The financing of the Patrind hydropower plant across three
states in Pakistan reveals how to complete deals in the
challenging frontier jurisdiction.
Although international investors question its political
stability, Pakistan is fast becoming a market that attracts
adventurous investors. And for good reason: in 2012 the Karachi
Stock Exchange hit all-time highs.
But growth demands infrastructure, and the Patrind
hydropower project, financed by multilaterals and an
export-credit agency, provides much-needed power to remote
areas of Pakistan.
Shearman & Sterling's Sanja Udovicic, who advised the
lenders in this financing, explained that this is a complex
cross-border PPA structure that follows that of the
New Bong Escape hydropower project, which closed in
But she noted that this is the first time a hydropower
project, spanning Azad Jammu and
Kashmir (AJK), which has a unique political status in the
region, and the Khyber-Pakhtunkhwa
(KP) Province, has reached financial close.
"We had to navigate various integration issues and carefully
analyze the risk allocations to ensure that political risks
were appropriately addressed in the power purchase agreement,
two separate implementation agreements, two water use
agreements and multiple direct agreements provided by the
Governments of AJK, KP Province and the Government of Pakistan,
which also provided a guarantee in support of the obligations
of the power purchaser," Udovicic said.
She added that the deal was financed by three multilateral
development banks Asian Development Bank (ADB),
International Finance Corporation and the Islamic Development
Bank as well as the Korean export credit agency (ECA)
Korea Export-Import Bank (K-EXIM).
The intercreditor issues were complex, especially the
incorporation of an Islamic lease structure in the mix,
The project required interfacing with each provinces
government as well as the Government of Pakistan.
Alfred Ng, a senior associate at Shearman & Sterling,
said that there were intricate local issues related to the
acquisition of land because the project straddled AJK and KP
with diverse local procedures and various landowners, including
local governments and individuals.
To resolve these issues, lengthy and complex statutory
processes had to be followed to ensure that all stakeholders
were consulted and treated fairly.
Counsel also had to be aware of intricacies regarding the
National Electric Power Regulatory Authority (Nepra). Udovicic
explained that the tariff for power generated by the project is
regulated by Nepra and is essentially a 'cost-plus'
It assesses the project at least twice during the course of
the financing stage: once fairly early on, with another
assessment pre-financial close, Udovicic explained. There is
then a true-up assessment performed once the project is
She added that the assessments are undertaken in accordance
with complex regulations which specify which costs can be
treated as project and financing costs for the purposes of the
Some costs which might otherwise be treated as
projects costs, such as funding of the debt service reserve
account and cost overruns which are not approved by the
regulations, are not taken into account in the tariff
calculation, she said. Financiers must
structure around the rules to ensure that the financing terms
and the financial model address these quirks
There have been several innovative project financings that
closed in Pakistan in 2012. Aside from the Patrind hydropower
financing, this year the ADB collaborated with the Islamic
Development Bank to close its
first wholly-shari'ah compliant financing of the Fauji
Foundation's two wind farms.
Moreover the Patrind financing demonstrates the growing
prominence of Korean sponsors and lenders in emerging
Ng said that this deal is reflective of the success of
Korean sponsors in Asia, including challenging jurisdictions
The Korea story is quite an important one for project
finance in the region, and Korea Water and Daewoo both
participated in the deal, with backing from K-EXIM, he
But a challenge may be attracting commercial banks, which
remain wary of local politics and contract law from their
experiences in the 1990s. Following the close of 19 independent
power projects (IPPs) under the Private Power Policy in 1994,
the Government of Pakistan terminated 11 IPPs by 1998 on
alleged or technical grounds that resulted in a difficult
three-year workout period.
Pierre Bailet, a legal expert at the ADB, said he expected
that ADB recently completed Pakistan project financings would
encourage commercial banks to support projects in the
This is especially key because many of the multilaterals
have done a number of projects in Pakistan and may be reaching
their country limits.
Udovicic noted that some
sponsors are looking to Chinese ECAs to meet part of this
funding gap. She expected to see more Chinese developers and
contractors make a push in these frontier
Chinese developers and contractors, together with the
Chinese ECAs and banks supporting them, may have a learning
curve in relation to the solutions developed to address issues
arising, she said. They will also need to be patient in terms
of the time and challenges involved in getting a Pakistan
financing off the ground
But Udovicic added that this could be an interesting new
source of funding for the many projects still in the
development phase in Pakistan.
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