Extended Annual Review Report
Project Number: 41903 Equity and Guarantee Number: EI7265/GU7265 September 2013
Equity Investment and Guarantee Pakistan: Daharki Power Project
In accordance with ADB’s public communication policy (PCP, 2011), this extended annual review report excludes information referred to in paragraph 67 of the PCP.
CURRENCY EQUIVALENTS
Currency Unit – Pakistan rupee/s (PRe/PRs)
At Appraisal At Project Completion 3 October 2007 16 May 2011
PRe1.00 – $0.0164 PRe1.00 – $0.0136 $1.00 – PRs60.74 $1.00 – PRs73.32
ABBREVIATIONS
ADB – Asian Development Bank COD – commercial operations date DPHL – Daharki Power Holdings Limited EMS – environmental management system EPC – engineering, procurement, and construction FPCDL – Foundation Power Company Daharki Limited HSE – health, safety, and environment IPP – independent power producer KPS – KEPCO Plant Services and Engineering Co. MGCL – Mari Gas Company Limited MPCL – Mari Petroleum Company Limited NTDC – National Transmission and Despatch Company Limited O&M – operation and maintenance PPA – power purchase agreement RBS NV – The Royal Bank of Scotland N.V. RCOD – required commercial operations date ROW – right-of-way RRP – report and recommendation of the President SEPA – Sindh Environmental Protection Agency SRO – Statutory Regulatory Order XARR – extended annual review report
WEIGHTS AND MEASURES
m3 – cubic meter Btu – British thermal unit kV – kilovolt kWh – kilowatt-hour MMCF/day – million cubic feet per day MW – megawatt MWh – megawatt-hour
NOTES
(i) The fiscal year (FY) of the Government of Pakistan ends on 30 June. The fiscal year of Daharki Power Holdings Limited ends on 30 June. (ii) In this report, "$” refers to US dollars.
Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General J. Yamagata, Private Sector Operations Department (PSOD) (OIC) Director M. Barrow, Infrastructure Finance Division 1, PSOD
Team leader S. Kondo, Investment Specialist, PSOD Team members M. Hashimi, Investment Specialist, PSOD C. Alano, Associate Project Analyst, PSOD A. Porras, Senior Safeguards Officer, PSOD R. Samiano, Safeguards Officer, PSOD M. Manabat, Senior Investment Officer, PSOD
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page
BASIC DATA EXECUTIVE SUMMARY i
I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 1 C. Progress Highlights 2 II. EVALUATION 3 A. Project Rationale and Objective 3 B. Development Impact 3 C. ADB Investment Profitability 5 D. ADB Work Quality 5 E. ADB’s Additionality 5 F. Overall Evaluation 5 III. LESSONS 6
APPENDIXES
1. Basic Data: Investment Summary 7 2. Private Sector Development Indicators and Ratings: Infrastructure 8 3. Environment Impact 12 4. Social Impact 15
BASIC DATA
Daharki Power Holdings Limited for the Daharki Power Project (EI No. 7265 – Pakistan) and (GU No. 7265 – Pakistan)
Project Screening, Appraisal, Structuring, Expected Actual Monitoring, and Supervision Concept Clearance Approval August 2005 12 May 2007 Board Approval October 2007 30 October 2007 Financial Agreements Signed November 2007 24 April 2008 First and Final Disbursement of Equity 30 September 2008 Guarantee: First Disbursement of Guaranteed Loan 10 June 2008 Last Disbursement of Guaranteed Loan 2 June 2010 Effective Date of Guarantee 24 April 2008 Termination of Guarantee 5 June 2024 Commercial Operations Date October 2009 16 May 2011 Latest Annual Monitoring Report November 2012 Extended Annual Review Report Mission 9–12 April 2013
Project Administration and Monitoring No. of Missions No. of Person-Days Due Diligence (15-17 August 2000/24-27 July 2000) 2 25 Project Administration (25-26/08;4/6-7/11/05/30-31/08/05) 11 29 Extended Annual Review Mission (19-25 Jun 08) 1 20 Nov03/25-26 Feb 08)
EXECUTIVE SUMMARY
Pakistan is facing an acute power shortage, leading to an increasing number of blackouts and proving a significant drag on economic growth. In addition, private investment in the power sector is hampered by concerns over investment returns. As a result, scarce indigenous fuel resources that could be used for power generation are lying idle, and much- needed increases in generation capacity are being delayed. The project played an important role in filling some of these gaps.
In October 2007, the Board of Directors of the Asian Development Bank (ADB) approved an equity investment in Daharki Power Holdings Limited (DPHL) of up to $2.75 million, and a guarantee in the principal amount of up to $44 million plus interest for the lenders to DPHL. DPHL owns Foundation Power Company Daharki Limited (FPCDL), the project company.
The project is a combined-cycle, low-Btu gas-fired power plant in Daharki, Ghotki District, Sindh Province, Pakistan. The plant consists of one gas turbine, one heat recovery steam generator, and one steam turbine. It has a total installed capacity of 186 MW and a net/dependable capacity of 180 MW. It is a base load plant with 100% dispatch because of its dedicated domestic gas field and resulting low tariff.
Evaluation of the project is based on four main criteria: (i) development impact, (ii) profitability of ADB’s investment, (iii) quality of ADB’s work, and (iv) ADB’s additionality. The results of this analysis were aggregated to derive an overall rating for the project.
The development impact of the project is rated satisfactory. It was evaluated in four categories: (i) private sector development; (ii) business success; (iii) contribution to economic development (economic sustainability); and (iv) environment, social, health, and safety performance.
The contribution to private sector development is rated excellent. As the first low-Btu gas-fired independent power producer (IPP) to reach financial close under the 2002 power policy, FPCDL set a benchmark for other IPPs and encouraged domestic and international investors to look at power generation as an attractive investment opportunity. The project is rated satisfactory for business success and excellent for economic contribution.
The project’s environmental, social, health, and safety performance is rated satisfactory. Environmental impacts were minor, short-term, and temporary during construction, and there were few significant impacts such as air emission, water resource extraction, effluent discharge, noise, or solid waste generation during operation.
The investment outcome of DPHL is rated satisfactory, with a robust collateral structure, timely guarantee fee payments, and a guaranteed return on ADB’s equity investment provided by the put option.
ADB’s work quality is rated satisfactory. ADB’s role in the project was in line with its operating strategies, policies, and standards.
ADB’s additionality is rated excellent. ADB’s participation catalyzed cofinancing for the project and provided reassurance to offshore and onshore lenders regarding the project’s viability, transparency, and governance practices.
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Overall, the project is rated successful. The project demonstrated that indigenous fuel resources with no other economic use can be used to produce additional low-cost power and reduce the constraints on economic growth caused by power shortages. ADB’s involvement encouraged the private sector to invest in IPPs.
I. THE PROJECT
A. Project Background
1. In October 2007, the Board of Directors of the Asian Development Bank (ADB) approved an equity investment in Daharki Power Holdings Limited (DPHL) of up to $2.75 million, and a guarantee in the principal amount of up to $44 million plus interest for the lenders to DPHL. DPHL owns Foundation Power Company Daharki Limited (FPCDL), the project company. The project consists of a 180-MW-, combined-cycle, low-Btu gas-fired power plant in Daharki, Ghotki District, Sindh Province, Pakistan (Daharki Power).
2. DPHL was incorporated in the British Virgin Islands. ADB’s financing partially funded the project through the equity investment in DPHL and through a guarantee on a loan to DPHL. DPHL contributed the proceeds of both the guaranteed loan and the equity investment as equity in FPCDL, which owns the power plant and was used to partially finance the costs of designing and constructing the project.
3. ADB holds 18.64% of the shares of DPHL, while the remaining 81.36% is held by the Fauji Foundation, the project’s major sponsor. ADB’s guarantee obligation is unconditionally counter-guaranteed (and collateralized) by the Fauji Foundation.
4. The Fauji Foundation is a charitable trust and operates on a self-sustaining basis. It channels about 78.5% of its profits from commercial ventures into welfare programs for ex- servicemen and their eligible dependents, who constitute about 7% of the country’s population.
5. The project was fully in line with ADB’s energy sector strategy, which strongly encourages ADB interventions to increase private sector participation to take advantage of the higher operational efficiencies that private operations can achieve and to meet the large capital requirements.1
B. Key Project Features
6. The project has a 25-year, build-own-operate structure, with power off-take supported by a sovereign guarantee. Power from the project is sold to the National Transmission and Despatch Company Limited (NTDC) under a 25-year power purchase agreement (PPA) in accordance with the tariff established by the National Electric Power and Regulatory Authority. At the end of the PPA period, FPCDL will be free to negotiate a new PPA with NTDC or other parties (the plant’s economic life is estimated to be 40 years).
7. The project’s initial capacity was 171 MW at approval. It is a combined-cycle, low-Btu gas-fired power plant in Daharki, Ghotki District, Sindh Province, Pakistan. The plant’s total installed capacity is 186 MW, which consists of one gas turbine (123 MW), one heat recovery steam generator, and one steam turbine (64 MW). The project’s net capacity is 180 MW.
8. The project requires 65 million cubic feet per day (MMCF/day) of gas with a net caloric value of 4.9 kWh/m3 (about 425 Btu), sourced from a deep well in the Mari gas fields under a gas supply agreement with Mari Gas Company Limited (MGCL). MGCL changed its name to Mari Petroleum Company Limited (MPCL) since it recently began exploration of petroleum products in addition to pipeline-quality and low-Btu gas. MPCL presently has 110 MMCF/day of
1 ADB. 2000. Energy Review of the Energy Policy of the Asian Development Bank. Manila.
2 low-Btu gas available from its field of which 65 MMCF/day is allocated to FPCDL and the remaining 45 MMCF/day to Star Power Generation Limited (Star Power).
9. The power plant was constructed under an engineering, procurement, and construction (EPC) contract with Doosan Heavy Industries & Construction Company Limited (Doosan) of the Republic of Korea. Construction started in October 2007. An operation and maintenance agreement was signed in August 2008 with Korea Plant Services & Engineering Company Limited (KPS). KPS later changed its name to KEPCO Plant Services & Engineering Company Limited.
10. The required commercial operations date (RCOD) as per the PPA was 9 October 2009, 25 months after the financial closing on 9 September 2007. The project is one of the first IPPs under the 2002 power policy to reach financial close.
C. Progress Highlights
11. The power plant did not achieve its commercial operations date (COD) until 16 May 2011, 19 months after the RCOD, due to several delays during the construction and testing phase of the power plant. During the construction phase, these delays were due to security issues in the vicinity of the plant, conflicts between tribes whose members were working at the site for the contractor, and the non-availability of commissioning technical field assistants due to security concerns.
12. The first attempt to fire the gas turbine, which was originally planned for April 2009, was conducted on 30 September 2009. During this first attempt, the gas turbine’s auxiliary gearbox was damaged. Replacement work was completed on 30 October 2009. It was then that the first firing attempt was successfully conducted.
13. The power plant began to transmit power into the national grid upon first synchronization of the gas turbine on 16 November 2009. In January 2010 (three months after the RCOD), the plant achieved full load operations. However, six combustion incidents of the gas turbine (in January, March, July, November, and December 2010, and February 2011) further delayed the declaration of COD by 16 months.
14. In February 2011, Doosan and General Electric, the original equipment manufacturer, concluded that defects in the design of the combustion system were the root cause of the failures. Accordingly, they replaced the fuel nozzles with a design to reduce gas velocity in order to improve safety margins against back flash of fuel gases and flame.
15. The power plant’s 8-day reliability test runs were concluded on 15 May 2011, after all the other PPA-related tests had been done. The plant achieved combined cycle mode on the evening of 16 May 2011, upon which COD was declared. Because of the delay in achieving the COD, cost overrun was incurred. The cost overrun was partly recovered from the EPC contractor in the form of liquidated damages and from the insurers in the form of damages and delay in start-up claims. The Fauji Foundation shouldered a portion of the cost overrun by providing a subordinated loan to FPCDL.
16. Plant performance since COD has been satisfactory. The plant has been operating on base load. The plant’s year-to-date (May 2012–March 2013) availability factor was 92.02%, while the average capacity factor for the same period was 91.86%. Total electricity generated for the period was 1,270,359 MWh.
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II. EVALUATION
A. Project Rationale and Objective
17. The project’s objectives as set out in the report and recommendation of the President (RRP) were to narrow the electricity demand-supply gap, promote efficient management of natural resources, and support private sector investment.2
18. Although Pakistan’s power sector deficiencies continue to pose a serious challenge, the project’s objectives have been fulfilled. In FY2012, the gap between electricity supply and demand in Pakistan exceeded the 6,000 MW mark during peak hours. It remained at 4,000 to 5,000 MW for most of the year. The project has reduced the country’s energy deficit by 5% by means of its high plant availability and dispatch factor. The project also has lower generation costs compared to other power plants due to reduced transportation costs because of the plant’s proximity to its fuel source. ADB’s support to one of the first IPPs under the 2002 policy promoted further private investment in IPPs. Currently, there are 23 licensed IPPs under the 2002 policy, of which 12 are already commissioned.
B. Development Impact
1. Private Sector Development
19. The energy crisis in Pakistan has its roots in a number of issues, including non-utilization of indigenous resources such as low-Btu gas. Low-Btu gas has a relatively low energy content, which makes it unsuitable or uneconomical for most purposes other than power generation. Aside from FPCDL, there are four other low-Btu gas-fired IPPs set up under the 2002 power policy: Engro Powergen Qadirpur Ltd., Green Electric Pvt. Ltd., Star Power Generation Ltd., and UCH-II Power Pvt. Ltd.3 FPCDL was the first of these five IPPs to achieve financial close. Because of the low price and limited alternative use of low-Btu gas, FPCDL is one of the cheapest sources of electricity in the country, placing it in the top 10 thermal power plants in terms of dispatch order.
20. The government recognizes the benefits of encouraging private sector participation in the power sector, both through privatization of state-owned entities and through enabling the private sector to undertake greenfield power generation. Private investment is hampered by a number of factors, including concerns over investment returns. FPCDL, as the first low-Btu gas- fired IPP to reach financial close under the 2002 policy, set a benchmark for other IPPs and encouraged domestic and international investors to look again at power generation as an attractive investment opportunity. Pakistan today enjoys significant private sector–led generation, representing 49.20% of total installed generation capacity.
21. ADB’s guarantee at the holding company level enhanced the return on equity. This made the project significantly more interesting to investors. It highlighted the need for an adequate risk-reward structure. This structure, which is routinely used in international financing of utilities, represents a significant market innovation in Pakistan.
2 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Equity Investment and Guarantee Daharki Power Project (Pakistan). Manila. 3 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Partial Risk Guarantee Uch-II Power Project (Pakistan). Manila.
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22. At the company level, FPCDL was directly involved in the local community of Ghotki District. They have supported the government and private agencies in implementing health care projects such as providing logistics for the national polio campaign and fumigation in local villages to prevent outbreaks of dengue. FPCDL has provided support during natural disasters, lending excavators, vehicles, and bulldozers for the rehabilitation of local communities and providing food rations and medical supplies to the affected population.
23. The private sector development impact of DPHL is rated excellent. Private sector development indicators and ratings are presented in Appendix 2.
2. Business Success
24. The project is rated satisfactory for business success.
3. Economic Sustainability
25. The project is rated excellent for economic sustainability.
4. Environment, Social, Health, and Safety Performance
26. The project was classified as environment category B and preparation of an Initial Environmental Examination was required. The “no objection clearance” for the project was issued by the Sindh Environmental Protection Agency (SEPA) on 10 February 2007. Other applicable government permits such as the bulk water agreement and effluent management agreement necessary for power plant operations were secured.
27. Key potential environmental impacts during operations include air emissions, water source abstraction, wastewater effluent discharge, noise, and solid waste management. These are continuously being mitigated and monitored by the health, safety, and environment (HSE) team. Monitoring results showed that all parameters are complying with Pakistan’s National Environmental Quality Standards and the World Bank Group’s Environment, Health, and Safety Guidelines. To further increase efficiency, minimize environmental impacts, and ensure compliance with government regulatory requirements and international standards, an environmental management system (EMS) was integrated into the plant operations. An HSE monitoring team has put in place comprehensive environment, health, and safety procedures such as the HSE manual (May 2008), emergency response procedures (March 2012), and EMS manual (February 2013), which includes monitoring, reporting, and regular training.
28. The project was classified as category B for involuntary resettlement and category C for indigenous peoples. There were four households living inside one of the properties that FPDCL intended to acquire. However, in 2007, negotiations with two landowners failed and FPDCL was unable to acquire this land. Therefore, no households were displaced. The project should have been recategorized to C as per ADB’s Involuntary Resettlement Policy (1995) because the acquisition of land through negotiated settlement did not entail any involuntary resettlement impacts.
29. The project did not entail any impact on indigenous peoples and therefore the original project category C based on ADB’s Policy on Indigenous Peoples (1998) is validated.
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30. The rating for environment, social, health, and safety performance of the project is satisfactory.
C. ADB Investment Profitability
31. ADB’s investment profitability in the guarantee is rated satisfactory.
D. ADB Work Quality
32. ADB’s effectiveness in the area of screening, appraisal, and structuring is rated satisfactory. The project is in line with ADB’s country, energy sector, private sector development, and environmental protection strategies. The project was processed within a very short period, demonstrating ADB’s responsiveness to client needs without compromising good practice standards.
33. Monitoring and supervision quality is satisfactory. ADB’s contribution to the project is rated satisfactory. ADB’s role was in line with its operating strategies, policies, and standards. The project supported ADB’s country strategy, which views ADB as one of Pakistan’s strategic development partners for infrastructure development, with power as one of the main areas of support.4 The project is also fully in line with ADB’s energy sector strategy (footnote 1), which designated the following as two of the most important operational priorities: (i) reducing poverty by, among other things, creating energy infrastructure for sustainable economic growth; and (ii) promoting private sector involvement by restructuring the energy sector and creating an enabling environment for private investors, especially in generation.
E. ADB’s Additionality
34. ADB’s additionality is rated excellent. In 2007, one of the main reasons why there had been no international investments in IPPs in Pakistan for the previous 7 years was the low return offered to shareholders under government policies. The enhanced returns with ADB guarantee made the project significantly more appealing to investors.
35. Funding for DPHL was facilitated by ADB’s participation in the project and the guarantee it provided. ADB’s equity participation also enhanced the project’s governance profile.
F. Overall Evaluation
36. The project’s overall rating is successful as summarized in individual category ratings below (Table 1).
Table 1: Evaluation of the Daharki Power Project Item Excellent Satisfactory Partly Satisfactory Unsatisfactory Development Outcome X Private Sector Development X Business Success X Economic Sustainability X Social and Environmental Impacts X ADB Investment Profitability X ADB Work Quality X Screening, Appraisal, and Structuring X Monitoring and Supervision X Role and Contribution X
4 ADB. 2005. Pakistan: Country Strategy and Program Update (2006–2008). Manila.
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Item Excellent Satisfactory Partly Satisfactory Unsatisfactory ADB’s Additionality X Highly Successful Successful Partly Successful Unsuccessful Overall Rating X Source: Asian Development Bank.
III. LESSONS
37. The project risks identified in the RRP were addressed during due diligence and are considered low to moderate, considering the sponsor’s strong financial position and stable operating performance, and the increasing demand for energy in the country. However, the following issues and lessons were noted:
38. Captive gas supply. FPCDL has a dedicated captive source of low-Btu gas from the Mari gas fields, which is 15 km from the power plant. Gas reservoirs in Pakistan are in a general state of depletion (predominantly due to increased consumption and low investment in new finds), as a result of which supply from the main gas grid has gradually reduced. This has forced other IPPs to shift to imported diesel and furnace oil–based generation, often costing in excess of US cents 20/kWh, which is one of the main contributors of circular debt in the country. Dedicated use of low-Btu gas enabled the project to exploit an otherwise idle indigenous resource, provide stable electricity at a competitive tariff (due to the proximity of the gas fields), reduce the project’s exposure to fluctuations in international oil prices, and help Pakistan save on fuel imports. Because of the low cost of gas for the project, FPCDL is in the top 10 thermal power plants in terms of dispatch order. The captive gas supply of FPCDL ensures the project’s long-term economic and financial viability.
39. Recovery from cost overrun. Sensitivity analyses in the RRP concluded that the maximum liquidated damages payable by the EPC contractor would be sufficient to cover for a delay of more than 3 months and also that the delay-in-startup insurance would cover losses caused by a delay of up to 15 months. It is worth bearing in mind that the liquidated damages from the EPC contractor under arms-length EPC contracts and/or good insurance coverage can be critical in recouping unexpected cost overruns.
Appendix 1 7
BASIC DATA
Investment Summary
Investment Identification
1. Country Pakistan
2. Investment Number/Guarantee Number 7265/7265
3. Type of Business Conventional Energy Generation and Operation
4. Project Title Daharki Power Project
5. Investee Company/Borrower Daharki Power Holdings Limited
6. Sponsors The Fauji Foundation
7. Amount of Approved ADB Assistance – Equity Investment $2,750,000 – Guarantee $44,000,000 plus interest
8. Environment Category B. Summary of environmental impact assessment submitted in 2005
ADB = Asian Development Bank
PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: INFRASTRUCTURE
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Potential Impact
Rating: (Sustainability) and 2 Appendix Impact to Risk to its Realization Combined Impact of the Project Datea Impacta Riskb Ratingc Justification / Annotations 1. Beyond Intermediary and Investee Company Impacts
1.1 Private Sector Expansion Excellent Excellent Modest Excellent FPCDL is the first low-Btu gas-fired IPP to achieve financial Contribution by a pioneering or close among 22 power generation projects approved under high-profile project that the 2002 power policy. Private investment in power generation facilitates or paves the way for increased from 39% of total installed capacity in 2007 (during more private participation in the project’s approval stage) to 49% of total installed capacity the sector and economy in 2012.
1.2. Competition. Contribution Excellent Excellent Low Excellent The project uses low-Btu gas unlike other thermal projects, of new competition pressure which use pipeline quality gas. There are five low-Btu gas- on public and/or other sector fired power projects set up under the 2002 power policy. players to raise efficiency and FPCDL is the first of these five power projects to achieve improve access and service financial close. Gas reservoirs in Pakistan are in a general levels in the industry state of depletion, as a result of which supply from the main gas grid has gradually reduced to power projects; this has caused other IPPs to shift to imported diesel and furnace oil– based generation, often costing in excess of US cents 20/kWh, which is one of the main contributors of circular debt in the country.
Because of the price and use of low-Btu gas, the project is one of the cheapest sources of electricity in Pakistan, placing it in the top 10 thermal power plants in terms of dispatch order.
1.3. Innovation Satisfactory Excellent Modest Satisfactory ADB’s guarantee at the holding company level enhanced the Demonstration of efficient new return on equity. This structure, which is routinely used in products and services, international financing of utilities, represents a significant including in areas such as market innovation in Pakistan. The structure highlighted the marketing, distribution, tariffs, need for an adequate risk-reward structure. production, and technology, and in ways to cover or contain costs and manage demand
Potential Impact Rating: (Sustainability) and Impact to Risk to its Realization Combined Impact of the Project Datea Impacta Riskb Ratingc Justification / Annotations The key equipment used in FPCDL is the GE 9E frame gas turbine and Fuji Electric’s steam turbine. The power plant has a net efficiency of 48.84%. This efficiency is comparable to any high efficiency plants using the 9E frame.
1.4. Links Excellent Excellent Low Excellent FPCDL proactively engaged with the local government to Relative to investments, pave the Daharki–Dad leghari road (leading to the project contribution of the project of site), benefitting not only the project, which used the road to notable upstream or transport heavy equipment, but also the neighboring downstream links to business communities’ commercial and agricultural activities. clients, consumers, suppliers, key industries, etc., in support FPCDL has contractual arrangements with various service of growth providers aside from the O&M contractor. These include contracts for security, small maintenance (other than power plant), and drinking water facilities. The nearby restaurants have flourished due to FPCDL presence. FPCDL has also supported the government and private agencies in implementing health care projects, providing logistics in the campaign to eradicate polio and fumigation in local villages to stop outbreaks of dengue. FPCDL has provided support during natural disasters, like rehabilitating the local community and providing rations to the affected population.
1.5. Catalytic Element Excellent Satisfactory Low Excellent Debt financing at the level of an off-shore holding company Contribution by pioneering with ADB guarantee catalyzed international banks to and/or catalytic financing, participate in the loan. ADB guarantee of the loan at the mobilizing, or inducing more holding company also induced local bank lending to FPCDL. local or foreign market financing and/or foreign direct Leveraged financing through the holding company structure investment in the sector was replicated by several other investors in the power sector. Appendix 2 Appendix
1.6. Affected Laws, Satisfactory Satisfactory Medium Satisfactory The import of plant and machinery for a power project in Frameworks, Regulation Pakistan is governed by SRO No. 575(I) of 5 June 2006. This
Contribution to (i) better laws SRO provides a reduced rate of import duty only for 9 and sector regulation for equipment that is not locally manufactured. This condition PPPs, concessions, joint minimized the scope of reduced duty benefit. In the case of ventures, and BOT and BOOT FPCDL, the gas turbine was imported under a package deal projects; and (ii) liberalization that included a locally manufactured generator (though of no
Potential Impact Rating: (Sustainability) and 10 Impact to Risk to its Realization Combined Impact of the Project Datea Impacta Riskb Ratingc Justification / Annotations Appendix 2 Appendix of markets as applicable for use to FPCDL). A reduced rate concession was therefore not better sector efficiency available. At the request of FPCDL and a few other projects, the Federal Board of Revenue amended the SRO. The
amendment allowed projects with construction costs of more than $50 million to avail themselves of the reduced sales tax. FPCDL was thereby able to take advantage of the reduced rate of import duty. 2. Company Impact With Wider Potential 2.1. Skills Contribution Excellent Satisfactory Low Excellent During the construction stage of the power plant, the average Contribution to new strategic, number of construction personnel at the site was about 1,500 managerial, and operational workers. The project gives preference to local people in skills with actual or potential employing unskilled, semi-skilled, and skilled workers during wider replication in the sector the plant’s operation. Currently, of 248 employees at the and industry project site (for both FPCDL and KPS, the O&M operator), 175 employees are from Ghotki District.
2.2 Demonstration of New Satisfactory Satisfactory Low Satisfactory FPCDL has an HR manual that governs the human resource Standards policies geared toward improving employees’ work As seen in new ways to performance and their benefits. operate the business and compete, and in investee performance against relevant best industry benchmarks and standards 2.3 Improved Governance Excellent Satisfactory Low Excellent ADB’s equity investment and nomination of directors at the As evident in standards set in Board brought better corporate governance to DPHL/FPCDL. corporate governance; FPCDL’s Board has created various committees, which meet stakeholder relations; at least 3 times a year. FPCDL regularly conducts its statutory environmental, social, health, meetings together with committee and Board meetings. and safety fields; and/or in Annual General Meetings and relevant forms are filed with the good energy conservation Securities and Exchange Commission Pakistan in a timely standards, etc. manner.
FPCDL is implementing a health and safety management system at its site. It was developed by KPS for FPCDL in accordance with KPS’s health and safety policy and local health and safety management standards. The system
Potential Impact Rating: (Sustainability) and Impact to Risk to its Realization Combined Impact of the Project Datea Impacta Riskb Ratingc Justification / Annotations provides guidelines for plant activities during O&M as per safety rules and regulations practiced by local and international organizations. 3. Overall Private Sector Excellent Satisfactory Low Excellent Development Rating The rating (excellent, satisfactory, partly satisfactory, or unsatisfactory) is not an arithmetic mean of the individual indicator ratings, and does not have fixed weights. The actual impact (positive or negative), potential future impact, and the risk to its realization need to be considered.
ADB = Asian Development Bank, , Btu = British thermal unit, DPHL = Daharki Power Holdings Limited, FPCDL = Foundation Power Company Daharki Limited, GE = General Electric, HR = human resources, IPP = independent power producer, KPS = KEPCO Plant Services and Engineering Co., O&M = operation and maintenance, SRO = Statutory Regulatory Order. a Excellent (4), satisfactory (3), party unsatisfactory (2), unsatisfactory (1). b Risk: low (4), modest (3), medium (2), high (1). c The combined rating should weigh impacts and risk to its sustainable realization. Source: Asian Development Bank.
Appendix 2 Appendix 11
12 Appendix 3
ENVIRONMENTAL IMPACT
A. Introduction
1. The Daharki power project, implemented by the Foundation Power Company Daharki Limited (FPCDL), involved the development and construction of a 180-MW combined-cycle, low-Btu gas-fired power plant in Daharki, Ghotki District, Sindh Province, Pakistan. The plant consists of one gas turbine, one heat recovery steam generator, and one steam turbine. The project requires 65 million cubic feet per day (MMCF/day) of gas, with a net calorific value of 4.9 kWh/m3 (about 425 Btu), to be sourced from a deep well in the Mari gas fields under a gas supply agreement with Mari Petroleum Company Limited (MPCL). The gas from the Mari deep well is dedicated to the project and to another power plant, Star Power. A 15-km gas transmission pipeline was built to supply gas to the project complex, and power from the project is evacuated to the National Transmission and Despatch Company Limited’s (NTDC’s) 220 kV Daharki–Rohri transmission line. The project has a lower generation cost compared to other power plants due to reduced transportation costs because of the plant’s proximity to its fuel source.
2. The project was classified as environment category B and an initial environmental examination was required at the time of project processing. The Sindh Environmental Protection Agency (SEPA) issued a no-objection clearance for the project on 10 February 2007 based on the original environmental impact assessment.1 An evaluation of the implementation of the environmental management plans and the degree of compliance with environmental safeguard– related covenant was conducted for the project.
3. ADB’s review of the project covered environmental, health and safety and social information submitted by FPCDL, site visit by an ADB mission to the project site in April 2013, and discussions with FPCDL officials and health, safety, and environment (HSE) monitoring team.
B. Mission Findings
4. Government Permits and Agreements. Prior to actual operation of the power plant FPCDL secured bulk water and effluent discharge agreements from the Irrigation and Power Department of the Government of Sindh Province in 2009. The bulk water agreement permits the abstraction of 5.5 cubic feet per second (cusec) from the Dahar Wah Lower to supply the industrial water requirement of the power plant. The effluent discharge agreement allows the power plant to dispose of 2 cusecs of treated water daily into Dahar Wah Lower.
5. Environmental Impacts. Environmental impacts were assessed to be minor, short- term, and temporary during construction, with few significant impacts such as air emission, water resource extraction, effluent discharge, noise, or solid waste generation during operation. The mission confirmed that the project site is located in an area of flat, unproductive saline land that is highly underdeveloped with no industrial activities. No endangered flora or fauna species were affected by the project. Transmission lines and gas pipelines are located along the right-of- way of existing roads to avoid disturbing the ecosystem and there was no change in land use. The gas pipelines are buried. No protected area or sensitive habitat has been affected by the installation of the gas pipelines from the Mari gas field or the transmission line. FPCDL monitors
1 Fichtner GmbH. EIA Report. 2005.
Appendix 3 13 its pollution load (effluents and emission) and reports it to the respective Provincial Environmental Protection Department. Based on the monitoring results of air emission, effluent discharge, noise, water source abstraction, and solid waste management, FPCDL is compliant with the legal environmental protection requirements of SEPA, 1997 ( National Environmental Quality Standards (NEQS), amended 2000), and international standards.
a. Air Emissions. Due to the high quality of natural gas from the Mari gas field the electro-mechanical contractor (General Electric, GE) advised not installing a low NOX burner. Stacks have been equipped with a continuous emission monitoring system to monitor the following parameters online: (i) nitrogen oxide, (ii) carbon monoxide, (iii) sulphur dioxide, and (iv) particulate matter. Monitoring results showed that all tested parameters are within Pakistan’s NEQS and World Bank standards.
b. Surface and Ground Water Abstraction. The Irrigation and Power Department of the Government of Sindh Province has approved the water abstraction from the existing irrigation canal and tube wells. The industrial water requirement of 275 m3 per hour for cooling purposes is being supplied by an existing irrigation canal (surface) and alternately with tube wells. The original plan was to tap no groundwater. However, due to the limited water supply from the existing irrigation canal, FPCDL has opted to construct a series of tube wells parallel to the irrigation canal as a standby source. Groundwater resource potential and availability within the project area has been confirmed by a detailed georesistivity survey.2
c. Wastewater Effluent Management. Wastewater effluent generated from various working areas within the power plant (e.g., cooling chemical dosing station, gas turbine area, steam turbine area, etc.) is treated by passing it through a series of wastewater treatment facilities such as the (i) neutralization pit, (ii) oily separator waste management facility, and (iii) sewerage treatment facilities (using precipitation separation contact aeration technology). Through the drains, wastewater from all plant areas is directly passed through the collection pit and then discharged into the evaporation pond. The treatment procedures for wastewater will ensure that no objectionable color, odor, or turbidity will be produced. Wastewater can also be discharged to the canal when the canal is flowing. Similarly, all domestic sewerage water will discharge after primary treatment and chlorination before subsequent use in local irrigation. The power plant has an online pH monitoring system in the chemical treatment area (neutralization pit) to monitor and adjust the pH as per NEQS before discharge to the collection pit.
d. Noise Control. Periodic monitoring of all working areas within the plant is carried out to ensure that noise levels are reasonable. The use of ear plugs or hearing protective devices is enforced and monitored in specific working areas found to exceed the recommended acceptable noise levels. Every year, a noise level survey is carried out for different working areas within the plant.
2 The georesistivity survey aims to determine (i) the lithological nature of the aquifer in the project area; (ii) the thickness and lateral extent of the aquifer; and (iii) the estimation of the groundwater quality profiles within the depth. Of 30 sounding stations executed during the georesitivity survey, 23 have been identified as potential sites for well drilling. Currently, the project uses 12 operating wells to augment the industrial and domestic water requirements of the power plant and the housing colony.
14 Appendix 3
e. Solid Waste Management. The power plant generates different waste types such as domestic, scrap materials, oily waste, chemical contaminated and other hazardous waste, clinical waste, information technology items, sanitation waste, and sludge. All solid waste generated is collected, stored, segregated (using color coding), transported, and disposed of through an arrangement with SEPA. Periodic inspection of designated waste disposal areas is undertaken to check that waste is disposed of in an environmentally friendly way and ensure that there is no negative impact on the surrounding community’s land, water, or air quality.
6. Environmental Management System. KEPCO Plant Service and Engineering Company Limited (KPS),3 the O&M contractor, is the designated HSE monitoring team. To increase efficiency, minimize environmental impacts, and ensure compliance with government regulatory requirements, an environmental management system (EMS) manual, HSE manual, and emergency preparedness procedures have been integrated into the overall operations of the plant to continuously mitigate and manage HSE impact. Training in firefighting, first aid, safe driving, oil/chemical spill prevention, and the like is regularly conducted for staff. An HSE officer prepares a quarterly environmental monitoring report for SEPA, which the plant manager then submits to the general manager before it is forwarded to SEPA. However, it is recommended that EMS also establish monitoring procedures on the abstraction and operation of current surface water (canal) and ground water (tube wells) to maintain sustainability of the water sources.
C. Conclusion and Recommendation
7. Based on the review and evaluation of available safeguard documents and the site visit it is concluded that national and ADB safeguard requirements related to the project’s environmental and social impacts have been adequately met. FPCDL’s current environmental records and performance have been satisfactory; implementation of the EMS should be maintained throughout the plant’s operations.
3 KPS is the project’s O&M contractor under the O&M contract (25 years) and shall be responsible for the plant’s O&M and the performance of all services in accordance with applicable law and the fuel supply agreement (as applicable to the operation of the plant), the power purchase agreement (PPA), and prudent utility practice, and at its own cost perform all necessary works and services to meet those requirements. The HSE monitoring team is composed of an HSE officer, a chemical engineer, and a chemist.
Appendix 4 15
SOCIAL IMPACT
I. Project Overview
1. At the time the project was processed, it was classified as category B for involuntary resettlement based on ADB’s Involuntary Resettlement Policy (1995). Four families were initially identified to be displaced from one of the parcels of land that the Foundation Power Company Daharki Limited (FPCDL) would acquire. These families are agricultural laborers and live on a residential compound owned by the landowner. Agreement has been reached with the village elder that these four households can relocate with residential rights and that FPCDL will provide cash assistance for relocation and construction of replacement housing. The project was classified as category C with respect to ADB’s Policy on Indigenous Peoples (1998). There should be positive social impacts as the plant is expected to provide employment opportunities to the local community during the project’s construction and operation phases. Following technical completion and start-up of the plant’s commercial operations the project’s actual social impacts were reviewed.
II. Review Findings
A. Involuntary Resettlement Impact
2. A total of 182.46 acres of land for the power plant and the pipeline right-of-way (ROW) was acquired through a negotiated settlement in early 2007 by the Fauji Foundation’s real estate department. The project involves acquisition of 117.95 acres of land from 38 landowners for the power plant and 64.48 acres of land from 207 landowners for the gas and water pipeline ROW. The initial area targeted to be acquired for the plant was 132.44 acres, including the area where the four households to be resettled are living. However, negotiation with two landowners failed and the actual land acquired for the power plant was reduced to 117.95 acres. The property occupied by the four households was not acquired and therefore no one was displaced by the project. All of the 38 landowners were compensated prior to construction and deeds of absolute sale were executed between FPCDL and the 38 landowners in January 2007.1 Since the agricultural land that the power plant will occupy is unproductive, the owners opted to sell portions of their land and used the money for home improvement, schooling their children, venturing into small businesses, or improving their remaining land.
3. Land was leased by the Irrigation and Power Department (Government of Sindh) for the installation of 12 tube wells.2 There is no land acquisition involved for the transmission line since the substation is only 8 meters away from the NTDC national grid. The Gas Dehydration Facility is located in Mari Gas Well No. 6, which is the source for natural gas. The area was developed 2 years ago and is owned by the Mari Petroleum Company Limited (MPCL).
4. Except for the six pending sale deeds, all the landowners have been compensated and sale agreements have been registered. Construction activities did not cause any displacement and damage to crops was minimal since construction was done in phases, taking note that civil works should be undertaken after the harvest. This was confirmed by the landowner, who was interviewed during the site visit.
1 Thirty-eight landowners agreed to the purchase price, amounting to PRs260,000 per acre, including improvements, which, according to FPCDL, is 30% higher than the prevailing market price during negotiation and land sale. 2 The agreed rate is PRs100,000 per tube well per annum or PRs1.2million per annum for 12 units.
16 Appendix 4
B. Indigenous Peoples Impacts
5. The project site is within the Ghotki District in the Sindh Province of Pakistan. It is situated about 100 km from Sukkur, between Mirpur Mathelo and Ubaro. There are no indigenous peoples in the area although there are many tribes in the district, including the Dahirs (main tribe), Syed, Jalbani, Mahar, Shar, and Pitafi. Members of the Pitafi and Mahar tribes were employed during project construction.
C. Other Social Dimensions
6. During construction (September 2007–January 2010), FPCDL was able to provide employment to the local community. The number of workers hired ranged from 41 to 1,650, the majority of whom were local residents. At present, FPCDL and its contractors employ around 248 workers within and outside Ghotki District in project operation.
7. FPCDL has provided assistance in the following community-related undertakings: (i) assistance during calamities/natural disasters; (ii) implementation of health care projects implemented by the government and private agencies; (iii) community welfare projects in nearby villages; and (iv) repair of the Daharki–Dad leghari road, which is the main road regularly traversed by the community.
8. At present, the HSE manager is responsible for the overall management of grievances/complaints. However, grievances have not been documented. During an interview with the HSE manager, the most common request from the community is employment at the plant. This, however, cannot be accommodated at the moment since the plant is already operational and the manpower requirement is limited.
III. Conclusion and Next Steps
9. Land acquisition for the project did not entail any displacement and FPCDL has compensated the affected landowners. A significant number of local community members were employed during construction, and at present some 248 local residents are employed. ADB also commends FPCDL’s participation in community-related activities, which is essential to establishing a good relationship with them. However, FPCDL should take appropriate action to be able to satisfy the requirements below.
a. Land Acquisition. FPCDL agreed to facilitate the documentation of the six remaining sale deeds so that the landowners can be paid and land acquisition documentation can be completed. An update on the status of documentation should form part of the E&S monitoring report, including the status of the court case filed against FPCDL.3
b. Grievance Redress Mechanism. Instead of the having the HSE manager handle all grievances over and above his primary responsibilities, FPCDL agreed to establish and maintain a grievance redress mechanism to resolve grievances raised by affected individuals or communities in relation to the project’s implementation. A team
3 FPCDL has a pending court case, filed by Mr. Allah Dino Lakhan, claiming co-ownership of a portion of land within the plant site. This actually is a family squabble about a share from a land sale. FPCDL filed an appeal and will follow the decision of the district court.
Appendix 4 17 will be created to immediately obtain and verify information from complainants so that FPCDL management can take immediate action as needed. The team will also assist in the documentation of grievances and update the complainant and local community about the grievances filed and the progress of grievance mitigation. Although individuals can approach the local court for specific issues, establishment of this mechanism can help prevent long and tedious court cases.