Legal Primer on Bidding On Tenders for the Disposal of Redundant, Old, and Defunct Power Plants in Pakistan

The disposal of old power plants in Pakistan presents a unique set of legal, financial, and regulatory challenges for bidders. Whether dealing with entities like Lakhra Power Generation Company Ltd (LPGCL) or similar government-owned energy assets, prospective buyers must be well-versed in the Public Procurement Regulatory Authority (PPRA) Rules, environmental laws, taxation requirements, and contractual obligations. This primer serves as an essential guide for mitigating risks and ensuring compliance in bidding for such projects.

1. Legal and Regulatory Framework

The procurement and disposal of government-owned assets fall under the purview of the Public Procurement Regulatory Authority (PPRA) Rules 2004. The rules mandate open competitive bidding, transparency, and compliance with principles of fairness. Under Rule 33, procuring agencies have the right to reject all bids at any time before award without incurring liability, making bid investments a calculated risk. Moreover, Rule 36(b) governs the Single-Stage, Two-Envelope bidding system, wherein technical proposals are evaluated before financial bids are opened. This emphasizes the importance of a technically sound submission.

Disposal Requirements:

• Public assets must be sold on an “as-is, where-is” basis while providing full and accurate descriptions of the assets.
• The Integrity Pact is mandatory for high-value procurements, ensuring bidders refrain from corrupt or collusive practices.
• Bidders should confirm whether the Council of Common Interests (CCI) has approved the disposal, given its jurisdiction over inter-provincial energy assets (as seen in past Supreme Court rulings on energy privatization).

2. Financial Risks and Hidden Costs

Bidders should anticipate the following financial obligations beyond the bid price:

• Taxes:
  • Advance Income Tax (Section 236A of the Income Tax Ordinance, 2001) – up to 10% of the gross sale price.
  • Sales Tax (Sales Tax Act, 1990) – generally 17% on goods sold, unless an exemption applies.
  • Provincial Sales Tax (e.g., Sindh Sales Tax on Services Act, 2011) – potential applicability to dismantling services.
• Dismantling & Removal Costs:
  • The bidder must bear all costs related to removal, transportation, and site clearance.
  • Disposal of hazardous waste (e.g., asbestos, furnace ash) may require compliance with Pakistan’s Environmental Protection Act (PEPA) 1997 and Sindh EPA Act 2014.
• Performance Security:
  • A 10% Performance Security (Bank Guarantee) is required within 14 days of contract award.
  • Delays trigger Liquidated Damages (LDs) at 0.05% per day, capped at 10% of the contract price.
• Payment Terms:
  • The full bid amount must be paid within 7 days of contract signing, requiring strong liquidity planning.
  • Late payments attract finance charges at KIBOR + 3% per annum.

3. Environmental Compliance and Liabilities

Environmental laws impose stringent duties on asset purchasers. Bidders must be mindful of the following:

• Environmental Impact Assessment (EIA) Requirements:
  • Section 12 of PEPA 1997 requires an Initial Environmental Examination (IEE) or full EIA for projects likely to have an environmental impact.
  • The contractor bears the responsibility for obtaining regulatory clearances before dismantling.
• Waste Management and Hazardous Substances:
  • Hazardous Substances Rules, 2003 regulate the disposal of toxic materials like PCB-laden transformers and industrial chemicals.
  • Any contamination discovered post-transfer could lead to retrospective liability under the “polluter pays” principle.

4. Contractual Pitfalls and Liability Traps

• No Warranty on Assets:
  • Assets are sold without warranties, meaning bidders must conduct extensive due diligence.
  • Intellectual property (IP) rights related to plant design and schematics are explicitly excluded from the sale.
• Indemnity & Liability:
  • The contractor must indemnify LPGCL against any legal claims, environmental liabilities, or worker injuries arising during project execution.
  • Liability provisions are one-sided, with unlimited exposure to legal claims unless capped in contract negotiations.
• Force Majeure & Frustration:
  • Under Section 56 of the Contract Act, 1872, impossibility of performance is a valid defense, but economic hardship is not.
  • Force majeure relief depends on specific contract clauses and must be invoked formally.

5. Anti-Corruption and Legal Risks

Bidders must operate with full transparency to avoid legal entanglements.

• National Accountability Ordinance (NAO) 1999:
  • Bribery, misrepresentation, or collusion can lead to criminal prosecution by NAB with penalties including asset seizures and blacklisting.
  • Past NAB inquiries into power sector contracts underscore the importance of ethical compliance.
• Competition Act, 2010:
  • Bid-rigging and cartelization can trigger investigations by the Competition Commission of Pakistan (CCP).
  • Heavy fines (up to 10% of annual turnover) may apply for anti-competitive conduct.

6. Case Law & Judicial Precedents

Past Supreme Court and High Court rulings have shaped the legal landscape for power asset transactions. Notable cases include:

• Lakhra Power Plant Lease Case (2013): The Supreme Court annulled the lease due to non-transparency and lack of CCI approval.
• Pakistan Steel Mills Privatisation (2006): The Court voided the sale due to undervaluation and procedural lapses.
• Rental Power Plants (RPP) Case (2012): The Court found procurement irregularities and ordered the cancellation of contracts, leading to NAB investigations.
• Pakistan Gas Port Ltd. v. SSGC (2018): Sindh High Court ruled that evaluation criteria must be strictly followed.

7.  Best Practices for Bidders

Prospective bidders must take a proactive approach to legal and financial risk management by:

• Conducting detailed due diligence on asset conditions, environmental liabilities, and contract clauses.
• Seeking pre-bid clarifications on ambiguous contract terms to avoid disputes.
• Engaging tax advisors to preemptively address hidden taxation costs.
• Implementing a compliance framework to ensure adherence to procurement laws and anti-corruption regulations.
• Maintaining comprehensive documentation to protect against post-award audits or legal challenges.

Typical Problematic Clauses in the Bidding Document and Their Risks for Local Pakistani Bidders

Bidding for the disposal of redundant, old, and defunct power plants in Pakistan comes with significant legal and financial risks, particularly for local bidders who may lack the financial and legal firepower of international firms. The bidding documents we have reviewed often,  while appearing procedurally sound, contain several clauses that raise serious concerns regarding potential hidden costs, post-bid liabilities, and compliance pitfalls. Below are some of the most concerning clauses that should raise red flags for local Pakistani bidders.

1. Bid Prices and Taxation Ambiguities
   “The total Bid Price quoted in the Price Schedule for each Lot shall be exclusive of any incidental charges, duties, all taxes including income tax and sales tax, cesses, commissions, fees and other levies, etc., which shall be paid/borne by and/or the liability of the Bidder as per the Applicable Law in relation to the Disposal of Assets.”
   Risk: This clause places the entire tax burden squarely on the winning bidder without specifying a ceiling on potential liabilities. Given the unpredictability of Pakistan’s tax authorities and the retrospective application of tax laws, bidders may find themselves paying significantly more than anticipated. Sales tax, income tax, advance withholding tax under Section 236A of the Income Tax Ordinance, and possible excise duties could inflate project costs by over 20-30%, significantly eroding profit margins.
2. Bid Security and Its Forfeiture
   “The Bid Security may be forfeited: (a) If the Bidder withdraws his bid except as provided in IB.19.1; (b) In the case of successful Bidder, fails to furnish the required Performance Security.”
   Risk: This clause means that if a local bidder fails to secure financing or is unable to fulfill an unforeseen contractual obligation, they lose their bid security without recourse. Given that bid securities are often substantial sums—typically 2% of the reserve price—the financial loss could be devastating, especially for small-to-mid-sized Pakistani firms.
3. Employer’s Right to Annul the Bidding Process
   “The Employer reserves the right to annul the bidding process and reject all Bids, at any time prior to award of the Contract, without thereby incurring any liability to the affected Bidders or any obligation.”
   Risk: Local bidders investing significant time and financial resources into bidding face the real risk of the entire process being scrapped at the discretion of the employer. Without a refund mechanism for bidding expenses, this clause can result in wasted resources and strategic setbacks.
4. Performance Security and Its Stringent Requirements
   “The successful Bidder shall furnish to the Employer a Performance Security in the form and the amount stipulated in the Conditions of Contract, within a period of 14 days after the receipt of Letter of Acceptance.”
   Risk: This clause is particularly risky for local bidders who may struggle with short turnaround times to arrange substantial performance securities. The requirement to provide security within 14 days is unrealistic, given the stringent lending conditions imposed by Pakistani banks.
5. Integrity Pact
   “The Bidder shall sign and stamp the Integrity Pact provided at Schedule-G to Bid in the Bidding Documents for all Federal Government procurement contracts exceeding PKR ten million. Failure to provide such Integrity Pact shall make the Bid non-responsive.”
   Risk: While anti-corruption compliance is essential, the enforceability of the Integrity Pact is questionable. If used selectively, it could be weaponized against local bidders, particularly those competing against politically connected entities.
6. Joint Venture (JV) Obligations
   “All partners of the joint venture shall at all times and under all circumstances be liable jointly and severally for the execution of the Contract.”
   Risk: This clause presents a serious liability issue for local Pakistani firms entering JVs with foreign entities. Even if a local bidder holds only a minority stake in the JV, they can be held fully liable for the entire contractual obligations, potentially leading to disproportionate financial exposure.

Legal and Strategic Considerations for Local Pakistani Bidders in Power Sector Tenders and JV Arrangements

The Pakistani power sector, while offering lucrative opportunities for local firms, is also fraught with risks that can render an otherwise successful bid into a financial and legal nightmare. For local bidders, especially those seeking joint ventures with foreign companies, the following legal and strategic considerations are crucial.

1. Understanding the Regulatory Landscape
Local bidders must ensure full compliance with Pakistan’s Public Procurement Regulatory Authority (PPRA) Rules, 2004, Disposal of Assets Regulations, 2024, Environmental Protection Act, 1997, and Income Tax Ordinance, 2001. Failure to comply with these can lead to heavy fines, disqualification, or even legal action.

2. Evaluating the Hidden Costs in Tenders
Beyond the reserve price, bidders must carefully assess:

• Environmental liabilities: Old power plants often contain hazardous materials such as asbestos, which can require costly disposal.
• Local government levies: Municipal and provincial authorities may impose additional fees for site clearance and transportation.
• Workforce liabilities: Redundant employees may claim compensation under Pakistan’s Labour Laws.

3. Structuring Joint Ventures with Foreign Companies Wisely
For Pakistani firms entering JVs with foreign companies, the following must be considered:

• Liability Distribution: The JV agreement must clearly outline which party is responsible for which obligations. It is advisable to cap local liability to a fixed percentage.
• Dispute Resolution: Ensure that arbitration clauses specify a neutral forum such as the London Court of International Arbitration (LCIA) rather than Pakistan, where local courts may favour state entities.
• Exit Mechanisms: Local bidders must have a contractual right to exit the JV in case of legal disputes or failure to secure financing.

4. Protecting Against Procurement and Corruption Risks
Pakistan’s procurement sector is notorious for delays, political interference, and corruption. Local bidders should:

• Engage a Competent Local Legal Counsel: Many foreign firms assume they can navigate the system alone, which is a costly mistake. Having a well-versed Pakistani lawyer mitigates compliance risks. Josh and Mak International team can be contacted at [email protected] 
• Monitor Political Stability: A change in government often leads to the scrapping or renegotiation of contracts. Locking in pre-bid commitments through escrow mechanisms can provide security.
• Avoid Middlemen and Fixers: While they claim to expedite processes, they often engage in underhanded dealings, exposing bidders to legal risks under Pakistan’s Anti-Corruption Laws.

5. Post-Bid Risks and Risk Mitigation Strategies
Winning the bid does not guarantee smooth execution. Pakistani bidders must anticipate:

• Delays in Site Handover: Government entities frequently fail to deliver assets on time, causing financial losses.
• Retroactive Taxation: It is not uncommon for tax authorities to reassess and impose new taxes after contract execution.
• Performance Bond Forfeiture Risks: Given that performance bonds are typically tied up for extended periods, bidders must negotiate partial releases upon reaching key milestones.

Final Thoughts: A Cautionary Approach for Local Bidders

Local Pakistani bidders looking to capitalize on power sector tenders must move with extreme caution. The regulatory and contractual pitfalls are extensive, and a lack of legal due diligence can lead to financial ruin. 

Whether bidding independently or in a JV, a sophisticated legal strategy is not optional—it is a necessity. Every clause must be scrutinized, and no assumption should be made that things will proceed as expected. If the contract is not water-tight, then it is not worth bidding for.

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At Josh and Mak International, we approach the law with the gravitas it deserves, understanding that every legal matter carries profound personal and ethical weight. Guided by principles of justice, fairness, and unwavering integrity, we see our role as more than advocates—we are stewards of our clients’ rights and aspirations. Our work is shaped by a commitment to excellence, meticulous attention to detail, and a deep respect for the dignity inherent in every legal challenge. With a steadfast focus on achieving equitable outcomes, we bring clarity to complexity and champion your cause with the insight and care it merits. Let us stand as your devoted partners in the pursuit of justice and peace.

Contact us at [email protected] for Legal Consultation.

https://joshandmakinternational.com/

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