Ten imported coal power projects of 6600 MW capacity proposed to be established at Gaddani (Balochistan) have hit serious obstacles with significant differences between the project sponsors and Private Power & Infrastructure Board (PPIB) on different matters related to the projects, sources close to Managing Director PPIB told Business Recorder.
The sources said coal power projects also face transparency issues and a Director dealing with coal projects resigned recently citing personal reasons. However, the outgoing Director wrote a “negative” comment on the coal projects’ files. His close associates are quoting him as saying that he does not want to meet the fate of the then Managing Director N.A. Zuberi.
The government has started many initiatives to overcome power load shedding including power generation projects based on imported and local coal. The Policy for Power Generation Projects 2002 provides for standardised security package documents for power projects in the private sector. These draft standardised security package documents for coal power projects comprise of Implementation Agreement (IA) and Power Purchase Agreement (PPA) which provide a legal and contractual framework for the financial closing, engineering, procurement, construction, commissioning, operation, and maintenance on Build, Own and Operate basis (BOO) of power projects in the private sector.
PPIB, in pursuance to its mandate under the PPIB Act 2012, is fully authorised to prepare these coal security package documents. To accomplish the task which requires a detailed due diligence as per internationally acceptable standards for the bankability of upcoming power projects, PPIB engaged services of international consultant, Thomas West Jr. who had earlier drafted similar documents.
In order to assess the bankability of and market test these documents, views and comments of the stakeholders, including project sponsors and investors who are in process of setting up of coal power projects, were obtained.
The technical, financial and regulatory aspects in the coal security package documents were deliberated in detail with the power purchaser, Punjab Power Development Board, Pakistan Power Management Company, Sindh Engro Coal Mining Company Limited, and international consultant with a wide and diversified international experience in power sector.
Earlier approved agreements have to be modified for coal power projects keeping in view specific and peculiar requirements associated with coal power including: (i) a dedicated coal jetty (ii) mine-mouth coal power plant (iii) availability and use of coal (iv) coal power-specific political and change in law risks afforded protection under the force majeure provisions (v) land lease, support services and water use agreements defined in project agreements (vi) guaranteed availability of 85% (vii) minimum off take of available capacity (take or pay) at 50% (viii) heat rate test at the time of commissioning (ix) penalties by the power purchaser and company in case of delay in performances and (x) revolving account for securing payments by the power purchaser, etc.
The coal security package documents are designed to cater for requirements of the imported, local, mine mouth integrated coal generation power plants. However, certain project-specific amendments would be inevitable during negotiations with the project companies provided GoP obligations do not increase.
Pursuant to Pakistan-China Economic Corridor agreement of 8 November 2014, a revolving account for securing the differential/shortfall in the recovery of payments of the power purchaser has been provided to secure payments of the sponsors / investors. This arrangement will be finalised by the Ministry of Finance. Moreover, GoP under the standardised security package documents is undertaking certain risks and costs of the public sector entities (Federal/Provincial) under the Lease Agreement(LA), Support Services Agreement (SSA) and Water Use Agreement (WUA) in the events of aphorise majeure and a default which should be indemnified by the respective / concerned public sector entities.
PPIB has rejected most of the demands of projects sponsors, saying that all the risks pertaining to the project development prior to Financial Close are to be borne by the sponsors and GoP cannot undertake or assume such risks or compensate private sponsors. The Board further stated that security package documents cannot be made effective prior to the financial close.
Sponsors argue that all security package documents should be effective at the time of signing so as to protect the equity invested in the project prior to achievement of financial close. Sponsors have also sought right to establish a six-month revolving SBLC, waiver of liquidated damages or payment of capacity and suspension of generation.
However, PPIB has rejected the demands of sponsors on the following reasons: (i) GoP guarantees the payment obligations of National Transmission and Despatach Company (NTDC) through the GoP guarantee; (ii) delayed payment interest is payable by the power purchaser for delay in payments; (iii) right of termination for payment default of the power purchaser exists under the security package documents; (iv) pursuant to CPEC agreement between Governments of Pakistan and China of November 2014 signed at Beijing an escrow/revolving account has been agreed; (v) IPPs’ obligation to generate power is independent of power obligations of the power purchaser and thereof no right of suspension to generate electricity can be given to IPPs; (vi) payment of capacity without generation will be a violation of superior court judgement; and (vii) SBLC cannot be opened due to financial constraints of the power purchaser.
Project sponsors argued that defaults under Support Services Agreement (SSA) and Lease Agreement (LA) should be considered as defaults under IA and PPA and also treated as Force Majeure Events (FME) under the IA and PPA.
PPIB, in its courter arguments, said that SSA and LA are treated as part of project agreement under IA.
“Material breaches of SSA and LA by the public sector entities (including provincial entities) are [the responsibility of] GoP . GoP should get a counter-indemnity from support services provider and leasor in respect of its defaults and breaches and duty to mitigate/compensate the effects of FME which may lead to termination of the security package documents and payment of compensation amounts. Default under the LA and SSA cannot be treated as an FME under the IA,” the sources continued.
Sponsors further pressed the PPIB that security package documents should be governed by the UK law and ICC arbitration at Singapore. However, PPIB rejected the sponsors’ demands on the following grounds: (i) rights and obligations of the parties accrue and arise under laws of Pakistan; (ii) governing law of security package documents as approved by ECC from time to time under Power Policy 2002 and Renewable Energy Policy 2006 for thermal (oil and gas), hydel, wind, baggase is the law of Pakistan; (iii) international arbitration under London Court of international arbitration is provided for; (iv) in case of foreign lenders and sponsors, direct agreement between the GoP, sponsors and lenders is governed by laws of England for creation and assessment of security interests in relation to the project; and (v) ICC arbitration at Singapore is not agreeable as Pakistan is familiar with the legal framework of the UK. In reply to a question, the sources said that GoP guarantees the payment obligations of the power purchaser under the PPA which is the principal document for generating revenue for IPPs in a project financing mode.
Other project agreements including LA, SSA, water use agreement, coal supplier and coal transport are commercial transactions and hence risk and cost should be mutually agreed and allocated between the parties without recourse to the GoP, the sources further added.
Inland Coal Transportation Agreement (ICTA) between sponsors and coal transporters (railways, land carriage transporters, ship operators) should be entered on commercial terms and conditions without involving GoP guarantee under the IA.
PPIB has also rejected a proposal of coal project sponsors which stated that in case of upfront tariff determination, term-sheet for the financing should not be provided for review of GoP.
“GoP should have the right to review the terms and conditions of financing in order to evaluate the obligations and liabilities of the GoP at the financial close which will have an impact on the compensation amounts at the time of termination,” the sources concluded.
SOURCE: RECORDER REPORT