Guddu Rental Power Project

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In July 2009, the rental services contract (RSC) between the state-owned Central Power Generation Company (GENCO-II) and Pakistan Power Resources (PPR) for the installation, and operation for a three-year term of a 110 MW rental power plant (RPP) at Thermal Power Station (TPS) Guddu, became effective. Three conditions were required for rental contract effectiveness: (i) advance payment guarantee by sponsor, (ii) down payment by the state-owned power purchaser, and (iii) issuance of a sovereign guarantee by the Government of Pakistan (GoP). The Government of Pakistan (GoP) chose rental power projects as its major strategic tool for closing Pakistan’s electricity demand-supply gap in the short term. The project was awarded on the basis of competitive bidding. PEPCO published a tender notice calling for submission of proposals for a 100-125 MW rental power plant by Dec. 1, 2007. The deadline was subsequently extended until Dec. 10, 2007. PPR, a joint venture between Walters Power International [United States] (35%) and Associated Group [Pakistan] (65%), was deemed the winning bidder. There was no publicly available information on the number of bidders. The evaluation criterion was the lowest total tariff in US cents per kWh terms, inclusive of rental charges and fuel cost component. On Feb. 6, 2008, Pakistan Electric Power Company (PEPCO) issued a Letter of Award (LoA) to PPR, which proceeded to sign the RSC with the designated state-owned power purchaser, Central Power Generation Company (GENCO-II), on Feb. 23, 2008. Under the RSC, GENCO-II was to pay a rental charge of US$72.5 million, payable in arrears in 36 equal monthly installments to the sponsor. The RSC set out three steps which had to take place in order for the contract to become effective. First, the project sponsor was obliged to obtain a bank guarantee equal to 7% of the RSC’s value. Second, within 10 days of receiving the sponsor’s bank guarantee, GENCO-II was required to make a down payment to the sponsor equal to 7% of the RSC’s value. Lastly, within 30 days of the RSC’s signing, GENCO-II was to deliver a Letter of Credit (LC) to the sponsor equal to the sum of GENCO-II's 36 monthly rental payments, as a guarantee of GENCO II's payment obligations. PPR submitted the 7% bank guarantee in June 2008. However, the implementation process then encountered a significant delay due to the inability of GENCO-II to obtain a Letter of Credit from a commercial bank at reasonable cost. As a result, the RSC was amended in March 2009. Under the revised RSC, GENCO-II made an increased down payment to the sponsor equal to 14% of the RSC’s value. Subsequently, the GoP issued an annual renewable sovereign guarantee covering GENCO-II’s rental payments in lieu of a LC. These steps were completed in July 2009, at which point the RSC became effective. The sponsor’s estimated investment was US$26 million. To calculate this estimate, first the investment's present value (PV) was assumed by multiplying an assumed investment per kilowatt (US$600) by the plant’s installed capacity. The PV was then used to find an annual amortized payment, assuming 15 years as the expected asset life and a discount rate of 10%. This annuity payment was then multiplied by the term of the rental contract in years, giving the sponsor’s total estimated investment.