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Hydropower project gives hope for exploiting water sector

The successful completion of Pakistan’s first independent hydropower project by a private investor, in record time and with almost no cost escalation, has given hope for harnessing the vast potential of the country’s water sector.

The growth of Pakistan’s water sector, led primarily by Water and Power Development Authority (Wapda,) has been marred by long delays and huge cost overruns of various projects. In such a scenario, mismanagement and other issues emerge as stumbling blocks in turning the enormous hydel potential into reality.

As per official estimates, Pakistan has 100,000 MW of hydel power generation. However, only about 6,500 MW of potential has been harnessed so far.

In Pakistan, a manifold increase has been witnessed in the cost of many hydropower projects due to various reasons. This has led to additional financial burden on the economy, besides unwarranted delays in the availability of cheap and abundant hydel generation for meeting the gap between electricity demand and supply.

Project delays and cost overruns also take place in other parts of the world. According to a report prepared by World Bank Operations and Evaluation Department, average cost of funded hydropower projects overrun to 27 percent, while schedule slips are calculated at 28 percent than estimated at appraisal. The World Commission on Dams said in its report that three fundamental reasons exist for the occurrence of cost overruns and schedule slips. These include poor development estimates and supervision by sponsors, poor implementation by suppliers and contractors and changes in external conditions.

Against this backdrop, Pakistan and AJK’s first private hydropower (independent power producer or IPP) commenced commercial operations this week. Laraib Energy Ltd, a subsidiary of the Hub Power Company (Hubco), is the frontrunner as the 84 MW New Bong hydropower project was successfully commissioned.

The project was scheduled to be completed in 42 months but it was completed three months earlier. In 2008, Hubco agreed to take up a 75 percent interest in the project and joined hands with minority shareholders to achieve financial close in 2009. In just less than four years, the project has become a reality after going through all the procedural issues.

There are many firsts with the completion of this IPP in hydropower sub-sector. It was termed ‘Project Finance Middle East Deal of the Year’ by Euromoney in the year 2009. The New Bong Escape hydropower project is of further importance due to its security package, which has been prepared by the Private Power and Infrastructure Board. The package has been accepted by global investors and lenders and will now form the basis for other private hydropower projects to come.

This initiative also provides a tested model for other projects’ financing through leading financial institutions. Furthermore, its tariff mechanism forms the basis for tariff determination for future hydropower IPPs in Pakistan.

The project has opened doors for immediate implementation of a portfolio of hydropower projects for full scale development of untapped national potential by developing a bankable framework. It will provide impetus to private hydropower projects under process.

Hence, in the backdrop of massive delays and cost overruns, Laraib Energy has shown that it is possible to complete complex projects in record time and with less than five percent cost overruns.

Owing to the project’s completion, the tariff envisaged before the start of construction is substantially intact as the project enters commercial operations. Thus, consumers will be able to reap the benefits of cheap hydel generation.

Lastly, the New Bong Escape project has the distinction of being Pakistan’s first hydropower project to be registered with the United Nations’ Framework Convention on Climate Change as clean mechanism development (CDM) Project. The CDM allows emission-reduction projects in developing countries to earn certified emission reduction credits, each equivalent to one tonne of CO2. By doing so, Laraib Energy will be able to reduce emission by 218,973 tons of CO2 annually. It will help replace 135,000 tons of oil imports valued in excess of $100 million per annum.

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