Infrastructure Project Development Nov 2012 Infrastructure Public Sector

Infrastructure Project Development Nov , 2012

Infrastructure – Public Sector Projects Infrastructure Projects in a narrow sense are those undertaken exclusively by public sector • Objective of such projects is to provide a broad public service to the community – Like railway, roads, utilities and sewerage system, large dams etc. • Such projects have low return, but they serve the community. Difficulty in pricing of benefits from such projects due to service to large community make it imperative that such projects are only undertaken in public sector especially in developing countries However, in a broader sense, infrastructure projects also entail those project that provide input for the other industry • For instance, power Projects which are basically key input for the other industry are serve as inputs to other sector of the economy - THAR COAL IS OUR EXPERIENCE IN INFRASTRUCTURE PROJECTS WHICH WILL BE KEY INPUT TO FUTHER DOWNSTREAM POWER & OTHER PROJECTS

Why Thar Coal q Thar Desert contains the world’s 7 th largest coal reserves: 175 Billion Ton = Total Thar Coal Reserve 1% = Thar Coal Reserve 50 Billion TOE = More than Saudi Arabia & Iranian Oil Reserves 2000 TCF 68 times higher than Pakistan’s total gas reserves 25% Pakistan’s Power Generation Capacity in 2010 Development of Block II alone would bring in investment of USD 12 Billion PAKISTAN Entire Thar Coal Reserves can be used to generate 100, 000 MW of electricity for over 200 years Thar The Heating Value of the Lignite Reserves of Thar Coal is 50% compared to Bituminous Coal is High Rank High Grade Coal Location of Thar Coal Field Source: GSP data/report – Energy equivalent is based on Shenhua report/RWE

Type & Rational of the Project Type of the infrastructure project considered, would depend on the following – • The necessity of development in a given environment/economy - For instance Thar coal rationale is : • Bridge the demand supply gap for power in the country • Economic Return • Opportunity to Earn a higher guaranteed return due to special incentives for development of Thar Coal • It also provides opportunity for down stream industries like gasification • Market Pioneers – First mover advantage: • First Movers have better incentives • Bring about a positive change for the country , for example , Thar Coal would develop indigenous mining industry for the country • Fiscal and Foreign exchange benefits associated with the project - Thar Coal would substitute import of expensive RFO or LNG thereby : • Resulting in reduced power cost for the economy • Saving of precious Foreign Exchange

Type & Rational of the Project • Market Demand - Thar Coal • • • Demand Supply Gap : The current demand supply gap in the power sector is about 7000 MW Competitive Advantage : RFO and LNG are expensive alternates and local Gas supplies are depleting due to low discoveries Positive Externalities from development of an infrastructure project • Creation of social assets: education institutions, medical facilities & vocational training institutes will enhance human capital, facilitate knowledge transfer and build capacity • Infrastructure development: sewerage system, provision of clean drinking water development of roads and other infrastructure will also benefit the community • Increased economic activity: will generate employment opportunities for local residents Development of Thar Mining & Power projects will contribute to economic and social uplift of the entire Thar region

Type & Rational of the Project Other long term benefits • Indirect Benefits : With greater availability of Coal Generated Power, gas will be spared for other key sector where its a key input like fertilizer • Success of one Project will eliminate barriers to entry for further Coal Mining, this in turn would increase competition, resulting in reduced project cost due to scale and eventually coal price • This can open up avenue for other uses of coal like Coal Gasification and even diesel production from coal

Project Scope Scale of the Project • Need to maintain the balance b/w size ( economies of scale ) and do-ability of size both in in terms of capital and technical resources • A large project would make financing difficult due to quantum of funding needed • Smaller than optimal size may make the project economically unviable • For Thar coal, project size was selected based on practicality of • Scale that makes the coal price comparable with imported coal • Associated power plant size – 1200 MW was considered optimal size • Hence initial mine size of 6. 5 m ton per annum was considered optimal in terms of project cost of USD 1. 3 BN, and lowest Annual Capital Cost and Opex and manageability of funding

Cost for various Mine Sizes Cost Assumptions (M USD) 1. 75 Mt 3. 5 Mt 6. 5 Mt Overburden removal - EPC 316 316 Equipment Cost 99 150 208 Non-Equipment 181 184 187 EPC 801 878 959 1, 148 1, 247 1, 351 Opex (USD/t)– 30 Years Levelized 34 23 18 Capital cost over 10 yrs @ 12% (USD/t) 116 63 37 Total Cost (USD/t) 150 86 55 Total Cost (USD/MMBTU) 14 8 5 Project Cost

Project Scope Conceptual design of the project Technology Consideration : • • For coal it will be mine design like slope, dumping plans, Excavation plan of the project Further two technologies can be used for coal mining • Surface Opencast Mining • or Underground Mining After due consideration to geology and opinion of consultants, opencast mining was selected for Thar coal, as due to loose soil, the mine would collapse incase of underground mining • In Opencast mines, available options were Truck & Shovel or Bucket & Wheel technology can be used • Truck & Shovel : This technology is used for soil which is loose near the surface and is more feasible for projects under 19 Mt/a Mine • Bucket and wheel which is more productive to use to remove overburden but is more feasible for use of larger mines above 19 Mt/a Mine • Based on above, Truck & Shovel method was selected for initial mining

Technology Selection – Incase of Thar Coal S/T Equipment Variant for Overburden Outside Dump (+180 m Above Sea Level) Shovel Mine (-115 m Above Sea Level) S/T Equipment Variant for Lignite Stockyard (+80 m Above Sea Level) Co Shovel Mine (-115 m Above Sea Level) Crusher e nv yo elt B r

Project Scope Detailed plan of the project • Once basis technology is finalized, schedule of the project is finalized • Selection of main and sub-contractors • Specific equipment needed for specific technology and location is then determined • Detailed project scheduling including work hours – 24 hours or daytime, downtimes, planning for specific seasons like monsoon season planning Requisite service areas for the project • Service areas for maintenance of equipment • Storage areas, power supply areas etc Human Resource management • Manpower requirements: Manning requirement during the construction phase and later at the operations stage is managed • Colonies needed for housing the resources during and after construction - For instance Thar Coal would require 1300 skilled/ semi skilled workforce will be required for mine operations & maintenance • Mobilization of skilled and unskilled resources • Training

Risks and its Mitigants Risk Mitigants Construction Delays • Back to back LDs covering delay risk • Performance guarantees issued by banks on behalf of contractors • Coverage though insurance of property damage or delayed COD in the event of machinery break down, floods earth quakes etc Imported Coal Risk : Imported Coal Cheaper than Local Coal • Economic model should ensure that the price of coal is competitive with imported coal and if required may ask for tariff protection in initial years Law & Order Situation • Necessary Security Measures taken – Security provided for Foreign Contractors & Employees traveling to the risk area • Make an effort to get project declared as “Projects of National Security” which can augment security available from law enforcement agencies • Engaging contractors from countries with less stringent travel advisories like China to reject project delay risks in case of deteriorating in law and order situation • Investment ins training to local engineers to reduce dependence on foreign experts • Partial coverage through Terrorism insurance

Risk and its Mitigation Measures – Govt Guarantee in case of Thar Risk Mitigation Payment Risks • Long term contracts, with take or pay agreement for off take of Coal incase it is with a public company it will be backed by the IA • Agreements with GOP to guarantee obligation of coal buyers in public sector • Nationalization, Acquisition of Shares or assets • GOP/Power Purchaser event of default, Change in Law or Pakistan Political Forced Majeure Event • IA Guarantee of GOP

Environment and social Impact Management • Impact and mitigation measures due to factors like noise, dust, hydrology at the site are assessed – Like in the case of Thar Coal No significant or unmanageable environmental threats and social implications are indicated • Waste water drainage facilities were evaluated – Effluent Disposal System Feasibility Study for Thar Block. II conducted by Go. S • Go. S already engaged to ensure completion of waste water drainage • Expected changes in demography, social aspects due to the project are also assessed • Resettlement and relocation plan of communities and compensation mechanism are also evaluated In the case of Thar Coal , some villages will need to be relocated • Resettlement cost, strategy, and timing are integal part of the project

Laws & Regulations • Laws, Regulations and Policies are reviewed – In the case of Thar coal, since coal is a provincial subject, Thar Coal Energy Board (TCEB) was created with the authority to act as a prime regulator for coal pricing and regulations • Similarly, other steps were taken to add Thar coal within power policy framework of PPIB Key Agreements • • Engineering and Procurement Contract Construction Contract Implementation Agreement Purchase Agreement Fuel Supply Agreement (For Diesel for running the equipment) Senior Lenders Agreement Financial/ Working Capital Agreement O&M Contract /Other Service Agreements

Fiscal Incentives • Fiscal Incentives are studied to evaluate advantageous to a specific infrastructure project • The fiscal incentives package approved by ECC for Thar includes time bound exemptions from corporate taxation, withholding tax and some levies • Thar Coal field be declared Special Economic Zone and Thar Coal Development Projects (including Coal Mining & Power Generation) be declared as “Projects of National Security”) • Other concessions were sought to make the project attractive for investors following which NEPRA has allowed and 20% USD IRR for power projects on Thar coal

Engagement of Consultants/Experts for feasibility study Requisite consultants with the required expertise are partnered with to ensure the success of the project, for instance in the case of Thar Coal World renowned consultants were inducted to carry out the Detailed Bankable Feasibility Study of the Project : • Detailed Feasibility Study – Sinocoal, China • Hydrological Study - Northeast Coal Bureau, China • Drilling Fieldwork – Deep Rock Drilling, Pakistan • Environmental & Social Impact Assessment – Hagler Bailly Pakistan/ SRK, UK • Ground Water Modelling & Mitigating Strategy for ESIA – RWE, Germany • Financial Model and Economic Viability Assessment – RWE, Germany

Stakeholders of a Project Major Stakeholders would depend on the need of infrastructure like in the case of Thar Coal Go. S wanted to partner with a capable infrastructure developer. Thar coal is a Joint Venture (JV) Company Structure : • 40% Government of Sindh (Go. S) - Go. S would assist in timely availability of all relevant data, requisite approvals from • 60% Engro Power. Gen Limited (EPL) and other JV partners - Engro Power. Gen will lead development, financing, Federal and Provincial Governments and timely delivery of infrastructure requirement for the Project including water, roads, transmission line and effluent disposal management and execution of the Project in a professional and fast track manner Other Stakeholders of the Project include • Employees • Local Residents – It was decided that spend 2% of Profit Before Tax on community and social development programs • • • improving socio-economic indicators of the area and reducing burden on PSDP* Contractors Transporter - Diesel and Coal transporters Lenders *Public Sector Development Program

Feasibility Scope & Critical Success Factors Thar Coal Infrastructure Development Factors Technical Viability Assessment Hydrological Study Numerical GW Model & Dewatering 3 D Geological Model Mine Planning Mine Equipment Planning Mine Service Facilities HR & Operations Strategy Water Provision Environment & Social Impact Assessment (ESIA) and Mitigation Environment Impact Assessment Well & Village Water Analysis Federal/ Provincial Govt. Scope Infrastructure Development Disposal of Ground Water & Effluent Economic & Commercial Viability Assessment Road Network Transmission Line Power Requirement Ecology & Biodiversity Survey Mine Cost Air Quality Monitoring Model Re-settlement Framework Financial Model Safety & Rescue Centre Groundwater Impact Assessment Social Impact Assessment ESIA Mitigation Plans Training Institutes Viability Assessment Scalability & Sensitivity Analysis Thar Block II Coal Mining Project Bankable Feasibility Study Coal Pricing Mechanism / Fiscal Incentives Mining Policy Reform/ Mining Lease , Govt. Approvals Govt. & Multilaterals Support for Project Financing

Project Cost & Economic Analysis : • Major Assumptions for Cost & Economic Analyst , Contingencies, Investment & Replacements • EPC costs, owners cost, capital structure, O&M quotes are then taken from different contractors • Due consideration was given in the cost structure to ensure its competitiveness against imported coal

Project Implementation Schedule is then finalized with specific Milestones & Timeline • Feasibility Study Completion • Issuance Mining Lease incase of SECMC • Completion of Economic Viability Assessment / Approval of Infrastructure Projects by the competent Authority • Signing of Coal off take agreement • EPC Bids negotiation • Selection of EPC Contractor • Financial Close for the project • Award of EPC Contract • Construction Phase • Production • Commissioning of the infrastructure project

Safety Health Safety Environment (HSE) • HSE philosophy will be developed to ensure compliance with all local laws in accordance with consultant studies Disaster Management • Emergency and Disaster Response • Medical Emergency Plan

Benefits of Thar Coal Development • To overcome the current energy crisis, Pakistan has no other alternative except development of indigenous energy resources • Investment in Thar Mining & Power projects will provide the following benefits : • Strategic energy resource that will guarantee energy security to Pakistan in the decades to come • Lower power tariff for Coal fired Power Plants as compared to RFO based power tariff • Socio-Economic Development of Thar region - Presently Thar District ranks lowest on all socio-economic development indicators in Sindh • Development of indigenous coal mining industry will lead to skilled job creation and transfer of technology • Potential for future downstream industries in Petro-chemical and Fertilizer products Thar Coal is a fortune turning opportunity for Pakistan