Opportunities & Challenges by Nadeem Babar Orient Power ... 2015/upload/Nadeem Babar.pdf · What Does Pakistan Offer – Policy Policy framework is very good and contracts well structured

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Opportunities & Challenges

by

Nadeem BabarOrient Power Company Ltd

November 2015

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The OpportunityMarket offers long term opportunities of

growth for those who understand the risksHalf of Power produced in Pakistan is by

private sector (one of the highest in world)Pakistan economy losing 2-3% GDP because

of lack of power; increase in power increases GDP and has an accelerator effectSuppressed demand and in-house load is

high, resulting in need of 7,000-10,000 MW in the next few yearsReturns offered are market based

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What is on the horizon

New Projects of GenerationDemand growth is strong but supply additions are insufficientCurrent shortfall at peak ranges from 5000 MW depending on season; load growing at 7%p.a. Suppressed demand and shift of in-house generation to grid will increase even moreNeed at least 20,000 MW addition in the next 10 years;

Transmission Lines in Private SectorPotential Privatizations

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Per Capita Electricity Consumption

United States 12,272 kwh (2013)Germany 7,270 kwh(2014)

China 4,295 kwh (2014)

India 952 kwh (2014)Pakistan 495 kwh (2014)

(India Per Capita Income PPP: $5418)(Pakistan Per Capita Income PPP: $4295)

Sources: India: CEA, China: IndexMundi, Pakistan: NEPRA, USG, IEA, IMF, World Bank

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Per Capita Electricity Consumption

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What do investors look for?Demand/Supply Gap: Is there unmet demand

Is fuel available or can it be arranged/ transported?

Is the legal system well developed and judiciary independent?

Are the macroeconomic trends positive?

Is the power policy structure attractive?

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What does Pakistan offer

Major growth potential in the sectorWell established legal system & independent judiciaryMost macroeconomic indicators trending upwards Sector is the top priority in government’s reform agendaReturns are market based: most investors have made good profits

What Does Pakistan Offer – Policy

Policy framework is very good and contracts well structured

No restriction on foreign ownershipLegal protections of investmentLong Term PPAsNo Corporate Income TaxOnly 5% customs duty; 0% for renewablesPass through of exchange rate & fuel pricesPolitical FM risk taken by the government

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ChallengesFuel Supply Constraints

(i) Gas supply tight, although LNG import has now started (ii) imported coal logistics are uncertain (iii) renewables like solar/wind are not base-load

Associated InfrastructureTransmission lines need major additionsPorts/Railway need large investments to support new coal fired power plants being plannedMore LNG terminals and new pipelines needed for gas import

Sector FinancialsLosses resulting in continuing gap in payables and receivables resulting in continuing “circular debt”Privatization/Deregulation lacking firm timelines

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How is GOP facing themThe Finance Ministry is providing subsidy to fund the lifeline subsidy, but not the continuing gap because of losses/recoveryCircular debt is being kept in 200-250 Bln but through controlled dispatchGOP focus on adding cheaper coal based power to lower average cost of generationFirst LNG terminal completed; more plannedA move to upfront tariff regime to eliminate concerns about delays in tariff determinationCPEC financing based projects, and public sector funding based projects launched

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Challenges that GOP needs to face up to

Addition of generation without controlling the leaking bucket of DISCOs will increase circular debt Finance Ministry has to keep providing a realistically budgeted subsidyCoordination between regulators and the ministries (MoWP and MNPR) needs to be improvedPast culture of investigations and disputes needs to end; after dispute resolution, decisions need to be implementedMarket needs to be freed up for B2B sales

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What does all this mean in the context of Insurance

Nature of projects changing to many large scale, foreign financing projectsLarge scale public projectsNew local players entering the marketNew technologies and equipment being introduced, some of which does not have experience in PakistanMany new opportunities are arising but risks need to be better assessed especially for DSU and BI