At Josh and Mak International, we strive to provide our clients with comprehensive and insightful legal analysis. This article aims to dissect the Hydel Power Policy of 1995, introduced by the Government of Pakistan (GOP) to foster private sector involvement in the development of hydropower projects. This policy was pivotal in promoting the use of indigenous hydel resources and addressing the growing energy needs of the country. Below, we provide a detailed examination of the policy’s framework, incentives, and implications for potential investors.
Introduction
The Hydel Power Policy of 1995 was established to complement the earlier policy framework announced in March 1994, which primarily focused on thermal power plants. Recognising the economic and environmental benefits of hydropower, the GOP devised this policy to harness the country’s significant hydro potential. This policy is designed to attract private sector investment in hydropower generation, with an emphasis on utilising indigenous resources, promoting economic growth, and ensuring energy affordability.
Key Features of the Hydel Power Policy
1. Choice of Site and Equipment:
- The policy allows investors to propose hydel power plants on tributaries and canal systems at any location, with the freedom to choose any type of equipment.
- It covers feasible hydropower plants with capacities up to 300 MW, including run-of-the-river types and those with nominal storage for daily fluctuations.
- Hydropower plants requiring reservoirs for seasonal storage are excluded from private sector development, except for plants above 300 MW which do not affect downstream users’ water rights.
2. Feasibility Studies:
- Public Sector Studies: Feasibility studies conducted by public agencies like WAPDA and SHYDO are available to private entrepreneurs for a fee, and investors can verify these studies or conduct their own appraisals.
- Private Sector Studies: Investors may also conduct their own feasibility studies, ensuring compliance with criteria set by international bodies like the World Bank or Asian Development Bank.
3. Financing Arrangements:
- Projects will involve limited recourse financing, with investors relying on revenues from electricity sales for returns.
- A minimum equity investment of 20% of the total capital cost is required.
- The Private Sector Energy Development Fund (PSEDF), supported by the World Bank and other agencies, may provide up to 30% of capital costs with a variable interest rate and extended maturity period.
4. Fiscal Incentives:
- Exemption from corporate income tax on income from electricity sales.
- Duty-free import of plant and equipment, except for a 2% custom duty on imported machinery.
- Permission to issue corporate bonds and discounted shares, with tax benefits similar to those for Non-Banking Financing Institutions.
5. Security Package:
- Model Implementation and Power Purchase Agreements (IA and PPA) have been developed to streamline negotiations.
- Projects will revert to government ownership after 25 years, with original entrepreneurs given priority for operational leases.
- Government guarantees include protection against specific force majeure risks and changes in taxes and duties.
6. Tariff for Bulk Purchase of Power:
- Tariffs are structured based on plant capacity, with specific rates for plants up to 20 MW, between 21 MW and 300 MW, and above 300 MW.
- The policy includes provisions for levelized tariffs and adjustments for currency fluctuations and inflation.
7. Environmental Considerations:
- Compliance with Pakistan’s environmental protection laws is mandatory, requiring detailed Environmental Impact Assessments (EIA).
8. Interconnection to WAPDA Transmission System:
- WAPDA will purchase bulk power and manage interconnection to the national grid, with cost-sharing arrangements to be determined.
Implications and Critique from an International Perspective
Strengths:
- Attractive Incentives: The policy offers substantial fiscal incentives, including tax exemptions and duty-free imports, which are highly attractive to foreign investors.
- Structured Framework: The provision of model agreements and a clear procedural framework ensures transparency and predictability, which are essential for international investments.
Weaknesses:
- Regulatory and Bureaucratic Hurdles: Despite the structured framework, the bureaucratic processes required to obtain necessary approvals can be cumbersome, potentially deterring investors.
- Environmental Oversight: The policy mandates environmental compliance but lacks robust guidelines and enforcement mechanisms, which are crucial for international standards.
- Financial Viability: The reliance on fixed tariffs and government guarantees may not align with dynamic market conditions, and the absence of competitive bidding for tariff determination could lead to inefficiencies.
- Technological Innovation: The policy primarily focuses on traditional hydropower technologies, with limited emphasis on integrating modern innovations and renewable energy solutions.
Conclusion
The Hydel Power Policy of 1995 represents a significant step towards leveraging Pakistan’s hydropower potential and attracting private sector investment. While the policy offers attractive incentives and a structured framework, addressing the highlighted weaknesses is crucial for aligning with international best practices. Enhancing regulatory efficiency, ensuring robust environmental safeguards, and promoting technological innovation will be vital for creating a sustainable and attractive investment environment. Josh and Mak International remains committed to providing expert legal advice to navigate these opportunities and challenges within Pakistan’s energy sector.
