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Provincial autonomy in IPP concessions – how dare they!

power energy pic 2

This old battle rages on.  Recent media reports indicate the Federal and Provincial Governments remain at odds over the latter’s Constitutional right to grant concessions to private companies to construct and operate power houses and to sell power to the national grid.  This is just yet one more instance of the internecine fights of the fiefdoms of the power sector while the citizens brave through prolonged spells of darkness and national productivity loss at a gargantuan scale.

Picture the CEO of a global power sector corporation with red carpets rolled out for him by a Province with MOUs following for construction of a hydropower project under the auspices of the Provincial Government.  The CEO then walks into his lawyer’s office only to be told to his utter bewilderment that the jury is still out on the issue whether the Province could grant the concession to build that power plant.  What would be the first thought in his mind: “no wonder these people are sitting in darkness!”

It is frightening to see that the Federation could rally around to pass the Eighteenth Amendment to strengthen democracy in the country (we would remain silent about party democracy) but cannot get together to pass a minor amendment that would lay the Constitutional controversy to rest and let every able agency – be that Federal or Provincial – to work to the best of its ability to maximize investment in the power sector.  Why should it matter in the end whether the Provincial or the Federal Government should grant the concession?  Critics would say that the devil is in the details – issues like Constitutional limitations, Federal ownership of the transmission and distribution companies and the denial of sovereign guarantees to Provincial projects, to name a few.  The answer is simple – none of these is a deal-breaker when it comes to structuring a project provided the right advisory team is on the project with good faith support of the relevant public bodies.

The Council of Common Interests (CCI) is being lobbied by the Provinces to provide maximum freedom to the Provinces in this matter.  The impression one gets from the media reports is that the stumbling block is the Federal Government, who has to be brought on board for the CCI to rule in favour of the equal right of the Provinces to grant concessions.  The legal arguments advanced against the Provincial autonomy in this area are summarized below (somewhat simplistically):

a)      Electricity is a Federal subject after the Eighteenth Amendment and therefore all legislative and concomitant executive powers on this subject vest in the Parliament and the Federal Government (by virtue of Article 97 of the Constitution);

b)        Article 157 of the Constitution, in so far as material to this article, reads as follows:

“(1)     The Federal Government may in any Province construct or cause to be constructed…power installations….

(2)      The Government of a Province may –

(c)       construct power houses….”    (emphasis supplied)

c)   Under the principles of Constitutional interpretation, a specific Article of the Constitution overrides the general statement of a subject in the Legislative List.  However, Article 157(2) limits the Provinces to “constructing” power houses, in contrast to the Federal Government’s additional entitlement to “…cause to be constructed…”.   This difference in drafting of sub-articles (1) and (2) of Article 157 is used by the proponents of the Federal Government to argue that while the Federal Government can promote IPPs (cause to be constructed), the Provinces can construct the power houses themselves alone and cannot provide concessions for private IPPs to do so.

d)    The Provinces demand a sovereign guarantee by the Federal Government for the payment obligations of the Federal Government owned Central Power Purchasing Agency (CCPA) /NTDC or the distribution companies (DISCOs).  The Federal Government takes the position that it will not provide a sovereign guarantee for power projects sponsored by the Provinces.

One wonders why this sterile debate has raged for such a long period without an out-of-the-box thinking.  If the ultimate objective is increasing private sector participation in the construction and operation of power houses, and the Provinces are really serious about this, why can they not sponsor a simple amendment in Article 157(2) of the Constitution to add the words “or cause to be constructed” just as is the case for the Federal Government?

If a Constitutional amendment seems beyond the power of the Provinces to swing, why cannot the CCI rule that the absence of the words “cause to be constructed” in Article 157(2) does not preclude the Provinces from sponsoring a power project, and then sub-contracting the project on build, operate and transfer basis (without the “own” part in conventional IPP projects) to private sector investors?  Surely, the word “construct” in Article 157(2) does not mean the Provincial Ministers have to be seen shoveling the project sites – the projects are always “constructed” by contractors, and it is absurd to suggest that the language of Article 157(2) requires the Provinces to use the Provincial C&W departments (or their equivalents) to do the construction.  All that Article 157(2) in its present form requires is that the ‘sponsorship’ of the Project in terms of its ownership or legal title should vest in the Provinces.

There is no apparent reason why the drafters of the 1973 Constitution drafted Article 157 the way it is – there might have been a deliberate policy at play not to let the Provinces grant concessions for private investment, but this seems far-fetched because the concept of private sector investment in power generation did not exist in Pakistan in 1973.  Perhaps the differential drafting might have been in the backdrop of the Federal Government owning WAPDA and therefore “causing” WAPDA to construct power houses.  But all this debate is sterile in the present day context where private sector investment is indispensable in propping up the crumbling power sector.

It seems the current construct of the concession and power purchase contractual framework in vogue in the IPP market in Pakistan is driving the parleys.  These contracts were developed on a strictly conventional project finance “build-own-operate” basis under the 1994 power policy of the Federal Government.  One wonders if the lending market has been consulted to find out why a sub-contract model suggested above with the project title, assets and receivables secured in favour of the lenders would not work.  The advisors are there to mould the contractual framework according to the specific transactional requirements and not the other way round.

Another mental block is the obsession with large scale projects – it seems the juices don’t start flowing with the decision makers unless the project is sufficiently large requiring investment in scores of millions of dollars.  Every megawatt is precious.  There are several small to medium scale projects which can be developed relatively quickly on known sites.

The sovereign guarantees are an amusing topic.  With an insolvent purchasing utility backed by a Federal treasury whose primary sources of finance are inflation-ridden measure of currency printing, private sector credit throttling by heavy public sector borrowing and financial assistance from ever domineering ‘allies’, one cannot but wonder at the private sector lenders’ and sponsors’ apparent disinterest to an out-of-the-box solution.  That said, there is no denying the fact that the effective credit instrument propping the current IPP investments is the sovereign guarantee; for if left to their own balance sheets, the wire line companies would not be able to backstop a cent’s worth of investment.

The sovereign guarantee addresses three pivotal project risks – payment default of the purchaser (CPPA/NTDC and the DISCOs), the nationalization or expropriation risk and the compensation (debt and equity) to the investors and lenders if the project is terminated.  It seems the Provinces have not done market testing to see if alternative solutions might be found.  I do not deign to say that work might not have been done in this arena – our markets are brimming with brilliant financial and legal minds, but their creativity faces the colossal obstacle of reactionary and apathetic response of the public sector players (with exceptions of course of some very gifted individuals who deliver very high output at meager compensation).

Leaving aside the issue of the limits to which the Federal Government can issue sovereign guarantees after the Fiscal Responsibility and Debt Limitation Act, 2005, one wonders why the Provincial Governments are convinced they cannot develop projects without the sovereign guarantee.  Project lenders and sponsors give highest rating in their project analysis to project cash flows and the ability of the purchaser to pay on time.  For small to medium scale projects, the solution may be found in (i) allocating the project risks to the respective parties best able to bear them (and also to cause them), and (ii) separating the “financial flows” of the projects from their “electrical flows”.

Payment default risk is no longer a “risk” – it is a fact that has already occurred.  The wire line companies are insolvent (barring a couple of DISCOs).  By dumping more IPP projects on the same “buyers” the insolvency problem is only being exacerbated by the day.  Why not, to the extent possible, find cash-healthy buyers?  The industry in Pakistan has a superior paying capacity and has suffered the most as a result of the power shortage.  Why can’t the Provinces lead “demand aggregation” of the industry, package it and sell this demand to the Provincially sponsored IPPs with the transmission and distribution companies acting only as the transporters of this electricity for a transportation charge (also known as the “wheeling charge”)?  This will not only relieve the wire line companies from accumulating a steadily rising portfolio of power price obligations, but will leave them free to perform their core function – operate the transmission and distribution networks for a cost-plus wheeling charge.  This is not a theoretical solution – this is a reality in the power sector industry worldwide where separation of financial flows from the electrical flows is commonplace.  This is a superior solution than parking the power price payment obligation with the already insolvent transmission and distribution companies.  It is not quixotic to expect that industrial estates, medium to large industrial consumers, housing societies and other significant concentrated loads will have superior credit-worthiness if the Provincial Government can step in and support this demand aggregation with appropriate legislation.  Can anyone shed some light on whether this exploratory exercise by way of a proper study has been carried out or has been considered but dismissed on the basis of conjectures alone?

The Distribution Licensing Rules of NEPRA made in 1999 and the transmission license of NTDC make it mandatory on them to provide wheeling services on “open access” basis to any generation company willing to get connected to their facilities against payment of a wheeling charge.  However, no such arrangement has been promoted by the companies for third-party open access, nor has the regulator deemed it necessary to enforce this arrangement.  One cannot resist remarking that the regulator’s role in industry reform and restructuring is wanting despite having all the enabling powers under the law.  Admittedly, NEPRA is hamstrung due to political constraints, but there are several areas including open access where the politicians might actually gain marks than lose them.  This is market opening – open access is a fact of life in almost all developed jurisdictions (including our neighbor) and is now undisputed wisdom in infrastructure industries.  Open access to telecommunication transmission networks was mandated by the telecommunication sector regulator (PTA) only a few years ago at publicly available tariffs and under approved interconnection contracts and it has revolutionized the telecommunications industry in Pakistan.

Let us now turn to the second primary risk of nationalization or expropriation.  It is inconceivable that this can happen given the fall from grace of socialistic economic norms, but the lenders and their lawyers need to address this remote possibility.  Why the Federal Government cannot offer a guarantee limited to this risk, given that the expropriatory powers of the kind feared by lenders rest primarily with the Federal Government?  There is no immediate financial exposure here as is the case in a payment default guarantee.

 As for the compensation on termination of the concession contract, the starting point will be a Provincial Government’s guarantee, or partial guarantee coupled with credit instruments from the Provincial banks.  Leaving aside for now potential Constitutional objections (which are not conclusive), is it not possible for the Provincial Governments to agree to provide security to the lenders over their National Finance Commission awards if the Provincial guarantee is not honoured on call?  I have not explored the Constitutional and legal implications of this route, but there isn’t any apparent obstacle to this arrangement.

 Critics may point out to the possibility of expropriatory legislation barring the enforcement of investor remedies in the above alternative cases, but then this objection applies equally to the sovereign guarantee.

As the old Texan saying goes “if all you ever do is all you ever did, then all you ever get is all you ever got”.

Sardar Ejaz Ishaq Khan, Managing Partner, AQLAAL Advocates, Islamabad

Procurement

procurementThe Supreme Court of Pakistan in its most recent judgment has set aside the Implementation Agreement (IA) executed in 2003 between Sui Southern Gas Company Limited (SSGCL) and Jamshoro Joint Venture Limited (JJVL) for extraction and supply of Liquefied Petroleum Gas (LPG). The IA has been set aside, primarily on the grounds of defects in the procurement process. The Supreme Court held that the project was awarded by SSGCL in a highly non-transparent manner with the object of giving undue benefit to JJVL. The Court observed that in a fair and transparent process of competitive bidding, the bid documents constitute the basis on which assessments, calculations and the bid itself are prepared by the bidders.

 This judgment has highlighted the importance of the Form of Contract attached with the bid documents. The Court held that although it is understandable that some terms in the Form of Contract (in JJVL’s case, the IA) were to be filled on the basis of bids received, however material changes in the contract subsequent to the bidding, will negate the notion of a fair and open competitive bidding process. The Court found that the IA which was finally executed between SSGCL and JJVL was significantly different from the Form of the IA which was given to other pre-qualified bidders.

Another serious lapse found in the procurement process by the Court was non-submission of the Bid Bond by JJVL along with its bid, despite an express requirement in the Instructions to Bidders. Although Bond was subsequently furnished by JJVL, the Supreme Court held that envelope containing the Financial Proposal could not have even been opened when the Technical Proposal was not accompanied by the mandatory Bid Bond. The Court observed that unjustified acceptance of such bid also constituted unfairness and illegality in the bidding process since other potential pre-qualified bidders were never informed that they could submit bids without Bid Bonds.

 Muhammad Ashraf Tiwana, Partner, AQLAAL Advocates, Islamabad

Permanent injunction under the Defamation Ordinance, 2002

images (7)AQLAAL Advocates is pleased to announce that Mr. Rashid Haneef, AQLAAL’s lead litigation partner, has been instrumental in protecting his client’s interests (a well-recognized and widely respected professional in corporate sector) against an onslaught of defamatory and derogatory emails of an influential individual by winning two land mark cases of award of damages under the Defamation Ordinance, 2002 to the tune of Rs.100,000,000/- each. This was achieved by successfully filing and pursuing of a suit for recovery of damages and grant of permanent injunction under the Defamation Ordinance, 2002.

We at AQLAAL Advocates are strong believers in safeguarding a person’s right to reputation and proactively advice clients on defending their rights under civil and criminal law in general and under the Defamation Ordinance, 2002 in particular. We understand that there is a general feeling in Pakistan to brush such matters under carpet but over time our experience with dealing such matters has shown that the courts generally have been inclined towards awarding the damages provided a cause is genuine and is properly pursued before the courts.

 Rashid Haneef, Partner, AQLAAL Advocates, Islamabad

Disability draft

disability

Persons with Disabilities in modern society continue to face a plethora of challenges. While internationally, recognition exists at Convention level through the United Nations, local legislation is entirely lacking in terms of providing a viable framework which would allow

Pakistan has a population of 183 million, fourteen percent of who are living with disabilities. Until 2012, even internationally,  no laws existed to respond to problems regarding disability. In 2012, UNO passed the United Nations Convention for Persons with Disabilities. Even the Convention however does not meet all the criteria of laws that should cater to Persons with Disabilities.

Mr. Saqib Javed, with assistance from Ejaz Khan (Partner) and fellow Associate, Roheen Ahmed has recently submitted a draft of the  Disability Act , 2013 to the Standing Committee on Health in the Punjab Provincial Assembly.

Saqib Javed, Associate, AQLAAL Advocates, Islamabad

DRONE

drone PicThe Honorable Peshawar High Court, recently passed judgment on drone strikes carried out at North and South Waziristan Agency, adjoining Khyber Pakhtunkhwa Province.

Brief Facts;

According to the reports since 2008, in North Waziristan Agency, 896 Pakistani civilians were killed, while 209 were seriously injured, only 47 foreigners were killed and 6 were injured. Similarly in South Waziristan, 553 local civilians were killed, 126 were injured.

According to Local & International media some foreign militants are hiding in the mountainous region of these Agency’s beyond the access of the local Administration and Semi Armed Forces. U.S through self framed opinion labeled these foreign elements as their enemy and these strikes are carried out on spy information to hit and kill these element, however the ratio of killing of foreign element is negligible while civilian casualties are shocking. Government of Pakistan has condemned these attacks. But the U.S stance is that General (R) Parvez Musharraf has given verbal consent to carry out these attacks but there is nothing in writing to support.

Order;

Drone strikes are against the provision of Article 2 (4) of the United Nation, which provides territorial integrity against the use of force against sovereign states. These strikes are also against the Geneva Conventions therefore clear & naked aggression on sovereign territory/ airspace of Pakistan. Drone strikes are carried out without taking into confidence of neither Government of Pakistan nor its security agencies. Which is clear violation of the UN Charter and its Conventions. Under the International Law & Conventions of the UNO, no state can choose and hit its enemy, hiding in another State, unless the latter State consent to it in writing which is not granted to the USA Authorities including CIA. Therefore these killing are war crimes, cognizable by the International Court of Justice, or Special Tribunal for War Crimes to be constituted by the UNO. As these operations are carried out against the militants who are not engaged in combat with the USA, therefore amounts to breach of International Law and UN Conventions as the casualties to civilians is more as well as to properties and live stock who shall be compensated in form of US dollars. Government and its Security Forces shall ensure that such strikes will not be carried out in future. Government shall take the matter to the Security Council of the UNO and in case it does not succeed there if VETO power is unduly exercised by the US authorities then urgent meeting of the General Assembly be requested through a written request to resolve this menace. The Ministry of Foreign Affairs is directed to prepare draft resolution. If US authorities do not stop the attacks the Government shall severe all ties including logistic & other facilities with the USA as a mark of protest.

Mehraj Tareen, Associate, AQLAAL Advocates, Islamabad

The Protection of Pakistan Ordinance, 2013

national assemlyOrdinance pertains to provide protection against waging of war against Pakistan & acts threatening the security. The Ordinance has been promulgated pursuant to the directions of the Hon’ble Supreme Court.

Any member of armed forces or civil armed forces deployed in any area on reasonable apprehension of commission of a scheduled offence (annexed to the Ordinance) after giving warning, use the necessary force and doing so shall exercise all powers of a police officer. Also arrest and enter any premises to take possession of any property without warrant. All the scheduled offences shall be cognizable and non-bail able. Inquiry shall be conducted by a joint investigation team comprising of one gazzetted police officer and two from armed and civil armed forces.

Where investigation cannot be completed within twenty-four hours a member of JIT, excluding the time necessary for journey from the place of arrest or detention to the court shall produce him before Special Judicial Magistrate and apply for remand. The detention shall not exceed ninety days. Person whose identity is unascertainable shall be considered as an enemy alien and shall be presumed to have joined insurrection against Pakistan.

Alien also includes a commonwealth citizen. Detention of such person shall be regulated in accordance with the provisions of Article 10 of the Constitution, and alien enemy shall be regulated under Clause (9) of the Article 10 of the Constitution. Government may appoint any person as judge of the Special Court, who is or has been a Session Judge or has been Advocate of the High Court for period not less than ten years.

The punishment for the scheduled offence shall be imprisonment which may extent to ten years with fine and confiscation of property. Person convicted may be confined at any place in Pakistan. Where Special Court is of opinion that the offence is not schedule offence shall return the case to be submitted before a Court of ordinary Jurisdiction. Appeal against the final judgment shall lie to the Supreme Court. Copies shall be supplied to the accused and public prosecutor on the day the judgment is pronounced, aggrieved person may file an appeal within a period of fifteen days.

Schedule providing offences are annexed to the Ordinance.

SECP Press Release

SECP1. SME Regulations Approved

The Securities and Exchange Commission of Pakistan (SECP) has approved regulations for the listing of small and medium enterprises (SMEs) for the Islamabad stock exchange. The regulations in addition to certain prerequisite conditions provide a set of procedures for issue, listing and trading of shares of SMEs. Now the SMEs  can raise funds from the capital market, through listings, for meeting their financial needs for  executing new projects and expansion of their existing businesse (Please click here for more detail)

2. Commercial Papers’ Regulations Approved (SRO 1036(1)/2013)

The regulations are aimed at facilitating highly-rated companies to raise funds from the capital market to meet their short-term financial needs through issuance of Commercial Papers (CPs), to provide the investors an additional financial product and to develop and broaden the domestic debt market. The CP is an unsecured short-term debt instrument issued by corporates at a certain  discount to its face value normally for meeting working capital requirements. The regulations have replaced the Guidelines for the Issue of Commercial Papers issued in 2002 by the SECP.  (Please click here for more detail)






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