Money Matters

Power and policies

Money Matters
By Engr. Hussain Ahmad Siddiqui
Mon, 08, 21

As early as 1990, the State Engineering Corporation (SEC) of the Ministry of Industries and Production had already embarked upon an ambitious effort to develop joint ventures with global companies for undertaking thermal power plant projects on turn-key basis. The looming electricity shortage in the country was duly anticipated – considering the existing 10,800 MW installed generation capacity – and the market demand for power plants was strong. It was no small achievement to attract foreign manufacturers as consortium partners in this venture, while it was an equally herculean task to secure government support for such a policy trajectory.

Power and policies

As early as 1990, the State Engineering Corporation (SEC) of the Ministry of Industries and Production had already embarked upon an ambitious effort to develop joint ventures with global companies for undertaking thermal power plant projects on turn-key basis. The looming electricity shortage in the country was duly anticipated – considering the existing 10,800 MW installed generation capacity – and the market demand for power plants was strong. It was no small achievement to attract foreign manufacturers as consortium partners in this venture, while it was an equally herculean task to secure government support for such a policy trajectory.

Within a short period, SEC had developed capacity and capability to supply conventional steam-based power plants (oil/ gas and coal) and combined cycle power plants, under technology transfer agreements with western companies such as GEC-Alsthom of France and the UK (now Alstom) and General Electric (GE) of the USA. These power plants could be set up in public or private sector on EPC (Engineering, Procurement and Construction) basis along with project financing.

However, as with most well-meaning efforts of specialists in the government sector, the domestic engineering industry was never allowed to develop the power sector thanks largely to a group of ill-meaning politicians and bureaucrats, whose omissions and commissions brought the country to today’s pitiful situation.

Initially there were some successes. The government of the time adopted measures to support local engineering industry, which translated into Ministry of Water and Power’s formal support for indigenisation plans as early as in January 1991. The PML-N government had also disallowed turnkey imports of power plants as well – vide Prime Minister’s directive of April 14, 1992 – emphasising on optimal indigenous content of such power plants. This allowed Heavy Mechanical Complex (HMC), then a company of SEC, to manufacture a significant portion of machinery and equipment for WAPDA’s Muzaffargarh Power Station Extension Unit 4 of 320 MW capacity for which the Chinese were the EPC contractors.

Earlier in 1991, HMC had produced and supplied equipment for Boiler Package of KESC (now K-Electric) Bin Qasim Thermal Power Plant Extension Units 3, 4, 5 and 6, each of 210 MW, under consortium with Hitachi (Japan) and Deutsche Babcock (Germany). WAPDA had also agreed to place orders on SEC for a complete thermal power plant of 210/300 MW capacity every year subject to satisfactory arrangements for technology transfer and financial package.

Pursuant to plan, SEC concluded a General Cooperation Agreement, on June 24, 1992, with GEC Alsthom, turbo-generator manufacturers, and Deutsche Babcock of Germany (now Babcock Borsig), manufacturers of steam boilers, for collaboration in joint execution of establishing complete thermal power plants under technology transfer arrangements. It was also agreed to participate in the refurbishment, upgrading and modernisation of existing thermal power plants.

The agreement had provision of setting up a joint venture company in Pakistan at a later stage for the purpose, and focused on human resource development in the areas of design, engineering and manufacturing. The foreign partners also agreed to provide technical and financial support for upgrading domestic production facilities to increase local content under a phased indigenisation programme. Subsequently, the detailed Framework Consortium Agreement was signed on October 02, 1992. Meanwhile, WAPDA decided to set up a unit of 360 MW capacity as extension of Muzaffargarh thermal power plant with the help of this Consortium.

Accordingly on December 13, 1993, a Framework Manufacturing Licensing and Transfer of Technology Agreement was signed with GEC Alsthom. The Agreement being valid for ten years, allowed SEC companies to progressively manufacture turbine, generator and allied equipment under license, for which GEC Alsthom agreed to provide generous technical assistance. This was a major breakthrough. A detailed technical, commercial and financial proposal was thus submitted to WAPDA on December 21, 1993, offering turnkey project, without civil works, at US$250 million, with SEC share of equivalent $50 million utilising national resources of engineering and manufacturing in public as well as private sector. The foreign portion was to be financed under a combination of state credit and commercial loans from France, the UK and Germany, whereas local financing was to be arranged by SEC through the then LMM (Locally Manufactured Machinery) Scheme of State Bank of Pakistan.

But by then the government had changed and Benazir Bhutto became the Prime Minister in October 1993. Progress on all WAPDA projects in pipeline was stalled and Power Policy 1994, titled “Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan”, was launched in March 1994.

Nonetheless, Chairman WAPDA still confirmed on June 12, 1994 that the SEC proposal for Muzaffargarh project was being recommended to the government. Interestingly, a cabinet minister from Balochistan on his first day in office had summoned the then Chairman SEC to his office only to introduce him to two of his “friends” who would meet the Chairman for securing ‘party funds’. The two friends came over the very next day and indicated that if their financial interest was not accommodated by SEC in the proposed Muzaffargarh thermal power project, it will never see the light of day. Their request for contributions was ignored and so, not surprisingly, the project was killed off from high up.

Another example of calculated dismantling of institutional efforts involved an MOU signed by SEC with GE and Cockrill Mechanical Industries (CMI) of Belgium on April 27, 1993 to establish collaboration for manufacture and supply of complete combined cycle power plants under transfer of technology. WAPDA had initially asked proposals for Quetta Combined Cycle project of 300 MW and Sahiwal-I Combined Cycle project of 600 MW. Sahiwal-II Combined Cycle project of 600 MW was proposed to be established in private sector, for which WAPDA had already prepared a detailed feasibility study and the World Bank was likely to finance. The proposed consortium had agreed to participate in all the three projects. GE was to supply steam turbines for the projects, whereas CMI was responsible for the boilers and SEC for components and auxiliaries of boilers, equipment for balance of plant and services for installation, erection and commissioning.

Subsequent to the later decision of WAPDA to go for a revised 300-MW power plant at Sahiwal in the first instance, the Secretary Water & Power, Chairman SEC and Member Power, WAPDA had detailed discussions at the headquarters of GE in the USA, also attended by CMI, in September 1993, finalising parameters of the project and outline of technical proposal and financial package. Target price for the turnkey supply of the plant including civil works was $225 million, excluding land costs. Value-wise share of SEC for the supply of electromechanical equipment was agreed to be 30% of total bid price. Each consortium member was to arrange credit facility to finance the cost of its share of supplies and services. CMI also indicated part of financing through state credit (Belgium) at zero-rate interest.

Based on above parameters, WAPDA issued Letter of Interest to SEC for Sahiwal project on November 13, 1993 and a comprehensive Consortium Agreement was concluded in Islamabad on February 22, 1994. The 45-page document covered scope of supplies and services and proportionate share, management of project, and scope of transfer of technology to SEC, besides contractual conditions such as project schedule, payment terms, guarantees/warranty, taxes, liquidated damages for delays, insurance, disputes, etc. Generation cost worked out to be 3.76 cents per kWh using natural gas and 4.56 cents operating with furnace oil. Thus, a detailed proposal was presented to WAPDA on March 5, 1994 for 300 MW Sahiwal project, with firm price of $217 million, exclusive of civil works and financing costs, to be completed in 39 months. Financial package covered attractive commercial loans from the USA and Belgium without asking for sovereign guarantees from Pakistan.

With all this considerable groundwork done and internationally agreed to, the new government in its wisdom decided that WAPDA would not establish any more thermal power plants, declaring that it is in direct conflict with its Power Policy announced in March 1994. Under these circumstances, the consortium partners agreed in November 1994 to switch the Sahiwal project to private sector introducing an international investor from the USA to develop the project. The government did not allow this either. Ministry of Planning and Development in its correspondence of March 01, 1995 gave the reason that the policy package had already attracted investment proposals for about 17,000 MW for thermal-based power plants, and there was no need for additional generation capacity – although in the end only 3,400 MW was installed by the IPPs.

It is worth mentioning that the proposed Sahiwal project was to be constructed at $750 per kW. The 1,292 MW Hub Power Project (HUBCO), the first private power project in the country was constructed at $1.6 billion or $800 per kW. This new Power Policy of 1994 had assumed cost of a project at no less than $1,000 per kW, and indicative bulk tariff of 6.5 cents per unit for first ten years.

Thus, another effort towards indigenous and cost-effective power generation was thwarted. Eventually, the proposed summary of the Ministry of Industries and Production titled ‘Indigenisation of Thermal Power Plant Equipment’ forwarded to the ECC of the Cabinet for approval, was unceremoniously dumped under instructions of the office of the Prime Minister, communicated by then Secretary Water and Power, Salman Faruqui on May 14, 1995. Even though the then SAPM Shahid Hasan Khan had committed in writing to SEC on November 13, 1993 that “maximum indigenisation of power equipments should be at core of our energy policy”, they were only hollow words.

With the final blow being dealt to the years of efforts by relevant state institutions to pre-empt the power crisis, nineteen Independent Power Producers were allowed under the new policy regime to exact ridiculous margins of profit by way of exorbitant prices and lopsided terms and conditions, without any chance for indigenous learning or expertise. The disaster that this move proved to be for the economy and the people cannot be understated and Pakistan could not recover from this monumental disservice till today.


The writer is retired chairman of the State Engineering Corporation