Gulf Rental Power Project

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In September 2009, the rental services contract (RSC) between the state-owned Northern Power Generation Company (GENCO-III) and Gulf Rental Power Ltd. [Pakistan] for the installation, and operation for a five-year term of a 62 MW rental power plant (RPP) at Eminabad, Gujranwala, 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. On Sep. 26, 2008, under a ‘Fast Track’ procurement scheme, PPIB published a tender notice calling for submission, by Oct. 31, 2008, of proposals for rental power plants of 500 MW cumulative capacity. The bids for ‘Package-1’, which specified a target commissioning date of end 2009, were opened and evaluated in November 2008. Three bids were received, two of which met the technical and financial criteria of the tender. Among the two ‘responsive’ proposals was that of Gulf Power. On April 27, 2009, the Private Power and Infrastructure Board (PPIB) issued a Letter of Award (LoA) to Gulf Rental Power Ltd., which proceeded to sign the rental services contract (RSC) with the designated state-owned power purchaser, Northern Power Generation Company (GENCO-III), on Sep. 6, 2009. Under the RSC, GENCO-III was to pay a rental charge of US$85 million, payable in arrears in 60 equal monthly installments to the sponsor, and to pay the sponsor’s fuel costs at a rate of Rs. 6.6622 per kWh based on the reference fuel price of Rs. 26,000 per metric ton. 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-III 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-III was to deliver a Letter of Credit (LC) to the sponsor equal to the sum of GENCO-III's 60 monthly rental payments, guaranteeing GENCO's payment obligations. The implementation process encountered a significant delay due to the inability of GENCO-III to obtain a Letter of Credit from a commercial bank at an acceptable cost. As a result, the GoP modified the implementation process during 2009. In line with the revised process, GENCO-III 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-III’s rental payments in lieu of a LC. These steps were completed in September 2009, at which point the RSC became effective. The sponsor’s estimated investment was US$24.5 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. On April 28, 2010, all test operations were satisfactorily completed, after which the project came online.