated <is exempt from Coryorate Tax on their income from revenues out of sale of electricity to WAPDAIKESC.

1. The non-resident lenders shall not be liable to taxation in Pakistan.

G.   The companies are liable to withhold and pay  to the Government of Pakistan as full  and final income tax liability of their contractors @ 4 % of the relevant payments made by the Company to the Direct Contractors plus 4% of the relevant payments made by the Contractors to their direct sub-contractors so that (i) the Company shall deduct income tax @ 4 % from its relevant payments to the Direct Contractors; (ii) the Direct Contractors will deduct 4% from the relevant payments to the direct sub-contractors.

H.     The tariff does not contain provisions for workers welfare fund and workers participation fund. These will be pass through items to be paid  ill the tariff on the basis of actual expenses by the Company, if any, under these heads.

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1. The tarijjdoes not contain 0.5% turnover tax on revenues and if it is to bepaid during operations, the tarijj will be increased accordingly,

1. Withholding tax on dividends on shares of the Company shall be payable @ 7.5% and the CentralBoard of Revenue shall exempt shareholders of the private power companies from any withholdingtax in excess of 7.5%.

K. Non-M uslim and non-resident shareholders shall be exemptfrom thepayment of Zakat on dividendspaid by the Company.

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ANNEXURE-II

SEASONAL-CUM-TIME  OF DAY TARIFF FOR POWER SELLERS UNDER INDUSTRIAL  SELF-GENERATION  SCHEME

Ihe following seasonal-cum-time-of-day tariff will be applicable for industrial self-generators and for consumers who will use WAPDA supply only in case of emergencies or overhauling of their ownpower plants, so that they may have a strong incentive to spare power when it has high value for national economy.

Sale by  WAPDAIKESC

Peak  rates:

Off-peak rates:

Ps 228/kWh  + FAS Ps 114/kWh  + FAS

Buy Back  by  WAPDAIKESC(based on current avoided costs)

DEC-JULY

(Ps!kWhJ

AUG-NOV

(Ps/kWh)

Peak rates:

Off-peak rates:

206

82

103

73