Diamer_Basha_Dam_Project_Financing_(1)_(1).pdf

IQC 391 – I – 11 – 00003

AID – 391 – 14 – 00001

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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Disclaimer:

This Project is made possible by the support of the American people through the United

States Agency for International Development (USAID). The opinion expressed herein are those of the author(s) and do not necessarily reflect the views of USAID, A. A. Associates or

Techno-Consult International.

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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Data Collection, Review and Preparation of

International Tender Document for the Diamer Basha Dam Project

DIAMER BASHA DAM PROJECT FINANCING

Prepared by : Huzefa Mazahir Ali

Revised by : ----------

Approved by : Azher Uddin Khan

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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Data Collection, Review and Preparation of

International Tender Document for the Diamer Basha Dam Project

DIAMER BASHA DAM PROJECT FINANCE

Table of Content

ACRONYMS

UNITS OF MEASUREMENT

1.0 ASSIGNMENT BACKGROUND

1.1 USAID SUPPORT

1.1.1 SCOPE OF WORK FOR CONSULTANTS

1.1.2 SCOPE OF INVESTMENT SPECIALIST

1.2 SCOPE OF THIS REPORT

1.3 METHODOLOGY

2.0 SUMMARY OF FINDINGS

2.1 FINANCING STRATEGY

2.2 INSIGHTS FROM FINANCING OF OTHER HYDROPOWER DAM PROJECTS

3.0 PROJECT TIMELINES, ECONOMIC ASSUMPTIONS ESTIMATED CAPITAL COSTS

3.1 DIAMER BHASHA PROJECT BRIEF

3.2 PROJECT COSTS & TIMELINES

4.0 TAXES AND FEES APPLICABLE TO POWER PROJECTS

5.0 PROPOSED APPROACHES FOR FINANCING OF DIAMER BHASHA PROJECT

5.1 FINANCING STRATEGY FOR DBD PROJECT

5.1.1 PHASE 1

5.1.2 PHASE 2

5.2 KEY CONSIDERATIONS FOR FINANCING OF DBDP

5.2.1 CIRCULAR DEBT RESOLUTION:

5.2.2 ALTERNATIVE FUNDING STRATEGY:

5.2.3 PRIORITIZATION OF PROJECTS:

6.0 FINANCING OF OTHER DAM PROJECTS

6.1 DEREGULATION

6.2 EVOLUTION OF PROJECT FINANCE MARKET

6.3 SOURCES OF FINANCING FOR HYDROPOWER PROJECTS:

6.3.1 RAISING EQUITY

6.3.2 RAISING LONG TERM LOANS AND GRANTS

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6.3.3 USING CREDIT GUARANTEES TO EXTEND THE TENURE OF LOANS

6.3.4 ISSUING DOMESTIC LONG-TERM BONDS

6.4 FINANCING STRUCTURES OF OTHER CONTEMPORARY DAMS

7.0 REFERENCES

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Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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1.0 ASSIGNMENT BACKGROUND

Diamer Bhasha Dam Project (DBDP) is a very important project for Pakistan. When completed it would have a gross storage capacity of 8.1 million acre-feet (MAF), live storage of approximately 6.4 MAF and installed power generation capacity of 4,500 megawatts (MW), yielding about 19,000 gigawatt hours (GWh) annually.

The project is expected to abate irrigation water shortages in the Indus Basin Irrigation System, improve irrigated agriculture by meeting future demand, aid in management of flood peak flows, compensate for the loss of storage by sediment deposition in existing downstream reservoirs and provide hydropower to alleviate acute electricity shortages. In addition, approximately 1,100 GWh of additional energy will also be generated annually at Tarbela due to conjunctive operation of both Diamer Bhasha and Tarbela reservoirs. Diamer Bhasha Dam will also enhance the life of the Tarbela reservoir by 35 years by storing a major part of the sediment presently flowing into the Tarbela reservoir.

1.1 USAID SUPPORT

The United States Agency for International Development (USAID) is supporting the Government of Pakistan (GOP) in rapid reviews of environmental, technical and financial plans for raising funds for the Diamer Bhasha Dam Project. USAID also intend to have a complete environmental assessment undertaken at a later stage to ensure that the environmental and social resettlement plans are in accordance with the international best practices and align with the prevailing policies of potential donors like the World Bank, ADB and other multilateral and bilateral funding agencies.

1.1.1 SCOPE OF WORK FOR CONSULTANTS

To achieve the aforementioned USAID has commissioned a team of consultants (Consultants) to perform the following:

► Collect data, information, and copies of studies and reports prepared for the proposed DBDP by the Government of Pakistan (GOP) and other partners, including the World Bank and the Asian Development Bank (ADB), ► Review the materials collected to identify gaps in the existing data, information, and analyses in comparison to international best practices, ► Develop statements of work (SOW) for the recruitment of international consultants to carry out further evaluations, assessments, and design modifications related to environmental and technical aspects, ► Develop a statement of work for the recruitment of international consultants to prepare a financing plan and dynamic financial model for this mega project.

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Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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1.1.2 SCOPE OF INVESTMENT SPECIALIST

The Consultants scope of work has been divided into environmental, technical and financial aspects. With regards to financial aspects, the Consultants/Investment Specialist has four deliverables which are as under:

1. Power Sector Overview

2. Energy sector financial claims on GOP

3. Diamer Bhasha Dam Project financing

4. Terms of Reference for appointment of financial consultants

1.2 SCOPE OF THIS REPORT

The purpose of this report is to provide USAID with an insight into the following:

a. Basic information such as project timelines, economic assumptions, and current estimated capital costs;

b. Information on project related taxes and other fees required by GOP regulations;

c. Discussion of GOP and WAPDA proposed approaches to funding construction of the project, i.e., financing studies;

d. A brief overview of other relevant mega-dam projects and how they were financed.

e.

1.3 METHODOLOGY

In preparing this report, reliance has been placed on both primary and secondary data sources. Secondary research on project’s costs and timelines, financing strategy for Diamer Bhasha and other contemporary dams was completed based on various documents collected from WAPDA and other sources. Furthermore, meetings were held with Mr. Amjad Mahmood, Joint Secretary, Ministry of Finance and Mr.

Shamshad Khan (CEO-Diamer Bhasha) for discussions on proposed financing strategy for DBDP.

Financing structure of some other contemporary large to mid-sized dams was studied for the purposes of this report. Our data set was limited due to lack of availability of reliable information on the funding of some other recently constructed dams (such as the Bakun dam being constructed in Malaysia). Moreover, dams being constructed in mid to low income countries were considered as the financing structures available for dams in advanced countries may not be relevant for comparison. Furthermore, some of the earlier constructed hydropower dam projects were disregarded as the project finance market evolved in late 80s and early 90s and therefore, the earlier constructed dams did not have access to bank loans and ECA loans which a more recent project would have.

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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2.0 SUMMARY OF FINDINGS

2.1 FINANCING STRATEGY

GoP/WAPDA would be relying primarily on external sources for raising finance for Diamer Bhasha project. Based on indicative financing plan prepared, GoP, most likely through WAPDA, intends to commit US$ 2 Billion in financing for the project. This commitment would be front-loaded i.e. utilized largely in initiating the project, completing land acquisition, relocation of affected people and payments to consultants etc.

In order to raise financing for the project, WAPDA has divided the project into two phases/parts. Part 1 pertains to the civil works portion of the reservoir which is estimated to cost approximately USD 5.5 Billion and would take around 9 years to complete. Phase 2 would entail completion of power house and installation of power generation equipment so that the project is able to generate electricity – the second phase has a shorter expected completion time of 3-4 years and would commence at the end of 7th year of completion.

Given the long lead time for Part 1 and lack of a commercially viable output at its completion, it appears to be difficult to raise financing from commercial sources for this phase. Hence, GoP/WAPDA expect to finance this phase through a combination of their own funds as well as grants/soft loans from friendly countries and multilateral agencies.

WAPDA believes that Part 2 of the project could be packaged as a commercially viable project and financing can be obtained for this phase through a combination of supplier credit, multilateral and commercial bank loans, as well as donor funding and grants for the balance component. Based on indicative financing plan, another important source of financing may be through deferring the Interest during Construction portion of approximately USD 2.15 billion and repaying it through electricity sales.

2.2 INSIGHTS FROM FINANCING OF OTHER HYDROPOWER DAM

PROJECTS

Based on the financing structures of other dams studied, the following conclusions can be drawn:

I. The larger the dam size, the larger the proportion of equity financing

II. Bank funding was available for relatively smaller scale projects; however, credit guarantees were necessitated for obtaining these funds

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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III. Role of ECA’s was limited as, in general, the civil works portion of the dam constitutes a large portion of the project cost and in many cases (China, Brazil etc) have their own equipment manufacturers.

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Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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3.0 PROJECT TIMELINES, ECONOMIC ASSUMPTIONS ESTIMATED

CAPITAL COSTS

3.1 DIAMER BHASHA PROJECT BRIEF

The Diamer Bhasha (DB) project is located on Indus River, about 315 km upstream of Tarbela Dam, 165 km downstream of the Gilgit and 40 km downstream of Chilas (refer location map). The proposed dam would have a maximum height of 272m and impound a reservoir of about 8.1million acre feet (MAF), with live storage of more than 6.4 MAF. Mean annual discharge of Indus River at the site is 50 MAF. Thus the dam will impound 15% of the annual river flow. The dam project would cover an area of 110 km2 and extend 100 km upstream of the dam site upto Raikot Bridge on Karakoram Highway (KKH). The DB project would have a gross installed power generation capacity of 4,500 MW and would produce 19,000 Gwh of energy per annum.

3.2 PROJECT COSTS & TIMELINES

Diamer Basha Dam project is expected to take 10 years to complete and cost around USD 13,662 million, based on current estimates. Project costs can be broken down into the following major components:

Project Cost details

Major Components Amounts in USD

Land acquisition, resettlement and social safeguards

1,263

Consultancy and Project management

KKH relocation, project colony and access road costs

Concrete dam & related structures including diversion tunnels

2,158

Underground works and related structures

Hydro-mechanical equipment and hydraulic steel structures

Power plan generation equipment

1,119

Electrical high voltage equipment & power plant electrical equipment

1,156

Physical contingencies and duties

Escalation during construction

1,684

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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Interest during construction

3,936

Total

13,6611

Furthermore, the project’s spend curve/funding utilization levels are produced in the table below:

Project cost utilization

Year Amount in US$ mn upto June 2013 256

2013-2014 696

2014-2015 452

2015-2016 644

2016-2017 1,116

2017-2018 1,256

2018-2019 1,565

2019-2020 1,710

2020-2021 1,628

2021-2022 1,461

2022-2023 1,467

2023-2024 1,412

Total 13,662 2

1 Diamer Bhasha Dam Project Cost wise schedule (Updated July 2012). Source document shared in meeting with CEO of Diamer Bhasha Dam.

2 Extracted from a presentation made to USAID by Chairman WAPDA. Source document shared in meeting with CEO of Diamer Bhasha Dam.

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Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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4.0 TAXES AND FEES APPLICABLE TO POWER PROJECTS

Given the energy shortage in the country, successive governments in Pakistan have offered generous incentives to attract financing in the power generation sector. These incentives have focused on providing appropriate returns to the investors as well as reducing the cost of establishing these projects.

The ‘Policy for Power Generation Project 2002’ provides the following tax incentives to power sector projects:

► Customs duty at the rate of 5% on the import of plant and equipment not manufactured locally.

► No levy of sales tax on such plant, machinery and equipment, as the same will be used in production of taxable electricity.

► Exemption is already available from income tax including turnover rate tax and

► withholding tax on imports.

WAPDA has estimated that taxes and duties payable on account of DBDP project would be to the tune of USD 110 million. This represents a 5% duty on foreign component of electrical and mechanical equipment and machinery in respect of Lot 1 to 5 (source: PC-1 for DBDP project).

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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5.0 PROPOSED APPROACHES FOR FINANCING OF DIAMER BHASHA

PROJECT

Government of Pakistan and WAPDA are cognizant of the need for Diamer Bhasha project and are trying to move swiftly on that front. GoP has agreed to fund the costs for land acquisition, relocation and social infrastructure development, which would cost an estimated PKR 120 Billion. Some progress made on that front is demonstrated3 by:

i. Completion of a bridge at Thakot on Indus River by National Highway Authority (NHA) to facilitate transportation of construction material and equipment.

ii. Release of Rs.6.563 billion to Government of Gilgit-Baltistan for acquisition of land. of which 1,783 acres has already been acquired.

iii. Release of Rs. 262 million to D.C. Kohistan for land acquisition. 162 acres have already been acquired.

5.1 FINANCING STRATEGY FOR DBD PROJECT

WAPDA/GOP is working on an alternative financing arrangement for the dam, following some reluctance from the World Bank (WB) and the Asian Development Bank (ADB) to provide financing for the project.

The newly inducted government of Prime Minister Nawaz Sharif considers this project to be vital towards tackling the severe energy crises of the country and is considering a new strategy to address the financing crunch. Broad contours of this strategy was described during our discussions with WAPDA officials (CEO of Diamer Bhasha Dam project – Mr. Shamshad Khan) as being divided into two phases to facilitate financing.

The funding strategy would accordingly be tailored in accordance with the unique characteristics of these phases, which can be broadly classified as under:

Phase 1. Completing the construction up to the stage where the civil works for the reservoir for water storage is complete. This phase is estimated to

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3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf

DIAMER BHASHA DAM PROJECT FINANCING

Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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Mr. Shamshad Khan, CEO Diamer Bhasha)

Phase 2. Development of the power house and installation of power generation equipment so that project is able to generate electricity. This phase would commence at the end of 7th year from project start date and end 3-4 years thereafter

5.1.1 PHASE 1

This phase has a long lead time and is more complex, given that it would entail creation of a reservoir, and therefore would be more prone to cost and time overruns.

As already indicated, this phase would only result in creation of a reservoir for water storage, without any power generation and hence, no source of revenues. Based on these characteristics, it would not be possible to obtain ‘Project Financing’ for this phase and it would need to be financed from GoP/WAPDA from own sources, along with funding support from loans/grants from multilateral agencies and other donors.

5.1.2 PHASE 2

This phase is expected to have a relatively shorter construction timeline and once complete, would enable the project to generate electricity, which would raise revenue for the project. Given that the project would produce 19,000 Gwh of electricity per annum and based on current blended electricity generation rate of USc 11 per Kwh in Pakistan, the project’s electricity sales would fetch revenues in excess of US$ 2 Billion per annum. Hence, for Phase 2 market based financing sources such as project finance loans from local and international banks as well as supplier credit backed by ECA loans can constitute a large component of the financing requirements.

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Data Collection, Review and Preparation of International Tender document for the Diamer Bhasha Dam Project

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WAPDA has prepared an indicative financing plan for the project, please see below:

Indicative financing plan for Diamer Bhasha dam project4

Component Cost

Estimate

GOP/

sukuk bonds/

Power surcharge

IDB/

Middle

East donors/

USAID/

PPP,

supplier credit

Suppli ers’ credit /Exim banks / local banks

/ ADB

Deferred payment s from power revenues

All USD million

Land acquisitions

542 - - -

Resettlement and Incidentals

721 - - -

KKH relocation

361 -

361 - -

Project colony in Thor

71 - - -

Consultancy

242 - - -

Engineering and project management including Authority's overheads

103 - - -

Access bridge along with approach road

15 - - -

Contract lot 1 - concrete dam & related structures including diversion tunnels

2,158 -

2,158 - -

Contract lot 2 - underground works and related structures (left and right banks)

828 -

828 - -

Contract lot 3 - hydro-mechanical equipment and hydraulic steel structures

459 - -

459 -

‘Projects for USAID Assistance (ongoing – new) for 2013-18”. http://www.wapda.gov.pk/3FF7EAD7-

E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-

9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-

3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf

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Contract lot 4 - power plan generation equipment (left and right bank)

1,119 - -

1,119 -

Contract lot 5 - electrical high voltage equipment & power plant electrical equipment (left and right bank)

1,156 - -

1,156 -

Physical contingency

171 -

171 - -

Duties and taxes

110 - - -

Escalation during construction

1,684 -

868 -

Interest during construction

3,943

1,190

2,143

Total

13,683

1,954

4,794

4,792

2,143

As can be seen above, the indicative financing plan has been devised keeping in view the characteristics of the two phases of the project.

The financing plan necessitates commitments by Government of Pakistan/WAPDA of approximately USD 1.95 billion. These commitments are significantly front-loaded to help kick-start the project; carrying out land acquisition, relocation of affected population, relocation of Karakoram Highway, project consultancies etc. GoP/WAPDA plans to finance these through a combination of Public Sector Development Program (PSDP) allocations, raising Sukuks/Term Finance Certificates and possibly through levy of a power surcharge.

WAPDA also anticipates that a significant portion of the Interest During Construction (i.e. approximately USD 2.15 billion can be funded through power revenues i.e. the IDC can be converted into other loan instruments which would be repaid through project revenues.

For the remainder, GOP/WAPDA anticipates raising approximately US$ 9.6 Billion through a combination of donor funding support from donors, such as USAID and donors from the Middle East countries, multilateral development agencies (MDAs), such as Asian Development Bank, Islamic Development Bank and Buyers/Suppliers credit and bank loans.

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5.2 KEY CONSIDERATIONS FOR FINANCING OF DBDP

The following are the key factors which would impact the financing arrangement for the project:

5.2.1 CIRCULAR DEBT RESOLUTION:

Resolution of circular debt issue, which causes a massive drain on GoP’s fiscal resources while making investments in the power sector unappealing to investors, will be imperative for raising financing for the project. If the circular debt issue can be addressed, investment in the project would prove appealing to commercial lenders and suppliers willing to provide credit facilities against equipment. In the absence of Circular Debt, the project financiers would have greater comfort that project’s cash flows would be sufficient to meet their debt/capital repayment requirements without recourse to Government of Pakistan and more competitive rates of financing would be offered.

5.2.2 ALTERNATIVE FUNDING STRATEGY:

GoP/WAPDA appear to be extremely reliant on foreign sources of financing and in case of delays/non availability of funding from these sources, the project would suffer from a cost spiral. Hence, GoP/WAPDA need to tap multiple sources of financing for the project and possibly rely more on indigenous sources. In this respect, reducing the extremely high budgetary deficit through a combination of increasing the low tax to GDP ratio as well as reducing the various subsidies (including that for electricity) and privatization/restructuring of loss making state owned enterprises would be a priority.

5.2.3 PRIORITIZATION OF PROJECTS:

WAPDA has a large pipeline of projects and given the state of its finances, it may not be in a position to complete all of these within the targeted timelines. Therefore, WAPDA may need to prioritize its scarce capital and prioritize certain projects.

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6.0 FINANCING OF OTHER DAM PROJECTS

Most large dam projects are set up to also generate electricity. Until the 1980s, large dam projects were largely financed by public funds. Public funding was supplemented by multilateral development banks and foreign development banks as well as grants/loans from friendly countries. Financing from commercial banks, bonds or Export Credit Agencies (ECAs) was not very prominent.

For non-hydropower dams, which usually are much smaller, this state of affairs has not changed very much. But for large hydropower dams this situation has changed significantly. There are various reasons for these changes but the primary reason is the deregulation of electricity markets as well as evolution of the global project finance market.

6.1 DEREGULATION

In many countries, large state owned entities that were previously responsible for developing large power projects (including hydroelectric projects) have been privatized. Consequently hydropower projects are now being financed more and more through private sources of capital. Equity in the project is typically contributed by the EPC contractor/operator of the dam while on the debt side, commercial bank debt also plays a growing role, mainly through loans from local and foreign commercial banks. ECA financing has augmented as well during the past decades, spurred mainly by the globalization of equipment markets.

6.2 EVOLUTION OF PROJECT FINANCE MARKET

Post 1980s, there has also been a rapid growth in the private sector investment in infrastructure projects as a number of countries offered incentives to investors to set up projects under Public Private Partnership mode (source: Institute of Public Private Partnership, USA).

The reasons for this strong/rapid growth have included a combination of long-term factors:

The first foreign debt crises in developing economies in the early 1980’s gave rise to the need for state governments in developing economies to find new “off balance sheet” financing mechanisms for priority public works and infrastructure investments

The strong economic growth rates posted by developing economies “emerging markets” by the early 1990’s and the increasing competition in the international market of private construction contractors and equipment suppliers

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The competitive pressures of globalization on governments to make efficient and available infrastructure the centerpiece of national competitiveness programs

The demonstration effect of successful project financing on governments, as well as investors and lenders, to apply similar PPP & project financing structures to their own priority infrastructure projects

6.3 SOURCES OF FINANCING FOR HYDROPOWER PROJECTS:

Due to deregulation and liberalization of the energy markets, hydropower projects now have to compete with other thermal based projects and are no longer unilaterally planned by the government. The following table provides a comparison between the key benefits and pitfalls of hydropower and thermal power projects.

Hydropower projects Thermal Power Projects

Pros

- Low operating costs

- Higher project life

- No greenhouse gas emission

Cons

- Relatively higher capex requirements

- Ecological impact

- Longer development timelines, resulting in higher interest charge

- Construction risks and prone to delays

Pros

- Lower construction risks

- Shorter development timelines

- Lower capital expenditure requirements compared to hydro

Cons

- Greenhouse gas emissions

- Higher operating costs

- Typically reliant on imported rather than indigenous fuel source

Given the longer life and higher cost of hydropower projects, these should ideally be financed with relatively long term capital. However, debt available from commercial bank loans and ECA loans have a maximum tenure of 10-15 years and the resulting higher annual debt repayment requirements would push the tariff very high in the initial period of the hydropower project.

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Therefore, there is a significant need to raise a higher proportion of equity or quasi-equity financing for these projects. Hence the need for public financing and loans from multilateral agencies, along with equity funding by the contractor, especially in the earlier stages of the construction of a hydropower project.

There are various capital sources that can be utilized to ensure the alignment of tariff structure with the longer lifespan associated with hydropower projects.

6.3.1 RAISING EQUITY

Increasing the equity component in the financing of a hydropower dam project is the most obvious solution to ensure that a source of funding commensurate with the project’s long life span is utilized in the financing structure to reduce the tariff in initial years. This equity can be contributed by a) host government, directly or through state owned equity, and b) operator/constructor of the project. The requirement for a high equity percentage would be felt more in a large hydropower project.

6.3.2 RAISING LONG TERM LOANS AND GRANTS

Financial institutions of countries where dams are being developed may be more amenable to offering relatively longer term financing. Another potential source of funding is multilateral agencies i.e. World Bank (which has been involved in financing of a number of projects).

Once the project becomes operational, getting the loans refinanced (at possibly lower rates and higher maturities) becomes possible due to lowered project risks and cash flow visibility. Multiple refinancing could potentially address the asset lifespan and capital tenure matching issues.

6.3.3 USING CREDIT GUARANTEES TO EXTEND THE TENURE OF LOANS

Credit guarantees, issued by export credit agencies or multilateral banks, are increasingly used to extend the tenure of loans. Export credit agencies try to stimulate the export from their country by guaranteeing loans extended by commercial banks to exporters of equipment or to their buyers (such as the operators of hydropower dams). Multilateral development banks can also issue guarantees for loans.

The Bujagali Falls case shows that through a combination of ECA and World Bank guarantees, which is a novelty, all loans to the project could have a tenure of 16 years, despite the political instability of the host country Uganda.

6.3.4 ISSUING DOMESTIC LONG-TERM BONDS

Another potential option for raising capital could be issuance of Infrastructure bonds, backed by a sovereign guarantee, to raise finances from host country’s financial markets. This could be a viable source of financing given that a significant proportion

DIAMER BHASHA DAM PROJECT FINANCING

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Page 21 of 24 AAA-TCI of costs incurred in development of a reservoir based hydropower project is in local currency and can therefore be financed with local currency loans. This option would be more practicable than raising foreign currency financing for countries with low credit ratings.

However, issuance of bonds alone cannot be expected to provide the entire financing for the project and would need to be used in conjunction with host country’s capital injection ‘equity’ along with ‘equity’ from the project contractor/operator with some ECA backed supplier credit.

6.4 FINANCING STRUCTURES OF OTHER CONTEMPORARY DAMS

While selecting dams for comparison, attention has been paid to the developments in mid to low income countries. Some other candidates comparable to Bhasha Dam exist but these have not been considered due to lack of sufficient data on financing structures.

A comparison of the financing structures of various dams has been provided in the table below. It appears that ‘Equity’ based financing is a predominant mode of financing for most of these projects and generally the proportion of ‘Equity’ funding is positively correlated to the cost of the dam project.

Another popular mode of financing is from Multilateral Banks and National Development Banks. Although bank loans are also available, these are predominantly available for relatively smaller scaled projects and that too in combination with credit guarantees.

Role of ECA’s in financing of these projects is also relatively subdued compared to other infrastructure projects. This is on account of a) higher proportion of civil works required in developing a dam project and b) many of the selected dams being constructed in countries with their own equipment manufacturers (China, Brazil etc).

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Financing structures of other hydropower dam projects*

Country Dam Project

Project Cost (US$ mn)

Equity

Multilater al Developm ent. Loans

National Developmen

t. Loans

Foreign Developmen

t. Loans/ Grants

Bank

Loans

Bon ds

ECA

Loans

Credit Guarantee s

China Three

Gorges 24,600 55% - 20% - 5% 19% 1% 4%

Brazil Belo

Monte 11,000-18,000 20% 80%** - - - -

Brazil & Paraguay

Itaipu Dam

18,000 60% - 6% 28% - - 6%

China Ertan 3,400 47% 23% 25% - 4% - 1% 4%

China Longtan 3,180 25% - 75% - - - - -

Venezuela Caruachi 2,300 44% 27% - - 16% - 13% (22%)

Lesotho LHWP 2,415 26% 20%

6% 48%

(17%)

Lesotho LHWP 1,150 30% 17%

53%

(10%)

Uganda Bujagali

Falls 583 20% 20%

3% 19% 3% 36% (55%)

*5 (Worm, J.; Dros, J.M.; and J.W. van Gelder (2003) Policies and Practices in financing large dams. Research paper II prepared for WWF International - Living Waters Programme April 2003. Research by AIDE environment and Profundo. Retried from:www.profundo.nl/files/download/WWF0304.pdf http://www.profundo.nl/files/download/WWF0304.pdf

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World energy,(2013), Retrieved from: http://www.worldenergy.org/documents/antonio_cardoso__inga_presentation_2008__rev140408.pdf World Bank, (2001), Retrieved from:

http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/09/01/000094946_01081804002882/Rendered/PDF/mult i0page.pdf

**80% of project finance is provided by The Brazilian Development National Bank (BNDES) which is a government owned corporation. The remaining 20% of the cost is to be provided by a consortium of investors, which is led by Electronote which is a subsidiary of stat-owned utility holding group Electrobras.

http://www.worldenergy.org/documents/antonio_cardoso__inga_presentation_2008__rev140408.pdf http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/09/01/000094946_01081804002882/Rendered/PDF/multi0page.pdf http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/09/01/000094946_01081804002882/Rendered/PDF/multi0page.pdf

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7.0 REFERENCES

1. Diamer Bhasha Dam Project Cost wise schedule (Updated July 2012). Source document shared in meeting with CEO of Diamer Bhasha Dam.

2. Presentation made to USAID by Chairman WAPDA. Source document shared in meeting with CEO of Diamer Bhasha Dam.

3. ‘Projects for USAID Assistance (ongoing – new) for 2013-18”.

http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-

3AA206EF4BB8/FinalDownload/DownloadId-

9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-

3AA206EF4BB8/pdf/proposedusaid.pdf

4. ‘Projects for USAID Assistance (ongoing – new) for 2013-18”.

http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D- 3AA206EF4BB8/FinalDownload/DownloadId-

9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-

3AA206EF4BB8/pdf/proposedusaid.pdf

5. Worm, J.; Dros, J.M.; and J.W. van Gelder (2003) Policies and Practices in financing large dams. Research paper II prepared for WWF International - Living Waters Programme April 2003. Research by AIDE environment and Profundo. Retrieved from:www.profundo.nl/files/download/WWF0304.pdf

World energy,(2013), Retrieved from:

http://www.worldenergy.org/documents/antonio_cardoso__inga_presentation_2008_

_rev140408.pdf

World Bank, (2001), Retrieved from:

http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/0

9/01/000094946_01081804002882/Rendered/PDF/multi0page.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.wapda.gov.pk/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/FinalDownload/DownloadId-9FA233E6F31285F2A50E4AF1BCC146E8/3FF7EAD7-E83E-4D91-B59D-3AA206EF4BB8/pdf/proposedusaid.pdf http://www.profundo.nl/files/download/WWF0304.pdf http://www.worldenergy.org/documents/antonio_cardoso__inga_presentation_2008__rev140408.pdf http://www.worldenergy.org/documents/antonio_cardoso__inga_presentation_2008__rev140408.pdf http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/09/01/000094946_01081804002882/Rendered/PDF/multi0page.pdf http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/09/01/000094946_01081804002882/Rendered/PDF/multi0page.pdf