Investing in Pakistan
A resilient nation of more than 180 million people, Pakistan is the 26th largest economy in the world. The country has abundant land and national resources and a strong human resource base. The country’s well established infrastructure and legal system allowed Pakistan to be the highest ranked South Asian nation on the World Banks ‘Ease of Doing Business Index’ in 2009. Host to more than 600 international companies, Pakistan offers the most liberal investment policy in South Asia and provides investors with an array of investment incentives especially in the power sector.
Pakistan is one of the ‘Next Eleven’ countries, the eleven countries that, along with the BRICS, have a potential to become one of the world's large economies in the 21st century.
Presently, approximately 40% of power generation capacity of the country is in private sector, and another 2,000 MW IPPs are under construction. The successive governments in the country have reiterated the commitment to increase private sector participation. Some of the advances and incentives for investors in the private sector include the following:
Availability of GOP’s Guarantees
GOP guarantees the performance obligations of its entities such as the power purchaser, and the provinces. GOP also provides protection to sponsors and lenders in case of termination of the project.
Predictable Multi-Year and Long-Term Tariff
Typically, a long-term tariff of 25 - 30 years is contracted with the power purchaser. The IPPs, thus, are not subjected to market risk for their output. The projects are expected to earn an attractive / competitive and stable return on investment.
Standardized Security Package
Standardized and tested agreements namely, the Implementation Agreement (IA), the Power Purchase Agreement (PPA), Water Use Agreement (WUA), the Fuel Supply Agreement (FSA), etc. are available upfront.
Pass-through of Fuel Cost and Additional Taxation
Any variation in price of fuel is to be passed on to the power purchaser. Similarly, any additional taxation over and above the Tariff assumptions is liable to be passed on to the power purchaser.
Risk Coverage for Exchange Rate Variation
To cover the exchange rate variations risk, the various tariff components are indexed for variation in the Pak Rupee and US$ exchange rates.
Protection against change in Duties & Taxes and Political Risks
GOP guarantees protection against change in duties and taxes, and against specified political risks.
Income Tax Exemption
Exemption from income tax, including turnover rate tax and withholding tax on import, is available to private power generation projects.
Power Purchaser to bear Hydrological Risk
For hydropower projects, hydrological risk is to be borne by the power purchaser.
Three Tier Tariff
Recognizing that cost uncertainty is a problem in hydropower project development, three distinct stages have been identified when costs may differ:
- Feasibility Level Costs
- EPC Level Costs
- Final Costs, no later than Commercial Operations Date (COD)
The tariff mechanism provides for NEPRA’s tariff determination bases on cost as feasibility study stage and then at EPC stage, adjustable at COD to reflect those changes which have been permitted in the mechanism.