Hydropower projects in AJ&K: Govt likely to extend GoP guarantee

MUSHTAQ GHUMMAN

ISLAMABAD: Federal Government is likely to extend GoP guarantee for hydropower projects being established in Azad Jammu and Kashmir, top of which is 174 MW Patrind hydropower project, official sources told Business Recorder.

Giving the background, the sources said, Economic Coordination Committee (ECC) of the Cabinet in 2007 had decided to provide indemnity to the foreign lenders through Direct Agreements - Implementation Agreement (IA) & Power Purchase Agreement (PPA) with the laws of England as the governing laws, to the effect that if the IA, PPA or the GoP Guarantee becomes illegal, invalid, or unenforceable due to change in law, the GoP shall indemnify the project company or the lenders for any cost, loss or liability resulting from such illegality, invalidity or unenforceability, which amount would equal what would have been received under the IA, PPA or the GoP Guarantee, had the IA, PPA or the GoP Guarantee not become illegal, invalid or unenforceable. The IA, PPA and the GoP Guarantee shall continue to be governed by the laws of Pakistan.

Pursuant to this decision of the ECC, indemnity has been provided to power projects of Engro Energy (Private) Limited, Uch II Power (Private) Limited and Laraib Energy Limited. These power projects have participation of foreign lenders.

Meanwhile, the ECC of the Cabinet in January 2010 approved standard security agreements for hydropower projects under the policy for Power Generation 2002 providing, amongst others, for GoP’s protection and guarantee against payment obligations, defaults etc. of the Azad Jammu & Kashmir (AJ&K)/Provincial Governments entities since most of the hydel potential is located in AJ&K and Khyber Pakhtunkhwa.

In case of AJ&K, there is an independent legal and constitutional framework as provided in AJ&K Interim Constitution Act 1974. Accordingly, in order to provide concessions and incentives for private sector investment in hydropower projects, the AJ&K Council, which is responsible for subject of electricity in AJ&K, has adopted the GOP Policy for Power Generation Projects 2002.

According to sources, since AJ&K is a distinct legal jurisdiction, the foreign lenders and shareholders of hydropower projects, such as 147 MW Patrind Hydropower Project, have requested for an extended GOP indemnity such that it also protects against illegality, invalidity or unenforceability of AJ&K Agreements (AJ&K IA, WUA) due to change in laws of AJ&K. This is a critical condition precedent for disbursement of financing by foreign lenders of the project that is International Finance Corporation, Islamic Development Bank and Asian Development Bank.

Patrind Hydropower Project is being developed with hundred percent (100 percent) equity investment of Government of Korea and due to achieve financial closing shortly and the project company has executed all the standardised security agreements except for direct agreements due to non-availability of this extended GoP indemnity.

Keeping in view all the constitutional issue, Ministry of Water and Power has recommended that where foreign lenders are participating in the hydropower projects, the existing direct agreements (IA & PPA) with laws of England as the governing law may contain an indemnity to the effect that if the AJ&K IA (AJ&K IA) or Water Use Agreement (WUA) becomes illegal, void, invalid or unenforceable due to Change in Laws of AJ&K or Pakistan, the GoP shall indemnify the project company or the lenders for any cost, loss or liability resulting from such illegality, voidness, invalidity or unenforceability, which amount shall equal what would have been received under the AJ&K IA, or WUA had AJ&K IA or WUA not become illegal, void, invalid or unenforceable. The GoP indemnity shall continue to be applicable as per its approved terms and conditions.