Project cost and funding mix
According to Asif (2020), the project is estimated to cost US$603 million, including contingencies of 30 million. The proposed project’s financing is based on an 80:20 debt: equity ratio amounting to total equity of US$123 million and total debt of US$480 million. The debt is comprised of US$ 300 million of senior debt and US$180 million of subordinated debt. The senior debt was raised through a US$140 million loan from the Exim Bank of the USA, an IFC +A+ Loan of US$40 million, an IFC +B+ Loan of US$60 million, and a US$60 million loan that was supported by the proposed Bank guarantee. The subordinated debt of US$180 million was provided through the PSEDF and amounted to about 30% of the total project financing. The Exim Bank of the USA and the Bank of China provided US$90 million and US$80 million, respectively in loans to GOP, which was earmarked for lending to the Uch project through the PSEDF. In comparison, the Bank provided a balance of US$10 million. The project is a precedent for the Bank Group’s approach to financing infrastructure projects. This landmark partnership between the Bank and IFC demonstrates how both institutions can use their strengths to benefit the client country.
Demand, supply, and risks
Zahoor and Rumi (2020) state the supply of energy did not meet the demand driven by 5-year annualized 4.4% economic growth. In the late 1990s, electricity demand grew by 5.1%, while supplies lagged behind, increasing by only 1.7%. According to Zahoor and Rumi (2020), the country’s energy demand was expected to increase by 8.8% per year after 2010. The resulting mismatch between supply and demand has affected the population, industries, and the economy as a whole. Thus, there has been an increase in electricity shortages, severely constraining Pakistan’s economic growth.
Asif (2020) affirms that the security framework for the project consisted of a set of contractual agreements that determine the prominent project participants’ rights and obligations. The project-related risks, such as completion and operation risks, including the gas reserve risk, were borne by the sponsors and the lenders, as well as the natural force majeure risks other than those related to either WAPDA or OGDC. The GOP and its agencies assumed Sovereign or political risks, which were backstopped by the Bank’s Guarantee.
Initial problems with the project and final restructuring
Despite the commissioning of the Uch power station, which began commercial operation in 2000, there was an acute scarcity of electricity in the country, which impeded the country’s economic growth and poverty reduction. Asian Development Bank (2020) notes that although sales and demand for electricity increased by more than 40% after implementing the Uch power project, investment in new generating capacity lagged. Pakistan urgently needed to develop local energy resources to reduce its dependence on imported fuel oil, which accounted for a third of its food. To further improve and increase its supply of electric power, an extension to the existing UPS facilities was proposed by the UPL Shareholders Group, led by International Power Plc and Creative Energy Resources, through implementing the Uch II Power Station Expansion Project.
Inc. Ibp (2018) asserts that UCH II is 100% owned by International Power. The total project cost is estimated at $480 million, which was funded by debt and equity in a 75:25 ratio. International Power’s equity investment of $120 million was funded from current liquid resources. The $360 million of debt was provided by the Asian Development Bank, IFC, Korean EXIM, and the Islamic Development Bank.
Despite some delays in its project implementation, Uch-II has been one of the most successful projects in Pakistan. In turn, it reflects the strong commitment and support from the project’s sponsors and investors. The successful collaboration with other multilateral development institutions also helped create a robust financing structure for the project’s development and realization. The successful financing of this project provided additional generating capacity and increased the reliability of the country’s electricity supply.
Asian Development Bank. (2020). Uch-II Power (Private) Limited: Uch-II power project (Pakistan) [PDF document].
Asif, Muhammad. (2020). Energy and environmental outlook for South Asia. CRC Press
Inc. Ibp. (2018). Pakistan: Economic and development strategy handbook: Volume 1: Strategic Information and Opportunities. International Business Publications.
Zahoor, B. & Rumi, R. (2020). Rethinking Pakistan: A 21st century perspective. Anthem Press.