From: hassan@cup.portal.com (hassan monu alam)
Newsgroups: soc.culture.bangladesh,soc.culture.indian,soc.culture.pakistan
Subject: Pakistan scheme to be Intl Blueprint
Date: Wed,  4 Nov 92 21:59:18 PDT
Organization: The Portal System (TM)

Far Eastern Economic Review
------------------------------
New power hub
Pakistan scheme to be international blueprint

Sy Salamat Ali in Islamabad and
Anthony Rowley in Hongkong

On a rocky, flat piece of wasteland on
the banks of the River Hub in Paki-
stan, earth-moving machines are
preparing the ground for the construction
of a scheme intended to increase the coun-
try's electricity output by up to a quarter.
But the US$1.5 billion project is breaking
ground in another way that could help
countries in and beyond Asia overcome
growing infrastructure bottlenecks.

The radical novelty of the Hub River
power project lies in the financial arrange-
ments for the scheme, by tapping private
sources of money for what has tradition-
ally been the public-sector domain of
power supply. And it attempts to over-
come the problems of securing and repay-
ing foreign loans for a project which earns
only local currency.

John Blackton, the Pakistan director of
the US Agency for International Develop-
ment calls it a "make or break" test for this
type of project in the developing world. If
it succeeds, it would encourage other such
schemes elsewhere to bring the private sec-
tor into the financing of public infrastructure
Ebrahim Elwan, private-sector
investment manager for the World
Bank in Pakistan, says it is "a blue-
print" for developing countries.

The Hub River scheme is the
largest project of its kind ever un-
dertaken. According to the arrange-
ment, a group of private companies
will build the power station with
an eventual capacity of up to 1,950
megawatts and then over 30 years charge
the Pakistan state utility an agreed rate for
the electricity it supplies.

In Asia, similar schemes have been tried
on only a small scale with power projects
in the Philippines and in southern China.
However, these cases have adopted the
"build, operate and transfer" model,
whereby they are eventually handed over
to the government. The Hub River project
is to remain privately owned.

The scheme is the "most complex piece
of project financing in any developing
country," according to an official of the
World Bank in Washington, which is cen-
trally involved in the scheme.

According to the World Bank's private-
sector arm, the Intemational Finance Corp.
(IFC), Up to US$1 trillion will need to be
invested in power stations by the develop-
ing world in the 1990s. In Asia, demand
for electricity is likely to increase by 12% a
year, compared with 7% during the 1980s.
Among developing countries, electric
power is mainly supplied by public utili-
ties, and governments "may not be able to
raise the necessary capital" to supply fu-
ture power needs, the IFC warns.

Private-sector involvement in electric
power is not new; nearly half of Indone-
sia's electricity is generated by small "cap-
tive" private plants. But it is more efficient
to generate electricity in large plants and to
supply consumers via public grids.

This is why the Hub River project, lo-
cated 65 kilometres north of Pakistan's
business capital of Karachi, is so important.
The private sector is involved in supplying
the money for both the US$324 million of
equity for the scheme and the US$1.2 bil-
lion of loans, including a
substantial quantity of
foreign borrowings.

Xenol Industries of Saudi Arabia is the
overall sponsor for the project, while
Japanese trading house Mitsui & Co. leads
a consortium of project builders. US, Ital-
ian, French and Japanese firms will pro-
vide equipment for, and supervise, the
project, while British Electricity Interna-
tional, a subsidiary of British utility Na-
tional Power, will operate and maintain it.

The equity portion of the project com-
prises US$127 million to be put up by a
consortium led by Xenol. Another US$107
million will be raised through the public
sale of convertible bonds. And a further
US$90 million will come from other over-
seas investors.

Sources close to the project say that it
aims to sell electricity at Rs 1.36 (5.4 US
cents) per kilowatt-hour for the first 12
years of supply and at Rs 0.94 per kilo-
watt-hour for the remaining 18 years. This
price is considerably higher than the cur-
rent cost of producing thermal electricity
by the state utility, which averages Rs 0.79
per kilowatt-hour. But the average price for
electricity in the OECD is higher--8 US
cents per kilowatt-hour in 1988.

The financing structure is particularly
innovative. This is designed so that com-
mercial lenders supply money against the
revenue stream of the project rather than
against the balance sheet of the Pakistan
Government. It involves some US$600 mil-
lion of commercial loans and US$400 mil-
lion of special funds from the World Bank
plus Japanese, US, French and Italian offi-
cial concessional loans and grants. The re-
maining US$500 million will come from
Pakistani lenders.

Unlike the traditional "sovereign risk"
project, in which the host government
guarantees the foreign loans, the lenders
take on the "project" risk if, say, costs rise
because of construction delays. The sover-
eign risk is limited to government guaran-
tees against changes in, say, foreign-ex-
change rates and electricity charges.

The World Bank is guaranteeing the
availability of foreign exchange to service
the debt on behalf of the firms holding
equity in the project. Sufficient foreign ex-
change to service external debts will be
placed by the World Bank in an escrow
account, but the intention is that Pakistan
should earn enough foreign exchange an-
nually from exports to service the foreign
loans on the project.

Countries such as Pakistan could not
normally hope to borrow commercial
money for anything like the 12-15 years in
which the project is expected to pay off its
debts. The escrow account and the World
Bank guarantee provide a form of security
for lenders. And this will enable the matu-
rity of the loans to match a realistic pay-
back schedule.

This should help overcome a major con-
straint on such schemes for anything other
than telecommunications projects where
part of the revenues are earned in foreign
currency. For power and transport projects
in developing countries, it is a different
story.

The IFC estimates that electric-power
projects in the developing world as a whole
will require nearly US$40 billion a year of
foreign-currency financing in the 1990s. So
the Hub River project will be carefully
monitored to see whether its lessons can
be applied elsewhere. The only limitation
on doing so is the sheer complexity of such
projects, say officials of the World Bank
and of the Asian Development Bank.

If the Hub River project succeeds, it will
be a blessing for Pakistan. Karachi urgently
needs an additional 1,400 megawatts of
new electricity capacity, while the country
as a whole loses millions of US dollars a
year because of power blackouts.
Newsgroups: soc.culture.bangladesh