Spearhead Analysis – 07.02.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
In January of 2008, Pakistan Electric Power Company (PEPCO) negotiated and inked a Rs.23 Billion (approximately US$329 Million) contract with Dong Fang Electric Corporation of China to construct the Nandipur Power Project. A 425 MW (potential capacity of 1,000 MW) combined cycle thermal power plant located near Gujranwala at Nandipur. By June 2010, substantial work had been undertaken and the expected date of completion was estimated to be April 2011. Due to delays with the Ministry of Law & Justice, the project remained “dormant” for almost two years till March 2012. As a result, machinery for the power plant valued at almost US$85 Million kept lying at the Karachi Port. In 2012, Dongfang Electric Corporation, decided to terminate the contract citing heavy losses due to the ongoing bureaucratic delays, and demanded US$40 Million as compensation for the losses suffered.
In June 2013, Pakistan’s Ministry of Water and Power began renegotiation of contract terms with Dongfang Electric Corporation for resumption of work at the Nandipur Power Project. As a result, work resumed in July 2013 and the plant was finally inaugurated in May 2014, after heavy losses and delays of almost two years. Unfortunately, it remained in operation for a mere five days and had to be shut down due to mismanagement and use of inappropriate fuel. The initial project cost of Rs.23 Billion (US$329 Million) ballooned to Rs.57.5 Billion and by some estimates the final cost was Rs.85 Billion on completion in 2015 (though the official figure caps the cost at Rs.65 Billion). That is a multiple of 3.7 times over the initial estimates. The Nandipur power project has become a controversial issue, with inordinate delays, repeated cost over-runs and allegations of mismanagement and ongoing corruption.
It is now estimated that the Nandipur power project is producing electricity at the highest rate from among some 78 projects in operation, despite having the advantage of being one of the most recent additions to the power grid. As per National Electric Power Regulatory Authority (Nepra), the average fuel cost of electricity generated by the 425MW Nandipur project in November stood at about Rs10.25 per unit (kWh) with a capacity utilization of only 42%. The fuel cost is considerably higher than that of older power plants within the private and public sectors, which range between Rs.5.00 and Rs8.30 per unit.
Source: Spearhead Research
As if the problems faced by Nandipur were not enough, the government has recently entered into a 10-year contract with Hydro Electric Power System Engineering Company (HEPSEC) of China for the operation and maintenance (O&M) of the much-hyped Nandipur power project. The terms remain unclear and as in the case of most CPEC-related transactions there appears to be much secrecy around the negotiated terms.
As per DAWN, HEPSEC was confirmed as the lowest bidder at a cost of US$185 Million, which works out to a per unit O&M cost of around 85 paisa on furnace oil – almost 80% higher than the 48 paisa rate allowed earlier by Nepra. This per unit O&M tariff is significantly higher than the 62 paisa per unit for the 1,292MW Hub Power plant and about 35 paisa per unit for AES-Lalpir plant.
Once again a controversial situation is in the offing as the government now has to justify and seek approval from Nepra to outsource operation and maintenance of the Nandipur power plant. Apparently the decision has been undertaken to reduce expenditures, and to bring about latest and efficient practices in power plant management.
The Ministry has also confirmed that work is underway to convert the plant to natural gas by end of April 2017, to improve performance, reduce operating costs, and increase capacity by 100MW to 525MW. Nepra has declined requests by the government to consider the total cost of the Nandipur project at Rs.65 Billion while determining its tariff, and has considered the project’s cost at Rs.42 Billion in a 30-year tariff that averages Rs.11.64 per unit. The government has been seeking Rs.15.63 per unit in view of the project delays, cost over-runs, penalties paid out and the cost of conversion to natural gas. Nepra has suggested that the government scale down its 15% return on equity to 7.5%. The tussles continue.
It is on record that at the time of the PPP government, the law and justice ministry was responsible for delaying the project for about four years, which led to an escalation in cost by 160%, from US$329 Million to US$847 Million, and the estimated loss is over Rs.113 Billion to the national exchequer. However, no one in particular has been held accountable, while the country has been burdened with billions in additional cost.
The Nandipur plant has been a controversial project since inception due to various reasons. It was expected that after the shut down due to technical faults and a tussle between the chief of the power company and the water and power ministry, the issues would finally be laid to rest once the plant commenced operations. However, the series of audits, probes and parliamentary debates, could not pinpoint responsibility and accountability for the problems.
It is unfortunate that another controversy is now being heaped upon the ill-fated Nandipur Power Project with the award of the latest O&M contract. There has been a lot of hype on multiple platforms to bring about an element of transparency and accountability in the negotiations and transactions being undertaken by the Government, but to date most of the multi-billion deals remain shrouded in mystery. It therefore becomes difficult to assess the actual merits and costs associated with such projects. The fact is that Nandipur is one of the most expensive power units not just in terms of construction and installation, but also in terms of running costs, is a worrisome sign and does not bode well for the other projects currently underway. After all there is so much that the country can really afford. The government needs to disclose terms and make the country aware of the actual cost burden on the economy, and in the end on the common man.
According to the government a ten year or two major inspections agreement has been signed by NPGCL with HEPSEC of China for long term maintenance and operation of the plant and this has been done on the recommendation of the regulator in line with worldwide practices. The power plant is currently operating on furnace oil and work is underway to convert it to gas by April 2017. The government claims that this will improve performance, cut maintenance and reduce operating costs.