RMC Discussion Paper Series, Number 118 Public Disclosure Authorized Financing Pakistan's Hub Power Project A Review of Experiencefor Future Projects Public Disclosure Authorized Public Disclosure Authorized Michael Gerrard Project Finance and Guarantees Department Public Disclosure Authorized Resource Mobilization and Cofinancing Vice Presidency August 1997 121 The World Bank CFS/RMC DISCUSSION PAPERS 101 - Privatization in Tunisia,Jamal Saghir, 1993. 102 - Export Credits:Review and Prospects,Waman S. Tambe, Ning S. Zhu, 1993. 103 - Argentina'sPrivatization Program, Myrna Alexander, Carlos Corti, 1993. 104 - EasternEuropean Experience with Small-ScalePrivatization: A CollaborativeStudy with the CentralEuropean University PrivatizationProject, 1994. 105 - Japans Main Bank Systemand the Role of the Banking Systemin TSEs, Satoshi Sunumura, 1994. 106 - SellingState Companiesto StrategicInvestors: Trade Sale Privatizations in Poland,Hungary, the CzechRepublic, and the Slovak Republic,Volumes 1 and 2, Susan L. Rutledge, 1995. 107 - JapaneseNational RailwaysPrivatization Study II: InstitutionalizingMajorPolicy Change and ExaminingEconomic Implications,Koichiro Fukui, Kiyoshi Nakamara, Tsutomu Ozaki, Hiroshi Sakmaki, Fumitoshi Mizutani, 1994. 108 - ManagementContracts: A Review ofInternational Experience,Hafeez Shaikh, Maziar Minovi, 1995. 109 - CommercialReal EstateMarket Developmentin Russia,April L. Harding, 1995. 1 10 - ExploitingNew Market Opportunitiesin Telecommunications:Lessons for DevelopingCountries, Veronique Bishop, Ashoka Mody, Mark Schankerman, 1995. 111 - BestMethods of Railway Restructuringand Privatization, Ron Kopicki, Louis S. Thompson, 1995. 112 - EmployeeStock OwnershipPlans (ESOPs),Objectives, Design Options and InternationalExperience, Jeffrey R. Gates, Jamal Saghir, 1995. 113 - AdvancedInfrastructureforTimeManagement, The CompetitiveEdge in EastAsia,Ashoka Mody,William Reinfeld, 1995. 114 - Small ScalePrivatization in Kazakhstan,Aldo Baietti, 1995. 115 - Airport Infrastructure:The EmergingRole of the PrivateSector, Recent Experiences Based on Ten CaseStudies, Ellis J. Juan, 1995. 116 - Methods ofLoan GuaranteeValuation andAccounting, Ashoka Mody, Dilip Patro, 1995. 117 - PrivateFinancing of TollRoads, Gregory Fishbein, Suman Babbar, 1996. JOINT DISCUSSION PAPERS Privatizationin the Republicsof the FormerSoviet Union: Frameworkand Initial Results,Soo J. Im, Robert Jalali, Jamal Saghir; PSD Group, Legal Department and PSD and PrivatizationGroup, CFS - Joint Staff Discussion Paper, 1993. MobilizingPrivateCapitalfor the PowerSector. Experience in Asia andLatin America,David Baughman, Matthew Buresch; Joint World Bank-USAID Discussion Paper, 1994. OTHER CFS PUBLICATIONS JapaneseNational RailwaysPrivatization Study, World Bank Discussion Paper, Number 172, 1992. Nippon Telephoneand TelegraphPrivatization Study, World Bank Discussion Paper, Number 179, 1993. BeyondSyndicated Loans, World BankTechnical Paper, Number 163, 1992. CFS Link, Quarterly Newsletter. RMC Information Center, phone: 202-473-7594, fax: 202-477-3045 Copyright (© 1997 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured and printed in the United States of America The findings,interpretations, and conclusionsexpressed herein are entirelythose of the authors and should not be attributed in any manner to CFS, the World Bank, or to members of the Board of ExecutiveDirectors or the countries they represent.The World Bank does not guarantee the accuracyof the data included in this publication, and accepts no responsibility whatsoeverfor any consequence of their use. The paper and any part thereof may not be cited or quoted without the author's expressedwritten consent. RMCDISCUSSION PAPER SERIES I I 8 Financing Pakistan's Hub Power Project A Review of Experiencefor FutureProjects MichaelGerrard Contents Foreword v Acknowledgments vii Abbreviationsand Definitions ix ExecutiveSummary 1 Finance Plan 1 Issues Affectingthe WorldBank 3 SignificantProject "Firsts" 6 Project Development 6 MobilizingSufficient and Least-CostFinance 9 Shorteningthe DevelopmentPeriod 9 Conclusion 10 FinancePlan 11 Overview I 1 Developmentof the Plan 14 BankingStrategy 19 StructuralIssues 23 Guidelinesfor Future Projects 27 ProjectDevelopment 31 Market Experience 32 TimetableAnalysis 34 SponsorGroup Formation 35 DevelopmentCosts and Risks 37 WorldBank Perspectives 40 Guidelinesfor Future Projects 41 InstitutionalDevelopment 43 The PSEDF and the ECO GuaranteeFacility 43 Institutionsin Pakistan 44 Postscript 47 .. Appendixes Appendix1 Offshorecommercial bank facilities syndicate profiles 49 Appendix2 Projectchronology 50 Appendix3 Principalproject agreements 52 Appendix4 Projectparticipants 53 Appendix5 Overviewof insurancearrangements during construction and operation 55 Appendix6 ExpandedCofinancing Operation (ECO): Summary of termsof the guarantee 58 Boxes Box 1 Profileof privatesector risk 16 Box2 Roleof globaldepository receipts in Hub PowerProject financing 18 Box3 Savingtime through privatization 33 Box4 Effectsof publicity 35 Tables Executivesunmmary table 1 Summaryof the basefinance plan 1 Executivesummary table 2 Facilitiesfunded by offshorecommercial banks 3 Executivesummary table 3 Reasonsfor successin syndication 4 Table1 Basefinance plan 11 Table2 Compositionof the PrivateSector Energy Development Fund 12 Table3 Mobilizationfinance 13 Table4 Facilitiesfunded by offshorecommercial banks 20 Table5 Reasonsfor successin syndication 20 Table6 Bilateralfunding and procurement 26 Table7 Keyevents and activitiesin projectdevelopment 31 Table8 Principalactivities subject to delay 34 Table9 Timetableof projectactivities 35 Table10 Breakdownof developmentcosts 38 Table11 Personneldeployments 38 iv FinancingPakistan's Hub Power Project Foreword T he Hub PowerProject is a 1,292megawatt oil-fired power station located in the Pakistanprovince of Balochistan, some 40 kilometers northwest of Karachi. It is a private sector project undertaken by the Hub Power Company Limited (Hubco), a special single-purpose company listed on the Karachi and Luxembourg stock exchanges that has a concession to build, own, and operate the power station. The project has become a landmark in the field of infrastructure finance. From project conception in 1987 through financial close in January 1995, it has evolved in line with the international market for private sector infrastructure. By demonstrating the viability of private finance for a major infrastructure project in a developing country, the project has set an important precedent, particularly in the energy sector. Commercial power was first exported from the station in June 1996, and construction was completed in early March 1997, ahead of schedule. What was foreseen by the government of Pakistan and the World Bank in 1985 as the only way to relieve a serious financial bottleneck in the development of Pakistan's energy sector has since been embraced as economic orthodoxy by governments around the globe and by all types of financial institutions. Moreover, this transformation has occurred not only in the energy sector but also in transport and, increasingly,other infrastructure sectors such as water supply The catalytic effect of the World Bank's participation in the Hub Power Project-relative to financing of the project as well as development of the energy sector and local institutions in Pakistan and of the international market for private sector infrastructure-has been profound. The skepticism that pervaded the market in the early 1980s has been replaced by a "can do" attitude that is due in no small measure to the successful financing of the project. As might be expected during a period of rapid market advancement, a new constraint has emerged-namely, the speed at which these transactions can be implemented. In highlighting this and other market constraints the project has been, to some extent, an exercise in financial research and development for the Bank. The project absorbed about 225 person-years of resources, 25 of them from within the Bank; required more than 200 individual project documents; and claims no fewer than 16 "firsts" in the field of project finance. That so many people within the government of Pakistan, the Bank, the sponsors, and other financiers of the Hub Power Project prevailed over the many setbacks and frustrations inherent in the creation of such novel financial "technology" is to their collective and lasting credit. Because of its pioneering nature, during implementation the project encountered most of the problems likely to be faced by a private infrastructure project in a developing country. Thus the solutions developed and lessons learned have wider applications. This report highlights the solutions and lessons that generally apply to similar private infrastructure projects, with an emphasis on the financial instruments used by the Bank and its management of the project development process. In addition to its significant physical and financial dimensions, the Hub Power Project has sizable institutional dimen- sions: agencies of six governments collaborated with the Bank and the project's sponsors in developing the project, and more than forty international commercial banks are direct lenders to the project. As a result knowledge of and experi- ence with the project have been widely distributed. It is hoped that through this report it will be even more widely shared, for the benefit of future project development. v Acknowledgments his report wasprepared under the directionof