CHAPTER 12

ECONOMIC AND FINANCIAL EVALUATION

12.1 INTRODUCTION

Population of Pakistan at the time of independence (Aug 14, 1947) was only 32.5 million,
which has grown to 184.4 million in 2013. The population growth rate, although declined
(from 3.06% per annum in 1981 to 2.04% in 2013), yet it is much higher than that of
neighbouring countries like India, Bangladesh, Sri Lanka and China. At present, Pakistan is
the 6th most populous country in the world and it is likely to become the 3 rd most populous
country by 2020, if the present trend of population growth continues. Such a high population
growth rate, not only dilutes the results of development efforts, but also creates
unsustainable demand on already scarce resources of the country. .

12.1.1 Need for the Project

Electricity plays a crucial role in our lives. Our industry, irrigation and water supply tube-
wells, hospitals, educational institutions, and households, all depend upon electricity and
electric driven equipment/devices in today’s world.

12.1.2 Economic Analysis of Chapare/Charkhil

Economic analysis of Chapare/Charkhil Hydropower Project is presented in the following

sections. The objective of the economic analysis is to determine:

 Whether the Project is beneficial for the economy of Pakistan; and

 To assess the economic viability of the Project over its economic life

Standard approach and methodology has been adopted to carry out the economic analysis
of 9.5 MW Chapare/Charkhil Hydropower Project. The investment cost of this Project has
been estimated as Rs. 2,632.98 Million including price escalation, custom duties and
interest during construction.

The benefits of the Project have been calculated on its energy production capacity of 9.5
MW (55.54 GWH per annum) and revenue collection (to be made during its construction
period of 36 Months and subsequent operational life span) on the basis of current
tariff/system sale price. The economic costs of the Project have been calculated on shadow
prices for unskilled labour and Standard Conversion Factor (SCF) of 0.9 for prices of skilled
manpower, goods and material. Local taxes, duties, escalation and contingencies have not
been counted towards economic cost of the Project. The total economic cost of the Project
so derived comes to 1,505.28 million PKR.

To demonstrate economic feasibility of Chapare/Charkhil Hydropower Project, equivalent

thermal power cost approach has been used. The life cycle cost of Chapare/Charkhil
Hydropower Project has been compared with the life cycle costs of alternative equivalent

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 thermal plants i.e. steam Generation Plant using Furnace Oil (FO plant) and a Combined
Cycle Gas Turbine (CCGT).

For this purpose benefits from the equivalent thermal plants have been evaluated in terms
of cost foregone for generating equivalent thermal energy of 55.54 GWh per annum.
Installation of 9.5 MW Hydel Plant would result in saving against oil fired plant or combined
cycle gas turbine.

12.1.4.1 Thermal Power Plant Parameters/Assumptions

Parameters/assumptions used in the analysis for Chapare/Charkhil HPP and alternate

thermal power plants are as under:

Table – 1 Assumption for Economic Analysis

Combine Cycle
Sr. No. Description Unit FO Plant
Gas Turbine
1 Capital Cost* US$/kW 1200 2000
2 Calorific Value Btu/kWh 3412 3412
3 Plant Efficiency (Factor) % 55 39
4 Heat Rate Btu/kWh 6203.6 8749
Fuel Price

i. Fuel Price Gas** US$/mm Btu 11.5 -

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ii. Fuel Price OF*** Litre/US$ - 0.45

iii. Consumption FO Litre/kWh - 0.27

6 Fuel Cost ( Average) US$/kWh 0.1269 0.1269
7 O & M Cost % 3 3
8 CO2 Emission**** Kg/kWh 0.15 0.25
9 Economics Cut of Rate % 12 12
* Detail Engineering Design Report DHP
** Pakistan Multan CIF Gas Price from Transit Pipe line from Iran
*** Furnace Oil Price has been based on Crude CIF Oil Karachi 105.27 US$/Barrel September, 2012
**** World Bank IPCC Report Page 102, 113

12.1.4.2 Price Datum

Market Rate System of KPK with an area factor of 1.1% is the basis of financial cost
estimates. All costs and benefits have been expressed at price level of June 2014. The
summary of cost estimate has been used for economic and financial analysis.

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12.1.4.3 Exchange Rate

This estimate considers the local currency in Rupee for Civil Works and the foreign currency
component in US Dollar for Electrical and Mechanical Equipment. Total cost is converted in
equivalent Rupees with exchange rate of 1 US$ = Rs. 100, and used throughout analysis.

12.1.4.4 Duties and Taxes

Duties and taxes @5% have been applied for imported items.

12.1.4.5 Shadow Prices

Economic analysis of the Project is based on accounting/shadow prices, as market prices

(being distorted due to government’s intervention through monetary and fiscal policies, and
trade union interference) do not represent real prices (true opportunity cost) in the economy.

12.1.4.6 Opportunity Cost of Capital (OCC)/Discount Cost

For converting the financial prices of traded commodities (imports/exports) into economic
prices, international prices published in World Bank Documents have been used after
making adjustment of port handling and transportation charges.

12.1.4.7 Standard Conversion Factors

The values of non-traded goods (local component) have been brought at par with border
prices by using Standard Conversion Factor (SCF). All amounts are expressed in real terms
and no escalations are applied to any component including capital, O&M and fuel costs etc.

The following conversion factors have been applied to convert base cost of local component
to economic cost:-

- Standard Conversion Factor 0.90

- Land 1.00
- Skilled Labour 1.00
- Unskilled Labour 0.77
- Portland/Sulphate Cement 0.75
- Steel 0.81
- Furnace Oil 0.81

12.1.4.8 Anticipated Total Cost of Project

The economic value of the Chapare/Charkhil Hydropower Project is the anticipated total
cost of delivering about 55.54Gwh of energy per annum which shall be sold to
PESCO/Central Power Purchasing Agency (CPPA) through existing Grid System.

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12.1.4.9 Capital Cost of Alternative Thermal Power Plants

The capital cost of alternative candidate thermal power plant is based on typical index
US$/KW.

12.1.4.10 Project Base Cost

Summary of the Project’s base cost is illustrated in Table-1.

12.1.4.11 Period of Project Activities

The period for project activities has been assumed as Thirty Six months, which has been
phased out as follows and shown in implementation schedule.

Year 1 Year 2 Year 3

22.48% 61.72% 15.8%
12.1.4.12 Economic Life of the Project

The analysis considers a 30-years useful economic life for the Hydropower Project and 30
years for machinery and equipment.

12.1.4.13 Operation and Maintenance Cost

1.5% of base cost has been assumed as financial O&M Cost for Chapare/Charkhil
Hydropower Project while the same for alternative thermal plants is assumed as 3%. The
total financial O&M cost works out to be Rs. 20.60 million per annum for the whole
economic life of the Project. When converted to annual economic O&M cost, using SEF 0.9,
it works out to be Rs. 18.54 million

12.1.5Results of Economic Analysis

Economic comparison of Chapare/Charkhil Hydropower Plant with alternative equivalent

thermal power plants is presented as under:

The Economic Indicators calculated in the comparison of Chapare/Charkhil Hydropower

Project with the alternative equivalent thermal plants (i.e combined cycle gas turbine and
furnace oil plant) clearly establish that the Project is economically viable. Summary of
results of these comparisons are shown as under:

Furnace Oil Plant CCG Turbine

Economic Indicators
Without CDM With CDM Without CDM With CDM
Present worth of benefits 4,744.70 5,115.20 4,659.90 4,943.00
Present worth of costs 1341.50 1341.50 2,323.50 2,323.50
Benefit Cost Ratio (BCR) 1:3.5 1:3.8 1:2.0 1:2.1

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 EIRR % 44.64 47.48 30.84 33.05
12.1.6Economic Sensitivity Analysis

To test the robustness of the economic appraisal of the Project, sensitivity analysis has
been carried out. The summary of the results of sensitivity analysis is presented below.

CCG Turbine Furnace Oil Plant

Indicators Without CDM With CDM Without CDM With CDM
IRR with Cost overrun by 20% 10.51 25.73 20.30 39.86
IRR with 10% less benefits 11.16 28.56 21.19 42.92
Combined Impact 9.63 22.36 19.09 36.01
Key; EIRR = Economic Internal Rate of Return; BC Ratio = Benefit Cost Ratio

12.1.7Certified Emission Reduction (CER)

The Chapare/Charkhil Hydropower Project will generate 55.54GWh per annum, as such the
Project will avoid emission of about 51.69 tons per annum of CO 2 if combined cycle plant is
considered as an alternative source of energy production and 81.98 tons per annum of CO 2
if the alternate plant is run by Furnace Oil. To monetize the emission of CO 2 by the Project,
US$18 per ton of CO2 has been taken. The monetary value of CO 2 has been added in the
cash flow for re-estimating the EIRR. The results are summarized below:

CCGT F.O
 Generation capacity (GWh) 55.54 55.54
 Carbon emission per kWh (kg) 0.517 0.820
 Estimated quantity of CO2 per GWh (tons) 28,714.18 45,542.80
 One ton CO2 rate (US$) 18 18
 Total annual cost of CDM benefits for 20 years (million PKR) 51.69 81.98
 Consultant’s annual registration cost @ 15% for 20 years 7.75 12.30
 Net annual CDM Benefits for 20 years 43.93 69.68

12.1.8Conclusion

The results reveal that this project is economically viable as the EIRR is greater than the
opportunity cost of capital. Therefore, making investment in this project does not involve any
risk and the Project is recommended for implementation.

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12.2 FINANCIAL ANALYSIS

Unlike economic analysis, the financial analysis deal only with the costs and financial
returns to the partners involved in the financing of the Project and does not care about the
impact of the Project on National Economy. However, it does identify the impact of Project
investment on public finance.

The rationale behind both (economic as well as financial analysis) is to provide economic
and financial yardsticks to the decision makers for selection or rejection of the Project from
among the competing alternative investment proposals, hence both are necessary.

12.2.1 Methodology

12.2.1.1 General Approach

This analysis will identify and assess whether the Project is financially viable to produce
electricity at affordable rates. The calculation is based on the capital expenditures and
operating costs, applying relevant parameters. These are based on specific prices for
maintenance and personnel, as well as figures like interest rates, financing terms etc. The
Project outflows include base cost, import duty on foreign cost of electric and mechanical
equipment, local and foreign cost escalation and interest during construction, whereas
inflows include financial revenue forthcoming from sale of energy based on estimated
tariff/kWh. Financial indicators such as financial internal rate of return (FIRR), generation
cost per Kwh, capacity cost per MW and tariff are work out to check the financial viability of
the Project.

12.2.1.2 Financial Structure of the Project

The prime objective of the implementation of Chapare/Charkhil Hydropower Project with a

total installed capacity of 9.5 MW. Summary of the estimated project base cost is presented
in the table given below.

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Table: Phasing of Project Cost over Construction Period of different options
Foreign Total Total
Local cost
Options   cost (Million (Million US
(Million Rs)
(Million Rs) Rs) $)
           
22.48% of Base Cost (1st Year) 22.48 402.99 128.72 531.70 5.32
61.72% of Base Cost (2nd Year) 61.72 1106.4 353.40 1459.80 14.60
15.80% of Base Cost (3rd Year) 15.80 283.05 90.40 373.43 3.73
Total Base Cost   1,792.44 572.53 2,364.95 23.65
Custom Duties   28.63 0.00 28.63 0.29
Price Escalation   107.74 0.00 107.74 1.08
Interest During Construction   101.18 30.49 131.67 1.32
Financial Cost   2,029.98 603.00 2,632.98 26.33

12.2.1.3 Terms of Loan

The repayment of the loan would be made in the form of annual amortization charges
whereby the principal and interest charges would be repaid in equal annual instalments.
The rate of mark-up fixed by the GOP for current financial year is 10.65% as notified by the
Ministry of Finance, Government of Pakistan for 2013-2014.

12.2.2 Financial Parameters

Financial parameters such as escalation rates (local and foreign), import duty and interest
during construction required to be developed prior to determining the financial feasibility of
the Project are briefly discussed as under:

12.2.2.1 Price Datum

In the Financial analysis of Chapare/Charkhil Hydropower Project, both cost and benefits
have been expressed on a price level of June 2014.

12.2.2.2 Financial Cost of the Project/Project Investment Cost

The total amount of money necessary to put a project into operation is known as "Capital
investment costs". This investment can be made through in-house capital, credit from
national and international financing agencies, and from suppliers.

The total project investment cost of Chapare/Charkhil Hydropower Project has been
estimated as 2,632.98 million PKR (26.33 million US$).

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12.2.2.3 Annual Amortization Cost

Debt is paid off in regular instalments over a period of time or the deduction of capital
expenses over a specific period of time (usually over the asset's life). More specifically, this
method measures the consumption of the value of intangible assets.

The annual amortization cost @ 10.65% at a period of 20 years (payback period), which
has been levelised over 30 years and worked out as 193.812 million PKR.

12.2.2.4 Annual O&M Costs

The financial annual O&M charges have been worked out at 1.5% of base cost which
comes 35.474 million PKR. These costs have been converted into annual economic 0 & M
costs i.e. Rs. 22.06 million using SCF 0.90. This arrangement has been assumed to be
constant for the economic life of the Project.

12.2.2.5 Annual Recurring Cost

Recurring costs refer to expenses that reappear over a period. The annual O&M cost and
annual amortization costs have been taken in the annual recurring cost which comes to
229.286 million PKR.

12.2.2.6 Local Escalation

The future projections of inflation rate are made on the basis of historical trends and
government policies to curtail inflation. In Pakistan the Inflation Rate for local cost is 6.5%,
which has been used in this project as well.

12.2.2.7 Foreign Escalation

The manufacturing unit value index (MUV) represent the escalation rate of seven
industrialised countries. For foreign cost updating, escalation rate of 2.2% has been used
(World Bank web site).

12.2.2.8 Interest During Construction (IDC)

Interest rates of public entity projects are determined by the Ministry of Finance GOP. The
mark up rate of June 2014 fixed by the government (i.e 10.65% for local as well as foreign
loans) has been used in financial analysis of this project. A simple interest rate has been
used for calculating interest during construction as per practice in WAPDA and planning
commission. The price escalation and IDC have been calculated for this project and given in
Table-2.

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12.2.2.9 Custom Duty

As per policy for power generation projects 2002, the GOP has given fiscal incentives which
allow adding customs duties at the rate of 5% on the import of electrical and mechanical
equipment's not manufactured locally, in project financial cost, which has been applied in
this project.

12.2.2.10 Exchange Rate

An exchange rate of 1 US$ = 100.00 PKR has been applied in the entire analysis.

12.2.2.11 Discount Rate

The selection of proper discount rate is highly important. The implication of high discount
rate discourage whereas the low discount rate encourage saving, investment and growth. In
Pakistan the marginal productivity of capital is 12%, has been used for estimation of
levelised tariff and is used in economic/financial evaluation of this project.

12.2.2.12 System Sale Price

Financial analysis has been carried out on the basis of system sale price of 8.94 PKR/kWh
as on 30th Jun 2013 (published in the 38th issue of power statistics of NTDC 2013), which
has been projected at 5% to the commissioning year which comes to 10.35 PKR/kWh and
thereafter it has been kept constant throughout the life of the Project.

12.2.2.13 Period of Investment

A useful operational life of 33 years after (construction period) has been considered for the
Project. The construction period has been taken as 36 months.

12.2.3 Terms of Loan/amortization

The annual amortization cost @ 10.65% at a period of 20 years (payback period), which
has been levelised over 33 years and worked out as 166.20 million PKR.

12.2.4 Results of the Financial Analysis

The Project will generate sufficient revenue to cover debt services, operation cost and
provide adequate rate to the Project investor. The financial analysis has been carried out on
the basis of system sale price. The result of the financial analysis shows FIRR of 18.71 as
shown in Annexure-11.

The appropriate level of FIRR is best judged against the Project weight average cost of
capital (ACC) .WACC considers the cost of all sources of capital used to finance the
Project.

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12.2.5Unit Cost

The cost per kWh of energy generated has been estimated by dividing annual recurring cost
by annual generation over the life of the Project. The annual recurring cost is arrived at by
amortizing the local and foreign financial cost including custom duties, escalation and
interest during construction of local and foreign cost components at the interest rate of local
and foreign costs for 20 years and levelised at the useful life of the Project which is
assumed as 30 years. Adding annual O&M cost 35.47 million PKR gives annual recurring
cost of 229.286 million PKR. The unit cost of the Project comes to. 4.128 PKR/ kWh (4.128
US¢/ kWh). The installed cost per MW comes to 292.554 million PKR equal to 2.93 million
US$. Detailed calculations are given in Annexure-14

12.3 BENEFITS OF THE PROJECT

12.3.1 Financial Benefits

The Project is highly beneficial due to less unit cost and will help in saving foreign exchange
on import of fuel.

The direct financial benefits are determined in the form of power revenue available from the
sale of energy generated by the Project. The annual generation at bus bar is estimated as
55.54, expecting revenue throughout the 30 years economic life of the Project. Revenue
has been estimated on the basis of system sale price of 10.35 PKR/kWh. 3.05% auxiliary
losses have been assumed. The total revenue comes to 633.71 million PKR per year.

The generation cost worked out to be Rs. 4.128 PKR/KWh (4.128 Cents) over the useful life
of the Project and cost per MW of installed capacity being Rs.292.554 Million PKR
(equivalent to 2.926 million US$) are also very attractive to reflect the financial benefits of
the Project.

The revenues of Govt. will increase due to direct and indirect taxation, duties and levies of
the production of goods and services that will arise from the power generation within the
Project area as well as from the electricity duty collected by the Federal Government,
Government of KPK or any other Government agency.

The Project will result in saving of foreign exchange required to import furnace oil for
thermal power generation

12.3.1.1 Profit/Loss account and cash flow statement (assumptions)

Expected income, profit and loss shown in in the statement, has been worked out on the
following assumptions.

The income/revenue projections are based on the sale of energy at the average sale price
of 11.41 per KW of 2013-14 (refer power system statistics 39 th issue) which have been

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 projected at the rate of 5% per annum, thus making the sale price as Rs. 11.41 per KW by
the year of operation i.e. 2016-17.

The revenue attributable to the Project is calculated at 100% of the sale proceeds. The
auxiliary losses @ 3.05% have been taken as all the power will be purchased by NTDC

12.3.2 Economic Benefits

The hydel projects need extensive civil works and can create significant number of job
opportunities for engineers, technicians, skilled and unskilled labour during execution and
operation of the Project.

The Project will provide incentive for the establishment of small and medium size industry
based on local raw material, creating gainful employment opportunities to the increasing
work force. This will further help in alleviating disguised unemployment in agriculture sector.
Providing basic infrastructural facility of electricity in rural areas goes a long way in checking
large scale migration of rural labour force to urban centres.

The savings of gas, presently consumed in thermal projects as a fuel, will help meet the
shortage of gas supply for consumption in domestic, industrial and transport sectors.

12.3.3 Social Benefits

The Project will supply 9.5 MW of power and generate 55.54 GWh of energy annually which
will assist in meeting power demand of the country.

The Project will implement several programs that are designed to improve living standard of
the area.

The hydel projects play an important role in the country’s economy due to utilization of
indigenous energy resources, in reducing load shedding.

12.3.4 Environmental Benefits

The Project has no adverse impact on the local environment. On the other hand it will help
to reduce emission of harmful bi-products i.e SO 2, NO2 and CO2 etc. The Project will avoid
annual releases of about 28714.18 to 45542.80 tone of CO2 from an equivalent thermal
plant and have a corresponding reduction in atmospheric pollution.

12.3.5 Conclusion

The financial analysis clearly indicates that the Project is financially viable and there is no
financial risk in implementation of the Project. In addition, the generation cost per kWh is
attractive and capacity cost per MW is within limit.

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