Lessons from the Independent Private Power Experience in Pakistan
The discussion paper reviews the IPP program and concludes with several lessons learned. Se tting a bulk tariff ceiling allowed Pakistan to alleviate its power shortage through private generation in record time; however, too much power was contracted with little regard for least cost expansion. Private investment in generation should be aligned with the country's sector reforms and also social, economic, political and institutional governance. In addition, solicitation of IPPs should be on a competitive basis and staggered over a few years so that changes in international investors' assessment of country and contract risks could lead to declining bid prices. Finally, while the risk of renegotiation can be minimized by competitive bidding and transparent contracts, this risk cannot be wholly avoided. All parties have to recognize that renegotiation is reasonable provided it is done in a mutually acceptable manner.
Pakistan’s first private power project, the Hub Power Project, and its subsequent 1994 private power policy – both supported by the World Bank – were lauded by the international investment community. Pakistan succeeded in attracting over $5 billion in investment and contracting about 4,500 megawatts of private generation in record time. However, macroeconomic instability in the country and financial problems in the power utility revealed some of the shortcomings in the policy and its implementation. Unilateral attempts to terminate and re-negotiate IPP contracts led to a tumultuous three year workout period. The Government, project sponsors and lenders all looked to the World Bank Group during this critical time as it was heavily involved in providing financing and guarantees to more than half of the IPPs under construction or operating in Pakistan at the time. The Bank Group was credited with facilitating an orderly resolution of the IPP disputes and helping to avert a wider Government default on IPP contracts which could have had macroeconomic implications for Pakistan. Several lessons that can be taken from the workout experience are highlighted in this discussion paper.
