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ISLAMABAD: Planning Commission has reportedly barred Power Division from carrying out alteration in power generation policy aimed at facilitating Chinese investment in Kohala Hydropower Project and Patrind Hydropower Project under China Pakistan Economic Corridor (CPEC).

Both the multi-billion dollar hydropower projects to be established in AJ&K were included in CPEC during PML(N) government in 2014. The tariff of Kohala hydropower project has been fixed at Cents 7.85/kWh (Rs 13.12/kWh at present dollar-rupee conversion rate whereas tariff of Patrind hydropower project has been agreed at Cents 7.12/kWh which is equal to Rs 11.90/kWh, sans taxes.

Planning Division argued that investors must have clarity and confidence in the policy so that private investments in the long-term infrastructure projects are possible. Therefore, all power projects being developed under Power Policy 2002. PPIB/Power Division should conform to the policy.

"Abrupt change in policy or terms should not be made that could impact on the viability or delay the financial close of the projects. Proposed changes, whenever, required, should be shared with the stakeholders before incorporation in the policy," stated Fouzia Ayub, Deputy Chief Energy.

Planning Commission further stated that the two projects - Azad Pattan and Kohola are both energy priority projects under the CPEC framework agreement with China. Further, these are first of their kind investments in the AJ&K in the region for hydropower projects, adding that any change in the policy would adversely affect the execution of these projects.

"If required, the policy should be revised in future of new IPPs and institutional strengthening should be done to implement and support the policy," she added. Planning Commission's CPEC wing is being headed by Lt-General, Asim Salim Bajwa (retired).

Tripartite Agreements of both projects have already been signed between the GoP, project companies and GoAJ&K.

According to the agreements, during the term, the company shall not be subject to taxation in Pakistan on its profits and gains and turnover tax derived from electric power generation, whether such profit or gains and turnover tax are construed to have been earned in Pakistan or in AJ&K, including payments made by the GoP to the company under and pursuant to this GoPIA. Local and foreign investors will be governed and taxed according to the applicable laws of Pakistan subject to bilateral tax treaties, foreign investors, where no bilateral tax treaties exist with the respective countries shall be taxed in accordance with the applicable laws of Pakistan.

For delayed payment, Kibor plus 2 per cent per annum, without compounding, would be calculated for the actual number of days for which the relevant amount remains unpaid on the basis of 365 days.

According to the Power Policy 2002, PPIB, amongst others, is processing following projects on BOOT (build, own, operate and transfer) basis; (i) 1124 Kohala Hydropower Project) to be located on river Jhelum in Azad Jammu & Kashmir (AJ&K) being developed by Kohala Hydropower Company Limited (KHCL) with China's Three Gorges Corporation (CTG), IFC and Silk Fund as sponsors of the project;(ii) 700.7 MW Azad Pattan Hydropower Project to be located on river Jhelum on dual boundary between district Rawalpindi, Punjab and district Sudhnoti, AJ&K, with China Gezhouba Group Company Limited (CGGC) as the sponsor; and (iii) 640 Mahl Hydropower Project to be located on river Jhelum on combined boundary among Punjab, KP and AJ&P, being developed by Mahal Power Company (Private ) Limited (MPCL) with China Three Gorges and Trans Tech Pakistan as the sponsors of the Mahal project.

Kohala Hydropower Project and Azad-Pattan Project are included in and being processed under China Pakistan Economic Corridor Energy Project Cooperation (CPEC) Agreement of November 8, 2014 executed between Pakistan and China . In order to extend 2002 policy incentives, concessions and protections by way of a legal and contractual framework, the 2002 policy requires that Standardized Security Package Documents i.e. Implementation Agreement (IA)(GoPIA), GoP guarantee, Power Purchase Agreement (PPA), Water Use Agreement (WUA) would be prepared in order to eliminate the need for protracted negotiations with private investors. Accordingly, GoP/provincial/AJ&K entities as per their respective mandate prepared the documents and the ECC on January 12, 2010 had approved the standard GoPIA and PPA and salient features of the WUA (since payment under WUA was also being guaranteed by GoP). The drafts were prepared based on concessions, incentives and protections provided under the 2002 policy salient amongst which are as follows; (i) guarantee the contractual obligations of its entities; namely (Wapda/KESC} CPPA-G/NTDC and provincial/AJK governments ,even though some or all the utilities may be privatized during the term of various agreements (this include obligations under AJ&KIA) and WUAs); (ii) provide protection against specified "political risks) (this includes change in law, war, riots, politically motivated countrywide strikes, embargo etc; (iii) provide protection against charges in the taxes and duties regime; (iv) ensure convertibility of Pakistan rupees into US dollars at the then prevailing exchange rates and the remitability of foreign exchange to cover necessary payments related to the projects, including debt servicing and payment of dividends; (v) two-part tariff regime i.e. (capacity payment and energy payment); (vi) tariff components will be adjusted and in accordance, against exchange rate variation, inflation, etc; (vii) hydrological risks have been parked on the power purchaser and; (viii) fiscal and financial incentives as mentioned in para-7 of 2002 policy.

Power Division is of the view that CPPA-G has been hived-off from NTDC and both have distinct roles under their respective constitution documents and Nepra's licences, it was imperative that their respective roles in the PPA are also contractually separated. Accordingly, the standard PPA has been restructured/redrafted to bifurcate respective obligations of NTDC and CPPA-G within their respective mandates (with one exception that payment obligations still remain with CPPA-G). With PPA now a Tripartite Agreement (TPPA), GoPIA, Azad Jammu & Kashmir Agreement (AJ&KIA), WUA also required changes to make them consistent with the structure of TPPA. Furthermore, the earlier approved standard documents were approved almost a decade ago and owning to introduction of NTDC as party to the TPPA, earlier approved standardized documents have been revised and certain improvements and other drafting changes have also been made therein by the respective entities i.e. PPIB, CPPA-G, NTDC, Governments of AJ&K/provinces while keeping in view the precedents and experiences. The standard drafts GoPIA, TPPA, AJKIA and WUA as finalized by PPIB, CPPA-G/ NTDC, GoAJ&K and province i.e. Punjab/KP respectively.

It was pointed out that while the negotiations with KHCL were underway, certain specific issues cropped up. All outstanding issues were presented to ECC on October 2, 2019 and April 8 and decisions were made on each respective case. In the light of such decisions and as to way forward, GoP, GoAJ&K and the KHPL would also enter into Tripartite Agreement which has been signed during the last week of June 2020.

The government has authorised Boards of PPIB, CPPA-G/ NTDC and Governments of AJ&K/ provinces to make and approve any project specific amendments in the respective standard security package documents, as the case may be, required during final negotiations provided GoP obligations or liabilities under the GoPIA and guarantee are not increased. Boards of PPIB, CPPA-G/ NTDC and governments of AJ&K/provinces have been further authorised to make and approve any amendments in the respective standard security package documents, as the case may be, required to comply with Nepra's tariff determination and approval/licence for specific projects; and (iii) these boards have been authorised to make and approve amendments in the respective projects specific GoPIA, TPPA, AJ&KIA, and AJ&K WUA, as the case may be, of the Kohala project in view of decisions of ECC.

During discussion, the ECC was informed about the deliberations held in the Cabinet Committee on Energy (CCoE) on the same subject. The CCoE, in its meetings held in the previous week had directed the Power Division to look into certain key questions related to the agreement and pricing. The ECC members needed clarification about waiver of sovereign immunity and the mode of arbitration to be adopted. It was also suggested that the Attorney General's office must be consulted, if not done so far. Also in terms of taking the responsibility of the AJK government's obligations, it was suggested that the transfer of the project to AJK should be subject to clearance of all such liabilities due to the Government of Pakistan. The forum underscored that the Power Division should carry, if it has not already done, the necessary due diligence, in order to avoid any further criticism. It was also underscored that a consistent policy framework would indicate that Pakistan had a stable policy environment, which will, in turn, attract foreign investors.

The Power Division clarified that the office of the Attorney General was appropriately consulted and they had no objection to nomination of London Court of International Arbitration (LCIA) as the dispute resolution forum. Regarding compensation, it was suggested the matter should be taken independently between GoP and the government of AJK. The forum was informed, by the Ministry of Energy, that sponsors had fully agreed to these agreements and the Ministry was ready to defend the proposal at all public and professional forums. It was also pointed out that changes in the security package should be done after careful consideration of the variations on the financial close of the projects. International bankability of the security package should remain a prime objective. The Cabinet recently ratified the minutes of the ECC.

Copyright Business Recorder, 2020

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