Techno Rental Power Project-I

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In December 2009, the rental services contract (RSC) between the state-owned Northern Power Generation Company (GENCO-III) and Techno Engineering Services (Pvt.) Limited for the installation, and operation for a three-year term of a 150 MW rental power plant (RPP) at Summandari Road, Faisalabad, 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. On October 10, 2007, PEPCO published a tender notice for invitation of proposals for a 150 MW RPP. The evaluation criterion was the lowest total tariff in US cents per kWh, inclusive of rental charges and fuel cost component. In response to the tender notice, three bidders submitted their proposals. Techno Engineering Services (Pvt.) Limited submitted a bid with two options: (1) using MAN B&W equipment; and (2) using Sulzer/Wartsila equipment. Although it was ranked third on price, Techno's Option 2 was approved because it met the commercial operations date requirement of May 15, 2008. On Jan. 24, 2008, Pakistan Electric Power Company (PEPCO) issued a Letter of Award to Techno Engineering Services (Pvt.), which proceeded to sign the RSC with the designated state-owned power purchaser, Northern Power Generation Company (GENCO-III), in February 2008. Under the RSC, GENCO-III was to pay a rental charge of US$135 million, payable in arrears in 36 equal monthly installments to the sponsor, and to pay the sponsor’s fuel costs at a rate of Rs. 6.268 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, Northern Power Generation Company (GENCO-III), the state-owned power purchaser, was required to make a down payment to sponsor equal to 7% of the RSC’s value. Lastly, within 30 days of the RSC’s signing, GENCO-III was to deliver Letter of Credit (LC) to the sponsor equal to the sum of GENCO-III's 36 monthly rental payments, guaranteeing GENCO-III'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 Government of Pakistan (GoP) revised the process in September 2009. Under the revised process, GENCO-III made an increased down payment to the sponsor equal to 14% of the RSC’s value. Following this, the GoP issued a sovereign guarantee covering GENCO-III’s rental payments in lieu of an LC. These steps were completed by Dec. 2009, at which point the RSC became effective. The sponsor’s estimated investment was US$35.5 million. To calculate this estimated investment, 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 annuity 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. As of June 2010, the plant was undergoing test operations and was not yet online.