Karkey Karachi Rental Project-I

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In April 2009, the rental services contract (RSC) between the state-owned Lakhra Power Generation Company (GENCO-IV) and Karkey Karadeniz Elektrik Uretim A.S. [Turkey] for the installation, and operation for a five-year term of a 232 MW rental power plant (RPP) in Karachi, 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. The Private Power and Infrastructure Board (PPIB) published a tender notice calling for submission of proposals for rental power plants of 500 MW cumulative capacity (‘Package B’). The technical bids for ‘Package B’ were opened and evaluated on July 15, 2008. Three bids were received, two of which met both the technical and financial criteria of the tender. Among the two ‘responsive’ proposals was that of Karkey for a 232 MW plant in Karachi. On Nov. 6, 2008, the PPIB issued a Letter of Award (LoA) to Karkey Karadeniz Elektrik Uretim A.S. [Turkey], which proceeded to sign the RSC with Lakhra Power Generation Company (GENCO-IV) on April 23, 2009. Under the RSC, GENCO-IV was to pay a rental charge of US$565 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. 6.344 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-IV 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-IV was to deliver a Letter of Credit (LC) to the sponsor equal to the sum of GENCO-IV's 60 monthly rental payments, guaranteeing GENCO's payment obligations. Karkey submitted the 7% payment guarantee on Oct. 27, 2008. The implementation process then encountered a delay due to the inability of GENCO-IV to obtain a Letter of Credit from a commercial bank at an acceptable cost. As a result, the GoP modified the implementation process. In line with the revised process, GENCO-IV 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-IV’s rental payments in lieu of a LC. With the submission of the sovereign guarantee in April 2009, these steps were completed and the contract became effective. The sponsor’s estimated investment was US$91.5 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.