Opportunities & Challenges by Nadeem Babar Orient Power Company Ltd November 2015 1
The Opportunity Market offers long term opportunities of growth for those who understand the risks Half 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 effect Suppressed demand and in-house load is high, resulting in need of 7,000-10,000 MW in the next few years Returns offered are market based 2
What is on the horizon New Projects of Generation Demand growth is strong but supply additions are insufficient Current 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 more Need at least 20,000 MW addition in the next 10 years; Transmission Lines in Private Sector Potential Privatizations 3
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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 5
Per Capita Electricity Consumption 6
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? 7
What does Pakistan offer Major growth potential in the sector Well established legal system & independent judiciary Most macroeconomic indicators trending upwards Sector is the top priority in government s reform agenda Returns are market based: most investors have made good profits 8
What Does Pakistan Offer Policy Policy framework is very good and contracts well structured No restriction on foreign ownership Legal protections of investment Long Term PPAs No Corporate Income Tax Only 5% customs duty; 0% for renewables Pass through of exchange rate & fuel prices Political FM risk taken by the government 9
Challenges Fuel 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 Infrastructure Transmission lines need major additions Ports/Railway need large investments to support new coal fired power plants being planned More LNG terminals and new pipelines needed for gas import Sector Financials Losses resulting in continuing gap in payables and receivables resulting in continuing circular debt Privatization/Deregulation lacking firm timelines 10
How is GOP facing them The Finance Ministry is providing subsidy to fund the lifeline subsidy, but not the continuing gap because of losses/recovery Circular debt is being kept in 200-250 Bln but through controlled dispatch GOP focus on adding cheaper coal based power to lower average cost of generation First LNG terminal completed; more planned A move to upfront tariff regime to eliminate concerns about delays in tariff determination CPEC financing based projects, and public sector funding based projects launched 11
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 subsidy Coordination between regulators and the ministries (MoWP and MNPR) needs to be improved Past culture of investigations and disputes needs to end; after dispute resolution, decisions need to be implemented Market needs to be freed up for B2B sales 12
What does all this mean in the context of Insurance Nature of projects changing to many large scale, foreign financing projects Large scale public projects New local players entering the market New technologies and equipment being introduced, some of which does not have experience in Pakistan Many new opportunities are arising but risks need to be better assessed especially for DSU and BI 13