Laraib Energy

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	28010
Company name	Laraib Energy Ltd.
Country	Pakistan
Sector	Utilities
Environmental category	B
Department	Infrastructure
Status	Pending Disbursement

Date SPI disclosed	April 2, 2009
Projected board date	May 4, 2009
Previous Events	Signed: November 5, 2009 Approved: July 30, 2009

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

IFC is proposing an investment in Laraib Energy Limited (“LEL”, the “Company”), which will develop and operate a 84 MW greenfield, run-of-river hydroelectric power generating complex known as the New Bong Escape Hydroelectric Power Complex (the “Project”) on the Jhelum River in Azad Jammu and Kashmir (AJ&K), Pakistan. The company is 75% owned by the Hub Power Company Limited (HUBCO), which owns and operates the first thermal power Independent Power Producer plant (the 1,292 MW Hub Power Station) in Pakistan, supported by the World Bank in 1990s. The Jhelum River is classified as an International Waterway and governed by the Indus Waters Treaty of 1960. In accordance with IFC’s Policy on Social and Environmental Sustainability (April 30, 2006), IFC, on February 17, 2009 sent riparian notices to the IFC Executive Directors for both, India and Pakistan notifying them of IFC’s proposed investment in the Project and its location in AJ&K, the Pakistan-administered portion of an area over which India and Pakistan have been in dispute since 1947. By supporting the project, IFC does not intend to make any judgment on the legal or other status of any disputed territories or to prejudice the final determination of the parties' claims. No objections have been received by either of the Executive Directors for India and Pakistan.

All project works are located in the flood plain of the Jhelum River approximately 7 km downstream of the Mangla Dam, a major multi-purpose water storage project commissioned in 1967, and adjacent to irrigation works that were completed in 1910 (the Bong and Upper Jhelum canals). The project will not involve the construction of a dam or reservoir nor will it affect existing water management regimes. It will withdraw water released from the existing Mangla Dam and return that water to the main stem of the Jhelum River through a 7.5 km tailrace constructed in a sub-channel of the Jhelum. Water released by the Mangla Dam is managed by the Indus River System Authority. As a run-of-river project, the project is not expected to affect upstream or downstream hydrology of the Jhelum River and is unlikely to cause any significant, lasting environmental and social impacts. The project includes an in-out connecting arrangement with the double circuit 132 kVA Mangla/Kharian transmission line, which passes over the project site. No right-of-way acquisition is needed since connection facility will be built within the project site.

The project will use the water being discharged from the upstream existing hydropower plant (1,000 MW Mangla Hydroelectric Power Station) located at Mangla Dam. The Mangla Dam is being raised by the national Water and Power Development Authority (WAPDA) to increase storage capacity (“Mangla Dam Raise Project”). The Mangla Dam Raise Project will provide better regulated water to the Project, however, both projects are not mutually dependent, and therefore, the Mangla Dam Raise Project has not been considered an associated facility to the project.

The project was registered as a Clean Development Mechanism (CDM) project by CDM Executive Board under the United Nations Framework Convention on Climate Change on January 31, 2009. The Asian Development Bank (ADB), the Islamic Development Bank and two local commercial banks (National Bank of Pakistan and Habib Bank Limited) approved financing to the Project in 2007. At the request of the company, IFC and Proparco are planning to provide additional financing to support the project.

Project sponsor and major shareholders of project company

Laraib Energy Limited’s Sponsor is Hub Power Company Ltd. (HUBCO). HUBCO was established in 1991 and owns and operates the 1,292 MW thermal power plant located at Hub in Baluchistan, Pakistan’s first IPP co-financed by the World Bank and other international lenders. Hub power plant represents about 8% of the generation capacity of Pakistan. HUBCO is listed on the Karachi, Lahore and Islamabad Stock Exchanges, and its Global Depository Receipts listed on the Luxembourg Stock Exchange. HUBCO has one of the largest market capitalizations of any private company in Pakistan with over 15,000 shareholders. HUBCO’s two largest shareholders are International Power (17%) and Xenel Industries (12%). International Power (IP) is a leading electricity generating company with over 30,000 MW in Australia, the USA, the UK, Europe, the Middle East, and Asia. In Pakistan, IP has interests in KAPCO (36%) and Uch (71.3%). IP is listed on the London Stock Exchange. Xenel Industries (Xenel), founded in 1973 by one of the oldest trading houses in the Middle East, is privately owned by the Alireza family. Xenel has is a diversified company with interests, amongst others, in energy, construction, infrastructure development, and carbon finance.

Laraib’s other shareholders are: Coate & Co. Limited (16.67%) and Asghar Ali Sons & Co. (7.78%). Coate & Co. Limited is privately held Pakistan company owned by Mr. Khalid Faizi, Mr. Aziz M. Khan, and Mr. Imtiaz Majeed. Mr. Khalid Faizi is a UK and Pakistan qualified chartered accountant with business interests in mining, oil & gas and telecom sectors. Mr. Imtiaz Majeed is an Australian and Pakistan qualified chartered accountant running Hammed Majeed Associates, a financial services consultancy. Mr. Aziz M. Khan is of Kashmiri origin with family businesses that include Kohsar Hydro (1.5 MW hydropower plant), which sells electricity to another family owned steel mill, Mangla Metals. Asghar Ali Sons & Co. is a Bahraini trading company involved in the businesses of perfumes, real estate, stainless steel and textile.

Total project cost and amount and nature of IFC's investment

The total project cost is estimated to be $217 million. IFC’s proposed investment consists of an A Loan of $35 million and an equity investment of up to $3 million.

Location of project and description of site

The project will be located approximately 120 km south-east of Islamabad between the New Bong and Old Bong Escapes, 7.5 km downstream of the existing Mangla Dam, in AJ&K. The Site is 438 ha. of which 417 ha. of land is required for the construction of the 7.5 km tailrace, roads, dike and soil disposal areas. The Government of AJ&K (GoAJ&K) holds 313 ha. of this requirement, which it has agreed to lease to LEL. WAPDA has agreed to release an additional 49 ha. of this requirement for onward lease to LEL by GoAJ&K. The remaining 55 ha. is privately held land, the bulk of which has been submerged by the waters of the Jhelum river since the river broke its course and cut a new channel (the Hari Channel) across this land in a major flood that occurred in September 1992. It is within the precincts of the Mangla Powerhouse (1,000 MW) adjacent to the highly secure Mangla Cantonment area. Laraib Energy Limited, the Company developing and implementing the Project, is located in Islamabad and is an unlisted public company.

Anticipated development impact of the project

The project is expected to have high economic and developmental impact as it will:

- Create a framework for hydro IPPs and have a strong demonstration effect (standards, procedures and document prototypes established in this project are expected to be replicated in other hydro projects in the pipeline);
- Reduce the level of very costly un-served electricity and meet incremental demand for power, thereby encouraging economic growth;
- Contribute to increase the country’s much needed installed capacity using a domestic renewable resource, thereby increasing energy security of supply;
- Contribute to lowering the average economic cost of power generation in Pakistan;
- Have significant environmental benefits compared to alternative thermal power options in terms of displacing greenhouse gas emissions (estimated reduction of greenhouse gas emissions is about 220,000 ton CO2 equivalent per year);
- Create jobs (around 350 to 500 skilled and unskilled jobs) during the Project construction phase and on an ongoing basis for the O&M contractor (60); and
Reduce reliance on imported fuel oil, thereby not impacting the country’s trade and current account deficits.

IFC's expected development contribution

Hydropower projects require long term debt funding with relatively long grace periods, as fixed costs related to debt service are the largest cost element for a hydropower project. Over the past 10 years, the GoP has been pushing for the development of a private hydropower industry but has not been successful, mainly due to the unavailability of adequate financing and the lack of specialized expertise on the part of domestic lending institutions. IFC’s ability to appraise such projects and provide competitive long term financing provides comfort to other banks and financial institutions, thereby closing the funding gap for the project.

IFC’s expected development contributions to the project, in particular, and the Pakistani power sector, in general, are as follows:

- IFC’s involvement will provide part of the long term funding needed to make the project viable from a tariff perspective. Without IFC’s funding, the company would not be able to raise the required long term funding, with similar maturity as that provided by IFC, in the local or offshore commercial debt market to fill the financing gap;
- IFC has engaged with the regulator, NEPRA, to provide a market-oriented perspective on typical current funding terms for project financings to be factored into the tariff determination calculation;
- Since Laraib Energy is the first hydro IPP, IFC’s involvement not only facilitates the project’s successful implementation but also serves as an important signal for other investors looking to participate in Pakistan’s nascent private hydropower industry; and
- Commitment to operating the project in accordance with IFC’s new Performance Standards on Social and Environmental Sustainability is expected to assist the project in strengthening environmental and social management systems, bringing risk and impact mitigation standards in line with good international industry practice in these areas, and implementing meaningful and effective community engagement programs.

Environmental and social issues - Category B

This is a category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts that may result will be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. The project will be a run-of-the-river hydropower plant and will not involve any new dam or reservoir. It will utilize surplus water currently being discharged from the existing upstream 1,000 MW hydropower plant (Mangla Hydroelectric Power Station) located at the Mangla Dam, which will improve downstream water resource utilization efficiency. The project will not cause any change in the irrigation water availability of the downstream areas, nor will it result in the physical or economic displacement of downstream communities.

IFC's review of this investment identified the following issues and opportunities:

- adequacy of client’s social and environmental management system for construction and operation, management of local and migrant labor and working conditions during construction,
- effectiveness of past and ongoing public consultation and disclosure programs,
- risk of natural hazards including seismic evaluation,
- disposal of excavated materials, impacts of canal diversion,
- protection of aquatic resources,
- potential impacts of the Project’s use of water of the Indus system of rivers, an international waterway, and the Project's location in Azad Jammu & Kashmir, the Pakistan-administered portion of an area over which India and Pakistan have been in dispute since 1947,
- community relations and benefits, including local employment, and arable land protection and reclamation,
improvement of environmental and social performance of the Project due to adherence to IFC Performance Standards, and
- avoidance of greenhouse gas emissions.

LEL is committed to responsible management of environmental, health and safety and social performance in the construction and operations of the project. A comprehensive environmental and social assessment has been prepared for the project and provisions for the management of community and worker health, safety and welfare as well as the mitigation of environmental impacts consistent with IFC requirements have been incorporated into the contracts of the Project’s Construction and O&M contractors.

This project will be Pakistan’s first hydro power IPP project and the company has been setting the ground and establishing a framework which is expected to be replicated for future hydro IPP projects.

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