D iD o of

The World Bank

MMR OMCIL USE ONIN

'§i' '!.>

S R 3pioN&i P-5366-PAK

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED EXPANDED COFINANCING OPERATION

TO PARTIALLY GUARANTEE UP TO US$240 MILLION

OF A SYNDICATED COMMERCIAL BANK LOAN

IN AN AMOUNT EQUIVALENT TO US$360 MILLION

TO THE

RUB POWER COMPANY

IN THE ISLAMIC REPUBLIC OF PAKISTAN

OCTOBER 29, 1991

Ths doceant has a resricted distribution and may be usd by recipients only In the performance oftdir official dutie Its cotents may not othwie be disclosed withou Word Bank authorition.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CuOwency Unit Pakistan Rupee (Rs)US$1.00 - Rs 24.04

1 Kilometer - 0.6214 milesI Ton - 1,000 kilogams1 Kilovolt - 1,000 voltsI Miegawat - 1,000 kilowatts1 Kilwatt Hour - 1,000 watt hours

ARREVIATIQ N X AND ACROMS

BEL - Bankes Equity LimitedCDC - Commonwealth Development CrporationCOFACE - Compagnie Francaise d'Assurance pour le Comnmerce Exterieur (France)ECAs - Export Credit AgenciesBOO - Expanded Cofinancing OpemionESL I - Energy Sector Loan IESL II - Energy Sector Loan IIFSA - Fuel Supply AgreementGOP - Govemrnent of PakistanHPG - Hub Power GroupHUBCO - Hub Power CompanyIA - Inplementation AgreementICB - International Competitive BiddingIDC - Interest Dining ConstructionIfF - International Monetary FundJEXIM - The Export-Inport Bank of JapankWh - KilowattHourNMiT Ministry of International Trade and Industry (Japan)MW - MeawattNDFC - National Development Finance CorporatonCDA - Overseas Development Administration (United Kingdom)PPA - Power Purchase AgreementPS - Private SectorPSEDF - Private Sector Energy Development FundPSO - Pakistal State Oil CompanySACE - Sezione Speciale per l'Assicurazone del Credito ail'Esportazione (Italy)SBP - State Bank of PakistanSP - Security PackageTKC - Tumnkey Construction ContractWAPDA - Water and Power Development Authority

(OP's FISCAI YEAR

July 1 - June 30

FOR OFFICUIL USE ONLY

EXPANDED COFINANCING OPERATION (ECO) TO PARTIALLY GUARANTEEUP TO US$240 MILLION OF A

SYNDICATED COMMERCIAL BANK LOANOF US$3C0 EQUIVALENT

TO THE HUB POWER COMPANYIN THE ISLAMIC REPUBUC GF PAKISTAN

PROJECT SUMMARY

The proposed Project is a conventional oil-fired power stationwith a capacity of 1,292 MW, to be undertaken by the HubPower Company (HUBCO) on a Build-Own Operate basis.Fuel for the proposed Projecet will be supplied by a pipeline tobe constructed and operated by Pakistan State Oil ompany(PSO), a public sector company. Two single circuit 500kVlines of 200 kilometers each, proposed to be constuced byWAPDA under the Transmission Extension and ReinforcementProject (Loan 3147-PAK) would connect the proposed Projectto the 500 kV transmission grid. The proposed Project wouldbe located at the mouth of the Hub River in BalochistanProvince, near Karachi

HUBCO would add nearly 18% of existing capacity, therebyaddressing critical shortages of electricity currently beingexperienced in the country. Since this capacity would beestablished in the private sector, it would release public sectorresources for other critical investments. A comprehensivesystem of penalties and bonuses, based on internationallyaccepted performance standards, would ensure that the plantwould be operated efficiendy and would serve as a benchmarkfor the evaluation of existng utilities in Pakist

* £iaka: Since the oil-fired generating units proposed to be installed byHUBCO are based on proven technology, there are nounforeseen risks in design and construction of these units. Riskof unforeseen geological conditions are midgated by ensuringthat all investigation work is completed prior to the start ofconstruction and the release of any financing for the proposedProject Adequate contingency provisions have been made toaddress any cost increases on account of changes in financingcost or other variations. Risks of damage due to fire, explosion,etc. would be covered by commercial insurance provisionssecured by HUBCO. Adequate special financing arrangementsto cover sovereign risks have been put in place under theagreements proposed to be signed by GOP and HUBCO. Themajor risk would be inability of the financiers to commit thenecessary financing for the implementation of the proposedProject However, construction activity would be inidated onlyafter commitments have been received from all finmciers.

This document has a restricted distribution and may be used by recipitats only Jn the peoceof their official duties. Its contents may not otherwise be disclosed with.ut Worl Bank authorization.

- i4 -

Proose FlnnenoPlan for the Hub Power CoMnIe

. z - -- 1,r_E-1:1 W gp llE

(VSS Millon)

Equity Base Debt Service Contingency Total£inancIng 12 Escrow Finj an c IiAnA A2

Sp CGSOMMIG MemSbers 78 6 - 38 116 7Offshore financialInstiutions 82 6 17 99 7Commoinwealth Dev. Corp. £ .1 - _ - I

Subtotal Foreign Equity j l ii 22l 15

HUB Cmvetible Bonds 100 12SubxotalEquity 2M MQ 12 31 2

Debt

FoceiggPSEDF 355 26 - 52 407 26Syndicated commercial bank loas 249 19 51 60 360 23ExpoCredit Agees 300 24 - - 300 21Commonwealth Dev.. Corp. 20 ..2 _ 2 Q I

Subtotal Foreign Debt 24 21 it 1 1 I 21

Lma1LoaxlBanks -m 9

Subtotal Debt 14 AQ i1 12 123

TOTAL 1342 100% 68 150 1560 100=~

IFigures may undergo minor adjusunents.2TWken as a perentage of th total cost of the Complex, which incudes inrest duing ctucton and

other finance related costs.

omi Rate of Return 18.3%

Staffi*zt: 9004-PAK

MAR No IBRD 22535

- iii -

SUMMARY OF TERMS OFTO PARTIALLY GUARANTEE

THE PROPOSED EXPANDED COFINANCING OPERATION (ECO)UP TO US$240 MILLION OF A SYNDICATED COMMERCIAL BANK. LOAN

OF US$360 MELLION EQUIVALENT (THE LOAN)TO THE HUB POWER COMPANY

TO FINANCE A POWER GENERATION COMPLEX (THE COMPLEX)IN THE ISLAMIC REPUBLIC OF PAKISTAN

Boirrower; Hub Power Company (HUBCO).

iuaran1nr& International Bank for Reconstruction and Development (WorldBank) and Export-Import Bank of Japan (JEXIM) in the ratio of2:1 (see Guarantee Provisions below).

LuLdm I'The commercial bank members of the syndicate (the Lenders).

AMwint US$360 million equivalent, consisting of four facilities:

(i) ECO guaranteed base facility of US$200 million equivalent;

(ii) ECO guaranteed secondary facility of US$40 millionequivalent;

(iii) a JEXIM guaranteed base facility of US$100 millionequivalent; and

(iv) a JEXIM guaranteed secondary facility of US$20 millionequivalent.

Currencies U.S. Dollars and Japanese Yen.

Use of ProEeeds! To finance part of the cost of eligible goods and services requiredfor the construction of the Complex. The balance of the costs willbe financed by export credit agencies, subordinated debt andforeign and local equity. Subordinated debt consists of a sub-loanfrom the Private Sector Energy Development Fund (PSEDF)which is partially financed by the Bank (Loan No. 2982-PAK).

Procurement: The equipment, materials and services for the Complex will beincluded in the Turnkey Construction Contract which has beenawarded through a competitive process meeting the requirementsof economy and efficiency under the World Bank's ProcurementGuidelines.

- iv -

Drawdnm: Disbursements under the Loan would be for eligible expendituresfor fte Complex. HUBCO would maintain a special account in abank acceptable to the Guarantors, denominated in currencies ofthe Loan into which the proceeds of the Loan would be deposited30 days prior to the start of the quarter, based on a quarterlyexpenditure requirement. 1UBCO would provide the WorldBank/JEXIM with periodic reports on the use of funds forexpenditurs for the Complex, including a yearly audit repor ofthe special accounts by independent auditors acceptable to theWorld Bank.

Term: 12 to 14 years from date of agreement including 4.5 to 5 years ofavailability/ grace period.

AtiaMiiRv 4.5 to 5 years from date of agreement.

lul"AlHate: I.U.S. Dollar Tranche

(a) For the bas fac :

(i) Three or six months London Interbank Offered Rate(LIBOR) plus 2% per annum prior to completion of theComplex;

(ii) Three or six month LIBOR plus 1-7/8% after completionuntil the earlier of the 4th anniversary of the date ofcompletion or the 8th anniversary of the date of the loanageement; and

OiH) Three or six month LIBOR plus 2-1/8% therafter.

(b) For the ws&mn facH4y:

Three or six months LIBOR plus 2-1/4% prior to completionof the Complex; after completion, the applicable interest ratewould be the same as the interest rate for the base financingfacility for the U.S. Dollar Tranche.

Jpanese Yen Tranche

For the Japanese Yen Tranche, the applicable intest rate may beone or a combination of the following

T lhem ts a of an indicave and preliminary nawe ad wil be revised at the tme of eeiving a fim commitment fom thecornmc bankm

- v -

(a) Fr the ba fiancing: f the Yen Tranche is based on theLong-Tenm Prime Lending Rate (LTPLR):

(i) LTPLR plus 1% per annum prior to completion of theComplex,

(ii) LTPLR plus 7/8% afte compledon until the earlier of the4th anniversary of the date of completion or the 8th

yof tdate of the loan agreement; and

(iii) LTPLR plus 1-1/8% thereaft.

The LTPLR would be revised every 4/5 years and/or every6/12 months.

If the Yen Tianche is based on LIBOR, the applicable interestrate would be LIBOR plus the same margin applicable to theU.S. Dollar Tranche.

If the Yen Tranche is based on the Short Tenn Prime LendingRate (STPLR), the applicable interest rate would be STPLRplus the same or slighdy higher margins as those applicable tothe LIBOR-based portion, depending on market conditions.

(b) Ea the second facilk:

Ile applicable interest rate for the base financing facility of theYen tranche, plus 1/4% prior to completion of the Complex;after completion, the applcable interest rate would be the sameas the interest rate for the base financing facility of the YenTranche.

Renamente lThe Loan would be repaid in 21 equal semi-annual installmentscommencing on the 4.5th anniversary of the date of the syndicatedloan (the Agreement).

Documentation The Agreement would be acceptable to the World Bank andincorporate inter alia, the following provisions:

Esw Accoun A Lenders' Interest Reserve Account will beestablished off-shore. It wili be required that an amount equivalentto approximately one year's interest payments to the Lenders bereserved in the account, from the time pnncipal repayments stam

- vi -

CrQss-Default Clauses: As in the case of other cofinancingagreements, the generally broad cross-default provisions ofcommercial loan agreements would be limited. Cross-defaultremedies based upon indebtedness to the World Bank may betaken by a majority of the lenders only if the World Bank hasaccelerated its loan for the Private Sector Energy DevelopmentProject (Loan 2982-PAK) or if there is a payment default byPaldstan under its World Bank loans in a material amnount (to bespecified) and which default persists for more an 45 days.

lafi=madun Sbahanr Non-confidential information concerning theComplex, normally exchanged in World Bank cofinancingtransactions, would be shared by the World Bank and JEXIM withthe designated Agent (see get below), for the benefit of theLenders. All information regarding the Complex and HUBCOgiven to the Agent for the benefit of the Lenders would be sharedby the Agent with the World Bank and JEXIM.

AMelm gnt: Any material amendment to the terms of theAgreement which would affect the Guarantee would require theprior consent of the World Bank and JEXIM

Conditions The Loan Agreement and the Guarantee will be effective onlyPrecedent when:to Effectiveness:

(i) an irrevocable letter of credit in favor of the sponsors coveringtheir total equity contribution has been opened and agreements foral remaining equity and debt financing including Export CreditAgencies as specified in the financing plan have been executed andall conditions precedent for their effectiveness have been fufilled;

(ii) all agreements required in connection with the construction ofthe Complex (including but not limited to the ImplementationAgreement, the Power Purchase Agreement, the Fuel SupplyAgreement, the Construction Conat, O&M Agreement, EscrowAgreement, etc.), have been executed and are effective; and allconditions precedent for their effectiveness have been fulfilled;

(iii) HUBCO has been capitalized and staffed in a mannersatisfactory to the Bank.

Provesipn&.: 2(1) The parial guarantee of the Loan is expected to be providedby the World Bank andJEXIM in the ratioof 2:1. The WorldBank Guarantee and the JEXIM Guarantee will be callable on a

2 Te guamnzee p s desaibed (except under "Scope-) reflect World Bank requ_met&

- vii -

pari passu and pro rata basis. The portion of the loan to beguaranteed by JEXIM is limited to Japanese Yen Tranche to beprovided by Japanese banks including Japanese branches of non-apanese banks. lhe Yen poron of the syndicated loan would be

at least one ird of the total amount;

(2) The World Bank Guarantee and the JEXIM Guamantee willcover the Imndal payments due under the Loan and remainingunpaid.

(3) The Escrow Agent of the Lenders' Debt Service EscrowAccount will be designated with the authcrity to call the guaranteeupon the occurrence of the following specified "events", whichwill be properly "certified" by the Escrow Agent:

(i) HUBCO (through the Escrow Agent) has failed to make aprincipal payment or a portion thereof due and payable to theLenders either on a scheduled payment date or on acceleraion; ad

(ii) The failure of HUBCO (through the Escrow Agent) to makethe payment is the result of the failure of the Government throughthe State Bank of Pakistan to make available the equivalent foreignexchange at the agred rate upon receipt of the local cunency fundsfrm HUBCO (though the Escrow Agent);

and/or

(iii) The failure of HUBCO (through the Escrow Agent) to make aprincipal payment or a portion thereof is the result of a shortfaU inthe receipt by HUBCO (through the Escrow Agent) of local andfoeign currency amounts payable by the Government under theImplementation Agreement.

Ajcelzafio: The Guarantee will not be callable/accelerable duringthe grace period of the Loan, i.e., until the 4.4th/5th anniversaryof the date of the Agreement, except in the event of tcmination (asdefined in the Implementation Agreement). If the Loan isaccelerated during this period for reasons other than termination,the Guarantee will lapse.

Subrogation; Upon any payment by the World Bank under theGuarantee, the World Bank would immediately become entided orecover from HUBCO and GOP the amount so paid and wouldhave the immediate right of subrogation against HUBCO and GOPin respect of such amounts regardless of whether the Lenders havebeen fully repaid by HUBCO and GOP in respect of otheramounts due the Lenders under the Loan Agreement.

Requisite Auth:ri7ations: All authorizations and approvalsrequired to make the Guarantee effective would be obtained andbe in fuil force and effect

- vili -

gO;dn to Rt=: Provisions expessly enabling the Lenders torelease the Guarantee would be included.

Gusrnte Fea! A guarantee fee of SO basis points per annum, less any applicablewaivers, will be payable by HUBCO on the outstandingguaranteed amount in line with the Bank's current guanteepricing policies.

EM: ment, Commitment, Arrangement and Agency Fees to be

l~z.nd OWL AU payments to be made under or in conecton with the Loan tolMeduions be free and clear of any taxes, withholdings or other deducons

whatsoever.

br ' The Islamic Republic of Pakdstar (Pakistan) and HUBCO wouldenter into an Indemity Agreement with the World Bank in respctof its Guarantee. Under such Indemnity Agreement, Pakistanand/or HUBCO would undealk to reimburse and idemnify theWorld Bank on demand, or as the World Bank may otherwisedeternine, for any payment made by the World Bank under itsGuarantee.

GsoeninugLaw The Agreement would be governed by Japanese and Enulish lawas appropriate and provide for the non-exclusive jurisdictionagainst the World Bank of the Japanese and English courts. TheIndemnity Agreement would follow the legal regime, and includedispute settement provisions which are customay in agreementsbetween member countries and the World Bank.

The Agent for the Lenders is to be appointed.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED

EXPANDED COFINANCING OPERATIONTO PARTIALLY GUARANTEE UP TO US$240 MILLON OF A SYNDICATED COMMERCIA! BANK

LOANOF US$360 MILLION EQUIVALENT TO THE HUB POWER COMPANY

IN THE ISLAMIC REPUBLIC OF PAKISTAN

1. The following memorandum and recommendation on a proposed Expanded CofinancingOperation (ECO) to partially guarantee up to US$240 million of a syndicated commercial bank loanof US$360 million equivalent to the Hub Power Company (HUBCO), a power generation utilityincorpoated in Pakistan to be wholly owned and operated by local and foreign Private Sector (PS)investors, to finance the construction of a 1,292 MW oil-fired power station for the supply of powerto the national grid, is submitted for approval.

2. Macroeconomic Setting. In spite of impressive growth performance for most of the 1980s,Pakistan, in recent years, has developed a large fiscal deficit, and more recently, serious balance ofpayments proble.ns. Progress in the implementation of the Government's structural reform coveringFY88-91, which was aimed at correcdng these imbalances, had been less than satisfactory,particularly regarding efforts to reduce the fiscal deficit. The country's problems have beenaggravated by the Gulf-crisis, which has led to a critical foreign exchange reserves situation. TheGulf Crisis has demonstated once again the country's vulnerability to external shocks, which haveweakened Pakistan's external resource position. Most of this is due to higher oil prices and thereduction in remittances from Paldstani workers in the Gulf area. The new Government, which tookoffice in November 1990, has moved swiftly in certain areas to reactivate the adjustment effortInvestment and import licensing have been virtually eliminated; the financial sector reform programhas been reactivated; and major enterprises in energy, telecommunications and highways are beinggranted increased autonomy. Important progress has also been made in two long-standing issues:provincial disputes over allocation of the Indus waters have been resolved with the recent agreement{of the four nparian provinces to a water apportionment scheme; and the National FinanceCommission has recently announced new revenue sharing arrangements between the FederalGovernment and the provinces.

3. The Government's policies place a particular emphasis on industrial deregulation andprivatization. The principal aim is to shift from the public to the private sector those functions andoperations which can be more efficiently and cost effectively carried out by the latter. A significantpart of this effort is the recently initiated public enterprise privatizadon process. The first phase ofthis program aims at privadizing about 115 production units, of which bids have already been invitedfor four. In the financial sector, two of the nationaLized commercial banks have been privatized in1991, one of them to that bank's employees, while bids are expected to be invited for two of theremaining such banks very soon. In addition, the Government has initiated the privatization of theTelecommunication Corporation and the Sui Northern Gas Pipelines Limited (SNGPL). In May1991, the national electricity utility, the Water and Power Development Authority (WAPDA), hasbeen asked to prepare proposals to divest some or all of its thernal staions and the distributionsystem to the private sector.

4. The Government has also confirned its intention to address the country's fiscal constraints.niially, the actions taken on this front were insufficient, contributing to delays in agreeing on the

third-year Structural Adjustment Facility, and in the release of second tranches under the Banlessector loans in energy and finance. However, GOP recently implemented price adjustments foreletricity and natural gas in the energy sector and undertook other measures in support of theadjustment progrm. As a part of its efforts to address the fiscal constraints in the medium-term,however, the Govermment of Pakistan (GOP) will continue to place a major emphasis on increasingprivate sector investment in the energy sector to increase the flow of private risk capital for a energy

.2-

investments identified as part of the least cost investment program for the sector. The proposed HubPower Complex (para. 6) represents the first such private sector investment in the power sub-sector.

5. Framework for Promotion of Private Sector Participation. The rationale for increasing therole of PS in the development of energy is to: (a) supplement public sector investments which werecurtailed under Pakistan's macroecononic adjustment progran; (b) mobilize additional resources forthe development of the sector in the form of equity and debt financing secured under limitedrecourse; and (c) improve the overall efficiency of the sector by tapping the technical and manageralcapabilities of PS in project design, finance, implementation, and operation. In 1988, GOPrequested B3ank assistance in the fonnulation of a strategy to increase PS participation in the energysector. The Bank's strategy called for: (i) strengthening the institutions responsible for theevaluation, negotiations and approval of PS proposals; (ii) introducing a regulatory framework forthe operation of PS and a package of incentives to attract PS venture capital; and (iii) creating avehicle to provide long-term financing to PS. In support of this stategy, the Private Sector EnergyDevelopiDent Project (Loan 2S182-PAK) was approved by the Board in June 1988, which establishedthe Private Sector Energy D v,lopment Fund (PSEDF). The Bank provided US$150 million toPSEJ)F with cofinancing frcm: Japan (US$150 million equivalent), the U.S.(US$46 mill:;n), theU.K. (US$50 million equivalent), Italy (US$50 million equivalent), France (US$20 raillionequivalent) and the Nordic Investment Bank (US$13 million). In addition, interzst has beenexpressed by Germany (US$25 million equivalent), for a potential total financing for PSEDF ofabout of US$504 million. It is envisaged that as funds are committed to approved PS projects,PSEDF would be replenished. PSEDF would provide debt financing of up to 30% of eligible PSenergy investment, provided the remaining 70% of the financing is mobilized, under limitedrecourse, in the form of equity (25%) and commercial loans and suppliers credit (45%). Repaymentterms for PSEDF loans would be 23 years, including a grace period of 8 years. The interest rate onPSEDF loans would be set at the prevailing market rate, currently at 14%. Loans from PSEDFwould be subordinate to senior lenders, e.g., commercial banks and Export Credit Agencies (ECAs).Since PS projects would be financed under limited recourse, which implies that lenders haverecourse only to the revenues generated by the projects and that the debt assumed by PS is notguaranteed by GOP, lenders and investors require instead a security package (SP), comprised of aset of interrelated agreements and provisions aimed at providing the safeguards needed for PS toinvest in projects without a direct GOP guarantee.

6. The :§ub Power Complex would be constructed, owned and operated by the Hub PowerCompany (HUBCO), a private utility incorporated in Pakistan, and would be the first subproject tobe undertaken under Loan 2982-PAK. The Complex is designed as a conventional oil-fired steampower station of 1,292 MW (4 X 323 MW) which will be located at the mouth of the Hub River inBalochistan. It would be constructed and implemented based on a fixed, lump sum price TumkeyConstruction Contract (TKC). Fuel for the Complex would be supplied by a pipeline. PakistanState Oil (PSO), a public sector company, would construct and operate the pipeie and supply thefuel oil to HUBCO, based on the terms and conditions outlined in the Fuel Supply Agreement (FSA)signed by HUBCO and PSO, which stipulates, inte ali, the price, quantity, and quality of fuel to bedelivered. All necessary provisions to ensure that the pipeline meets the environmental safe srequired of such projects are met. The plant would be operated by British Electricity InteratonaLLtd. of U.K., based on the terms and conditions outlined in an Operations and MaintenanceAgreement (O&MA) to be signed by HUBCO and British Electricity International. HUBCO wouldsell power to the Water and Power Development Authority (WAPDA), also a public agency, basedon the terms and conditions outlined in the Power Purchase Agreement (PPA) signed betweenHUBCO and WAPDA, which stipulates, inter alian the tariff level and structure for the sale ofelectricity at specified levels of capacity utilization, provisions for rewards and penalties,maintenance schedules, and billing procedures. The Complex would be connected to the national500-kV grid at Jamshoro through the installation of two single circuit 500-kV tansmission lines ofabout 200 kilometers each (see map). The transmission line would be constucted by WAPDA underthe Bank financed Transmission Extension and Reinforcement Project (Loan 3147-PAK), and wouldbe operated by WAPDA.

.3.-

!nS df the Nub Power Complex

7. The total cost of the proposed Complex, including taxes and duties, development costs,engineering and coordination, capitalized O&M costs, and initial working capital, is estimated atUS$994 million. Cost estimates are based on a lump-sum fixed price TKC, signed on July 2, 1991whose validity would remain until December 31, 1991 by which dme the mobilization payment isexpected to be made (pam 18) which would ensure the validity of the contract Thereafter adjustmentuntil financial closure would be for changes in the financing terms and any increases in costattributable to changes in design recommended by an environmental study currentdy beingundertaken. In addition, there might be changes in civil works required once the geological siteinvestigation is completed. TKC already includes allowance to cover costs normally associated withthe environment and subsoil conditions. The openers provide for a pass through of extra-ordinarycosts. A reserve contingency fund of US$150 million has been included in the overall estimate ofthe cost to cover increases in costs during construction. This represents approximately 15% of theinvestment cost net of IDC, and is in line with normal practice for projects financed on a limitedecourse basis. Under limited recourse project financing, lenders require the earmarling of a fund tomeet contingencies not anticipated at the time the fied price tunkey contrct is signed. The fund isintended to ensure that delays, if any, due to unforeseen events are expeditiously addressed tominimize the adverse impact on the forecast project revenues.

8. Total financing required for the Complex, including interest during construction (IDC),other finance related costs of US$348 million,the reserve contingency fund of US$150 million, anda debt service escrow reserve for interest payments on senior debt of US$68 million (includingfinancing costs) would amount to US$1,560 million. Of the total financing required, aboutUS$1,310 million equivalent would be in foreign exchange and about US$250 million equivalent inlocal crmncy. Project development costs of US$21 million include the preparation of prefeasibilityand feasibility studies, site investigation, environmental impact assessment, financial and legaladvisory fees, and the costs associated with the establishment of HUBCO. The local financingwoud cover a portion of civil works, some locally fabricated material for boiler island, IIDC on localloans and other financing costs, as well as taxes and duties. The amount of taxes and dutiesapplicable to the Complex is low compared to other power projects of similar size in Pakistanbecause customs duties are not applicable for investments undertaken in underdeveloped areas topromnote their development. Pre-operational O&M costs involve costs that would be incurred duringtesdng and commissioning, while worling capital would cover inventories and other consumables.

9. A brakdown of the costs of the Hub Power Complex and the financing plan is provided inthe attached Schedule A. The amounts and methods of procurement are provided in the attachedSchedule B and the Status of Bank Group Operations in Pakistan is provided in the attachedSchedule C Staff Report No. 9004-PAK, dated October 29,1991, is also attached.

S.u for the Proposed FCo

10. The Hub Power Complex is one of the major projects to be undertaken in Pakistan byeither the public or private sectors. The project would require financial resources that amount toabout US$1.56 billion in the form of equity, long-term debt and contingency reserve funds. At theimcepdon stage, the financing requirements for the Complex were to be mobilized in the form ofequity and long-term loans from PSEDF and multilateral institutions and the balance would be metby ECAs. The financing by ECAs and multilateral institutions was to be secured under limitedrecourse without soveneign guarantees. In order to mobilize the maximum amount of financing fromECAs and other cofinanciers, the Bank concentrted its efforts on strengthening SP with a view tominimizing the risks to be tsrme by ECAs and the other cofinanciers. Based on the composidon ofthe constructon consortium, coiiamitments for export credit financing have been received for anaggregate amount of US$300 million equivalent from MlTl of Japan, COFACE of France, andSACE of Italy. Given tie extent of financing for the Complex to be provided by ECAs, commercialbank loans would be needed to fill the gap in the debt portion of the financing plan. Pakistan hashitherto not been able to mobilize foreign commercial bank financing on a limited recourse basis.Even for sovereign debt, GOP has not been able to secure commercial loans for over US$100million with maturities that extend beyond six months or one year. In 1988 and 1989, foreign

-4-

commercial loans to Pakistan have been primarily trade credits, characterized by both shortmaturities, usually six months to one year, and amounts of less than US$100 million. In Pakistan'scase, commercial banks are unwilling to assume sovereign risks, but are prepared to assumecompledon and commercial risks, provided the security arrangements are satisfactory. Sovereignrisks encompass default by GOP or any of its agencies in complying with their obligations under SP.GOP has agreed to guarantee the perfonnance of its agencies and provide special funding (SpecialTemporary Punding and D)eficit Funding) to lenders and investors against events of political forcmajeure. However, in view of the magnitude of resources which need to be mobilized for HUBCOand the absence of a track record for GOP involving commercial transactions with PS companies inthe area of infrastructure, commercial banks require the comfort of a recourse in the unlikely ev kt

hat GOP fails to comply fully with the provisions under SP.

Obieetive _ gnu stur_re of The PranMW ECO

11. The objecdve of the proposed ECO is to assist Pakistan in the implementation of its strategyfor enhancing the role of PS in energy development by mobilizing financing from the intemationalfinancial markets on favorable terms.

12. The proposed ECO would provide a guarantee in respect of 100% of principal in the eventof debt service default on the loan, if the default is due to the failure of the government to fulfill itsobligations under the Implementation Agreement (IA), the central agreement comprising SP, for atotal amount of $240 million equivalent of an international syndicated loan of $360 millionequivalent. JEXIM would guarantee debt service default due to sovereign risks along the same linesas the Bank on the remaining US$120 million equivalent of the loan. The guarantee would beaccelerable at any time after the grace period (of 4.5 years). During the grace period, acceleradon ofthe loan could only occur in the event of termination of the project for reasons of GOP default underIA; in that event, the ECO) guarantee would cover any default on the acceleration payments.

13. HUBCO's ability to service debt to its lenders is intimately linked to the timely performanceby GOP, WAPDA, PSO, SBP, National Insurance Company, the Turnkey Contractor, etc. of theirfinancial and non-financial obligations under agreements comprising SP. For a Project of thiscomplexity, it is possible that there may be delays arising from foTce mWaiere events, disputes orcontractual non-performance, which in turn, could jeopardize the flow and level of anticipatedrevenues and other payments into the Escrow Accounts. All of these contingencies are adequatelycovered by special funding arrangements (e.g. Special Temporary Funding, Deficit Funding,Liquidated Damnages), some of which are obligations of GOP. However, with respect to obligationsof GOP, the commercial bank lenders consider that SP does not provide them with sufficientsecuity, given their current perception of Pakistan country risk The banks have indicated their firmview that, in order to successfully complete this syndication for Pakistan, with a maturity and graceperiod necessary to finance a power plant, it will be necessary to obtain a partial guarantee from theBank in respect of debt service due to the lender commercial banks. Specifically, a guaranteecovering defaults in respect of principal payments arising from failure of GOP to fulfill itsobligations under the IA, supplemented by adequate escrow arrangements to cover interest paymentsfor a 12-month period, would be essential.

14. The proposed ECO covers principal debt service defaults arising from tne failure of GOP toperform the specific undertakings to the project it would underwrite in the ImplementationAgreement. These consist of: (a) Special Temporary Funding, (b) Deficit Funding in the event of theoccurrence of certain defined events; and (c) a guarantee for foreign exchange convertibility by theState Bank of Pakistan. The ECO will not support other risks of the project such as completion andoperational risks which would be borne by the private sector--including the banks. Under thisarrangement, a considerable amount of risk for the project is borne by the private sector and thus isnot covered by thfe Bank or counter-guaranteed by GOP. As the Bank's past experience with publicsector projects has amply demonstrated, these risks which include cost overruns, constructiondelays, and suboptimal performance, are significant.

15. The proposed structure is in line with the intent of and the guidelines for the ECO programthat provide for support for limited recourse project finance. A particular guideline for the ECO

progamn requires that commercial banks assume at least 50% of county exposure on the financing.This proposal, however, rquires that ECO cover all sovereign risk on the project. When the ECOguidelines were drafted (in 1988) to define risk sharing that would ensure a catalytic role for theBank, risk sharing by allocating specific risks to different pardes was envisaged but not directlyaddressed Instead, the risk sharing was expressed in terms of dividing the tIQt risk on thefinancing (using the proxy of the present value of the guarantee) and the ceiling for the Bank's share

* was set at 50%. This measure for risk sharing is appropriate to public sector projects--where allrisks can be viewed as a single (sovereign) risk. The ECO guarantee in project financing, asexemplified by this project, is more akin to a partial casualty insurance rather than a comprehensiveguarantee aginst al risks, in the sense that the ECO covers ordy selective risks of the project leavingthe remaining risks to the private sector

16. Providing Bank support duough a partial guarantee covering only the undertakings of GOPto the project is more appropriate than a Bank loan since the indemnity from GOP to the Bank woudbe limited to the risks covered by the Bank under the ECO guarantee. If the Bank were to make adirect loan to the project, it would require a full indemnity from GOP, irrespective of the cause ofdebt-service default. This would mean that GOP carried commercial risks on the project at least tothe extent of the Bank loan. It would also weaken the government's case for not providing the sameprotection to other lenders/guarantors (many of whom have been pressing for a comprehensivesovereign guarantee) for this and other private sector projects in Pakistan.

17. This structure for the guarantee is appropriate for project financing of this type.Accordingly, it is proposed that the ECO guarantee be structured along the following lines:

(a) The partial guarantee of the Loan is expected to be provided by the World Bank andJEXIM in the ratio of 2:1. The World Bank Guarantee and the JEXIM Guarantee will becallable on a par! passu and pro rata basis. The portion of the loan to be guaranteed byJEXIM is limited to Japanese Yen Tranche to be provided by Japanese banks includingJapanese branches of non-Japanese banks. The Yen portion of the syndicated loan wouldbe at least one thW of the total amount;

(b) The World Bank Guarantee and the JEXIM Guarantee will cover the principal paymentsdue under the Loan and remaining unpaid.

(c) The Escrow Agent of the Lenders' Debt Service Escrow Account will be designated withthe authority to call the guarantee upon the occurrence of the following specified "events",which will be properly "certified" by the Escrow Agent:

(i) HUBCO (through the Escrow Agent) has failed to make a principal payment or aportion thereof due and payable to the Lenders either on a scheduled payment dateor on acceleration; 6

(ii) The failure of HUBCO (through the Escrow Agent) to make the payment is theresult of the failure of the Government through the State Bank of Pakistan to makeavailable the equivalent foreign exchange at the agreed rate upon receipt of the localcurrency funds fro1n HUBCO (through the Escrow Agent);

and/or

(iii) The failure of HUBCO (through the Escrow Agent) to make a principal paymentor a portion thereof is the result of a shortfall in the receipt by HUBCO (through theEscrow Agent) of local and foreign currency amounts payable by the Governmentunder the Inplementation Agreement

Acceleation: The Guarantee will not be callable/accelerable during the grace period of theLoan, ie., until the 4.5th/5th anniversary of the date of the Agreement, except in the eventof termination (as defined in the Implementation Agreement). If the Loan is acceleratedduring this period for reasons other than tennination, the Guarantee will lapse.

-6-

SuluoAign: Upon any payment by the World Bank under the Guarantee, the World Bankwould immediately become entitled to recover from HUBCO and GOP the amount so paidand would have the immediate right of subrogation against HUBCO and GOP in respect ofsuch amounts regardless of whether the Lenders have been fully repaid by HUBCO andGOP in respect of other amounts due the Lenders under the Loan Agreement.

Rqisite Authorizations: All authorizations and approvals required to make the Guaranteeeffective would be obtained and be in full force and effect

Otion to Releam: Provisions expressly enabling the Lenders to release the Guaranteewould be included.

Guaran Fee: A guarantee fee of 50 basis points per annum, less any applicable waivers,will be payable by HUBCO on the outstanding guaranteed amount in line with the Bank'scurrent guarantee pricing policies.

18. JEXIM has provided a commitment to co-guarantee the principal under the Yen portion of thesyndicated loan to be extended by Japanese and foreign banks in Japan. It is proposed that theamount of the guarantee be equivalent to about one third of the foreign commercial bank syndicatedloan of US$360 million amounting to about US$120 million. The Yen portion of the syndicatedloan is expected to be in excess of US$120 million equivalent and thus, would fully utilize theproposed JEXIM cover. JEXIM's guarantee would be provided in conjunction with, and as asupplement to, the Bank guarantee. The guarantees from JEXIM and the Bank would apply toseparate tanches of the loan and would be governed by each institution's respecdve policies, underterms and conditions applicable to its guarantee operations. Each institution would negotiate andenter into separate agreements with the commercial banks regarding their respective guarantees. Inaddition, JEXIM and the Bank would enter into separate indemnification agreements with GOP.Disbursement of the individual tranches of the syndicated loan would be according to the Bank andJEXIM guamntee proportions at commitment. Repayvnent terms on the tranches would be identical.Thus, amnordzation payments would reduce the outstanding guarantee of the Bank and JEXIM on a

gad as basis. The JEXIM guarantee would follow the structure of the Bank's guarantee.

ronied FiRandRn PAn

19. Following the signing of the TKC, and the reconstitution of the construction consortium inJuly 1991, HPG initiated all activities to commence construction. However, due to the complexity ofthe financing package, financial closure could be delayed beyond the validity date of the contract ofDecember 31, 1991. Currently, financial closure is expected by March 31, 1992. If thecommencement of construction has to wait until financial closure, the contract's validity would expire,the project would lose momentum, and the investors would find it difficult to sustain the level ofdevelopment effort which have so far cost HPG about US$21 million. Moreover, as stipulated inTKC, extension beyond December 31, 1991 would result in a price adjustment to compensate forinflation, exchange rate changes, etc., which would increase the cost of the project and financingrequired. If, however, the initial payment for TKC is made on or before December 31, 1991, the TKCprice would be frozen. In addidon, timely inidatdon of construction would maintain HPC'scommissioning schedule. It is proposed, therefore, that in order to enable HUBCO to startconstruction, financing from PSEDF be made available for eligible contracts equivalent to the downpayment. According to the estimates of HUBCO, about US$i25 million would be required to initiatethe construction of the Complex and meet HUBCO's financial obligations until financial closure. Inorder to maintain the debt equity ratio of the financing plan, the Sponsors would be required tocontribute about US$10 million in new equity to meet the down payment, while the balance would bemet through a loan from PSEDF of about US$115 million. This contribution, together with theUS$21 million contributed so far by the Sponsors would maintain the equity portion of the financing at21%. Untied funds from-the Bank and JEXIM (amounting to US$35 million equivalent each) wouldbe used to finance part of the initial payments for the contract for the turbine-generators under PSEDF

.7 -

awarded under Bank guidelines. The balance of the initial payment for this contract would be providedfrom the Government of Italy's contribution to the PSEDF (US$24 million equivalent) since thecontract was awarded to an Italian contractor. Similarly tied French aid expected to be made availableto PSEDF (US$20 million equivalent) would be used to finance the French contract for civil worksand the USAID gmnt (US$1 million) would be used for construction supervision being carried out byan American engineering firm.

20. At present, the mobilization of financing for the Complex has been firmed up and byDecember 31, 1991 commitments are expected from all debt financiers and equity investors.However, in view of the complexity of the financing arrangements for the project, which involves awide array of financing sources for both debt and equity, it is expected that following the receipt offirm commitments from all the financiers, at least 34 months would elapse to allow for the necessatycoordination, cross-checking legal documentation and administrative requirements, to achieve financialclosure. In recognition of the need to freeze the price for TKC and maintain the implementationschedule for the project, NDFC, as administrator of PSEDF, would enter into an agreement withHUBCO to disburse the mobilization payment, provided firm commitments have been made by allfinanciers and all debt and equity agreements comprising SP have been signed. These would includethe Implementation, Power Purchase, Operation and Maintenance, Fuel Supply and EscrowAgreements.

21. Of the total financing required of US$1,560 million, US$323 million (21 %) would be in theforn of equity, of which US$223 million would be foreign and US$100 million local. Theremaining US$1,237 million (79 %) would be financed through long term debt from PSEDF(US$407 million), foreign commercial banks (US$360 million), local commercial banks (US$150milion), ECAs (US$300 million), and the Commonwealth Development Corporation (CDC) ofU.K. (US$19 million), to be secured under limited recourse. The financing plan covers TKC,development cost, interest during construction and other finance related costs. It also covers: (a)provisions amounting to US$150 million to cover the costs associated with project implementation;i.e., variations in the specifications of equipment, and contingencies, which would be covered byPSEDF (US$52 million), the commercial banks (US$60 million) and the Sponsors (US$38 million);and (b) the establishment of debt service escrow reserve amounting to US$68 million, includingfinancing costs, for one year's interest payments on senior loans to be covered by commercial banks(US$51 million) and offshore equity (US$17 million). Foreign LquijM: The Sponsors,contractors, and institutional and private investors would contrbute about US$223 million equivalenttowards the financing of the Complex. Of this, US$168 million would be base financing, US$38million would be committed for contingency financing to be utilized only in parallel with the debtcontingency funds are used and about US$17 million would be for the debt service escrow reserve.Members of HPG have confimed their irrevocable commitment to provide an equity contribution ofUS$78 million. HPG would also be expected to provide US$38 million in contingency reservefunds, which woud be drawn down as equity in the event debt contingency reserve funds are drawndown in order to maintain a constant debt/equity ratio. Guarantee against political force mieurewould be provided by MMTI for the equity contribution of Mitsui and Co. and IH1. ECGD woudcover Hawker Siddeley and BEI, COFACE would provide coverage for the equity contribution ofCampenon Bemard, and SACE would cover Ansaldo. Xenel Industries has applied to MIGA forcoverage of up to US$22 million under the limit of US$50 million authorized under MIGA'smandate for a single project, as coverage is not available in Saudi Arabia. The remaining US$28million of the coverage available under MIGA's ceiling would be available for equity investorsprovided they are not nationals of Pakistan or citizens of countries which are not members of MIGA.MIGA intends to coordinate its coverage with the other national insurance schemes to ensweconsis -,ncy in the coverage being provided. The Commonwealth Development Corporation (CDC)of U.K has confirmed its participation in providing equity of US$8 million. The remaining US$99million, inclusive of US$17 million for the debt service escrow reserve, would be raised with privateplacements from off-shore investors, a number of whom have expressed their strong interest.Chartered West LB of U.K has entered into an agreement with HPG for the placement of offshoreequity on a best effort basis. HPG has received letters of interest from several investor groups,including The Impact Group of the U.S. (US$ 20 million), the Al Baraka Investment Company ofSaudi Arabia (U $15 million), and the Investment and Securities Group, Inc. in Luxembourg(US$60 million). Citibank Pakistan has also identified off-shore investors (US$ 20 million). While

discussions are underway, definite commitments would be forthcoming once project costs and debtfinancing are finalized and HUBCO is in a position to release all relevant information to the potentialinvestors. Ultimately, however, the responsibility for mobilizing the off-shore equity rests withHPG which would undertake to place the off-shore equity with due diligence by the time financialclosure is achieved. Any shortfall resulting from a failure to place the off-shore equity would have tobe taken by HPG as sponsors and developers of the Project.

22. LaLW Egujit: 'Me capacity of Pakistan's capital market is constrained as illuswated by thefact that new equity listings issued in FY87 and FY88 amounted to Rs. 744 million (US$35.4million) and Rs. 435 million (US$20.7 million) respectively, compared to the local equityrequirement for HUBCO of about Rs 2,400 million (US$100 million). Consequendy, a strategywas developed involving the mobilization of local equity by issuing a convertible instrument,HUBCO Convertible Bonds (HCBs). HCBs have been structured in the following manner. (i) fivetranches of about US$20 million each would be issued, commencing in FY91 and maturing formandatory conversion at intervals of four years; (ii) except for the first two tranches,which would beissued in FY91, six months apart, the remaining 3 tranches would be issued annually from FY92 toFY95 timed to match the disbursement profile of the project while accommodating the absorptivecapacit of the market; (iii) each HCB would carry a coupon of 16.5% payable semi- annually to betreated as redeemable capital for the purpose of eligibility under the prevailing Islamic law whichdoes not allow fixed income instruments; and (iv) each tranche would be priced differently toprovide a yield to the investor which is commensurate with the time of investment and, hence the riskassumed. This approach to compensating HCB holders for risks would result in annual yields onthe instrument between 18% for the first tranche and 15.5% for the fifth and last tranche, when theproject would be well under operation. GOP has reviewed the proposed strategy for themobilization of local equity and approved in general the structure of the Hub Convertible bonds as aninstrument for raising local equity. Since all financial instruments in Pakistan are not tradeable in thesecondary market, the liquidity and, therefore, the attractiveness of the instruments would beaffected. The State Bank of Pakistan has confimed that in the case of HCBs, there is no legalbarrier to local commercial banks participating either as primary underwriters or as creators ofsecondary liquidity. The subscription to the issue would be open to all investors, including allfinancial insttutions. The bonds would be listed on the Karachi stock exchange and would beoffered in registered and bearer form and the coupons would be treated as dividend payments for taxpurposes. In accordance with GOP's request that the local equity be underwritten by an offshoreinstitution, Dhabi Trading (DT) has been appointed by the Sponsors to act as leading underwritersfor HCBs of US$100 million equivalent in Pakistan, and Grinlays ANZ of Pakistan have beenappointed the managers of the issue based on their experience and knowledge of the local capitalmarkets. DT has also appointed two local banks as co-managers of the issue, the newly privatizedMuslim Commercial Bank and the House of Prudential, and marketing strategy for the issue hasbeen prepare

23. Foreign Debt: PSEDF would finance about US$407 million equivalent, comprised ofUS$355 million in base financing and US$52 million in contingency financing. This represents25% of the total financing requirement of the Complex, including financial costs and contingencies.These funds would be lent to HUBCO at a fixed interest rate of 14% with 23 years repayment,including 8 years grace. A preliminary commitment by NDFC, the administrator of PSEDF, inregard to this financing has been issued to HUBCO. In addition, it is expected that ECAs of France,Italy and Japan would provide export credit guarantees for suppliers from their respective countriesfor a total of US$300 million. SACE, MMTI and COFACE have all provided commitments toguaantee export credit financing for US$180 million, US$70 million and US$50 million equivalent,respectively. The French portion may change slighdy depending on the financing made availablethrough PSEDF by the Government of France, which has indicated support for the project throughCOFACE and PSDF contribution for a total of US$70 million. CDC has made a preliminarycommitment to provide US$20 million equivalent as debt. Financing from foreign commercial bankswould amount to the balance of US$360 million equivalent, which includes contingency financingfor an amount equivalent to US$60 million and provision for a debt service escrow reserve in anamount of US$51 million. The Sponsors have issued a conditional mandate to a group ofcommercial banks consisting of Mitsui Taiyo Kobe Bank, The Bank of Tokyo, Ltd., CiticorpInvestment Bank, Ctedit Lyonnais, and Union Bank of Switzerland. Letters of preliminary

-9-

commitment for the amount of US$360 million have been received from the group of banks.Indicative terms and conditions of fte syndicated commercial banks loan would be set out prior toBoard presentation, and would be negotiated following the Board's consideration of the proposedECO. However, preliminary discussions between the Bank and the group of commercial banksindicate that the loan may be structured for a 14-year maturity with a 4-year grace period. HUBCOwould purchase exchange rate risk insurance for the commercial loans dhrough SBP and the cost ofsuch insuance is included in the total costs of the project. Local The local debt requirementof US$150 million equivalent is of an unprecedented amount for Pakistan's credit market and it isepecxp d that this financing would be available with significandy longer maturities than has beenavailable in the local credit market in the past NDFC and Bankers Equity Ltd. (BEL), majordevelopment finance institutions in Pakistan has been appointed syndication managers for the localdebt portion of the financing plan by the Sponsors based on their experience in raismg financing forprjects in the local market and NDFC's already extensive familiat with HPC through its role asadministrator of PSEDP. With the consent of the State Bank of Pakistan, the nationalizedcommercial banks have been authdoized to extend the required financing to the project under theleadership of NDFC/BEL .-.ithout breaching the credit ceiling set under the macroeconomicadjustment program. The trens and conditions remain to be finalized with the Sponsors butpreliminary terms for this financing have been indicated hy NDFCtBEL as 14 years maturity with a4-year grace period.

24 . Tlle following¢ action s are WaggvAe as condition s of effectiveness of the xrDsdECO: (a) aletter of credit for an amount equivalent to US$128 million inclusive of development cost of US$21million verified by an internationally reputable auditing firm, and US$38 million in contingencyfinancing, shall have been made by HPG; (b) agreements satisfactory to the Bank to place off-shoreequ*ty for an amount equivalent to US$99 million shall have been signed by HUBCO with off-shoreinvestors, or in the absence of such agreements a guarantee shall have been received frm the parentcompanies of the sponsoring investors to subscribe to the equity for the same amount; (c) an equitycontribution to HUBCO in an amount equivalent to about US$8 million shall have been made byCDC; (d) an underwriting agreement for the issuance of HCBs for equity in HUBCO in the Pakistancapital maiket for an amount equivalent to about US$100 million shall have been signed with DT; (e)ageements for export credits for HUBCO in an aggregate amount equivalent to about US$300million shall have been signed with MMi, COFACE, and SACE and all conditions precedent to theeffecdveness thereof shall have been fulfilled; (f) a loan agreement between NDFC and HUBCOshall have been signed and all conditions precedent to the effectiveness of the loan agreementbetween PSEDF and HUBCO in an amount equivalent to US$407 million shall have been fulfilled,other than those for the effectveness of the proposed Bank Guarantee; (g) a loan agreement for aforeign syndicated commercial bank loan to HUBCO in an amount equivalent to about US$360million shall have been signed with the consortium of commercial banks, and all conditionsprecedent to the effectiveness thereof shall have been fulfilled, other than the effectiveness of theproposed Bank Guarantee; (h) a loan agreement to HUBCO for an aggregate amount equivalent toUS$20 million shall have been signed with CDC, and all conditions precedent to the effectivenessthereof shall have been fulfilled, other than the effectiveness of the proposed Bank Guarantee; (i) aloan agreement for a local syndicated commercial bank loan to HUBCO in an amount equivalent toabout U S$150 million shall have been signed with NDFVBEL, and aU conditons precedent to theeffecdveness thereof shall have been fulfiled, other than the effectiveness of the proposed Bankguarantee; (j) the Shareholders' Agreement shaUl be signed by all the shareholders of HUBCO,mcluding members of the reconstituted construction consortium, and the Memorandum and Articlesof Association amended to the satisfaction of the Bank and adopted by HUBCO's Board; (k) apermanent Board of Directors of HUBCO shall be constituted in a manner satisfatory to the Bank,and the Chainnan of the Board and CEO shaaU be a ted; O) the Implementation, Power Purchase,Construction, Operton and Maintenance, Fuel Supply and Escrow Agreements shall have beensigned by authorized representatives of HUBCO and GOP, and al conditions precedent to theeffectiveness thereof shall have been fulfiled; (m) the first Annual General Board meeting of aUshaeholders of HUBCO shall be held to ratify the Inplementation, Power Purchase, Construction,Operaion and Maintenance, Fuel Supply, and Escrow Agreements; (n) the necessary staffing forHUBCO shall be in place and senior management posts in finance, engneering, accounting, legal,

- 10-

administation, public relations, and project management shall be filled and personnel appointed; and(o) title deeds for the land required for the complex shall have been executed in favor of HUBCO; (p)the completion of a corporate development plan for HUBCO, satisfactory to the Bank; (q) theappointment by HUBC0 of consultants acceptable to the Bank, in accordance with terms ofrefeence also satisfacty to the Bank, for the purpose of introducing a commercial system of utilityaccounts; (r) the Environmental and Social Soundness Assessment (Phase II) will be completed byHUBCO; (s) HUBCO will give an undertaking to provide assistance for the preparation of anenvironmental impact assessment of the oil pipeline and associated terminal facilities which will beused to provide fuel to the plant; and (t) HUBCO shall open a Special Account in a bank, satisfactoryto the Bank.

25. In addition. HUBCO would be required to agree to: (a) achieve for each year beginning with1996, a DSCR of at least 1.5 for its total debt, and at least 2.0 for the senior debt; (b) submit to theBank an audit report of annual receipt and expenditure of the Special Account for each year withinsix months of closing of the year, providing details as may be reasonably requested by the Bank; and(c) declaration of dividends subject to payment of all debt and compliance with the agreed DSCR anddebt/equity ratio.

ationske for Bank Involvement

26. The Bank has played a critical role in the development of PS involvement in the energysector in Pakistan, in the area of institution building, and establishing a framework for thesolicitation, evaluation, negotiation, and ultimately financing of PS investment. In addition, theframework provides for the monitoring of project implementation, the resolution of conflicts afteroperation begins, and the orderly interaction between the private sector and the various public sectorentities. The institutions created have been staffed, and extensive training as well as suppon in theforn of long-tern and short-term internationally experienced consultants was provided to ensureadherence to the highest internationally accepted standards in tenms of evaluation, negotiations, andfinancing of private sector investments. The Bank has also played a major role in mobilizingconcessionary financing for the PSEDF which result in a cost to the government substantially belowthe onlending rate and would generate a surplus which would be reinvested back into the privatesector by providing local financing in the future and thereby avoid the need to tap the local creditmarket, crowd out other investments and/or exceed the ceiling set to achieve fiscal and externalbalance. The role of the Bank in structuring the guarantee transaction and SP has been instrumentalin mobilizing commercial bank lending for a project of this magnitude under limited recoursearrangements and for the first time mobilizing co-guarantees, thus leveraging the Bank's resources.These arrangements are highly complex and would require maximum collaboration andunderstanding among the numerous agencies concerned during the implementation of the project forsuccessful completion. The Bank's role will remain critical during the entire implementaton periodto remove obstacles, facilitate a dialogue, promote better understanding and assist GOP and itsagencies in a highly onerous and innovative operation.

Bwea

27. The proposed EC0 would facilitate the mobilization of resources from the international andlocal capital and credit markets to supplement public sector investments in achieving the energyobjectives of the Seventh Plan. More specifically, ECO would support the establishment ofHUB:CO, on the basis of internationally acceptable standards which is pivotal to securing debtfinancing under limited recourse. HUBCO would serve as a benchmark for the evaluation of theperformance of the existing utilities in Pakdstan.

28. The Security Package has been structured to safeguard the interests of the lenders, GOP andinvestors, and to address the risks associated with the different stages in the preparation,development, implementation and operation of the Hub Power Complex. Provisions and safeguardsbacked by stringent guarantees and penalties have been put in place to ensure that, throughout the life

-I l-

of the project, lenders, GOP and investors would bear the consequences of all risks except thoseclearly attributable to events beyond their control.

29. 1 recommend that the Executive Directors authorize the Bank to negotiate the guaranteeprovisions for the proposed syndicated commercial bank loan to the Hub Power Company,substantially in accordance with the termns and conditions described in this Report and Term Sheet.Upon satisfactory completion of negotiations, approval by the Executive Directors of the Bank'sparticipation in the proposed ECO will be sought.

Lewis T. PrestonPresident

AtachmetWashington, D.C.October, 1991

- 12-

Schedue A(Page I of 2)

PKSTA

VPTOiIR24 MILLION OF AX CAMr COMMECAl, BANK L-OAN l)F ux$36 wM.l,glN

To = HB 221 COAMP

itMate Cofts pn Fluancing Plan for the Hub Power Comnie

|~~~Edg *os et t --i CA-PIAI

BLmufl It$ion

A. Project Development Costs 505 21

B. Tunkey Construction Contract Cost 21,344 888

C. Enghnering and Coondinaion for HPG 1,250 52

D. Preopern onal O&M Costs 457 19

E. Wodking Capital 336 14

Subtotal Project Costs2/ 29 mbF. Intenrst During Construction and oe Fnace Related Costs 8.366 348

G. Resrve Coninncy Fund (Debt and new Equity) 3,605 150

IL Debt Service Escrow Reserve 1,635 68

Total Fiancing Requirements 37LS2 L5

1 At exchange rate of Rs. 24.04/US$2 ncludes the following Taxes and Duties: 1,226

*13-

Sce A(Page 2 of 2)

(US$ MUJ8oX

Equty Base Debt Service Contigency TotalEWmnane .2 F-arn E1nanerg £anrIgg &k2

FemignnetMMem nbers 78 6 38 116 7

Offsoe Financial Instittions 82 6 17 99 7Commonweath Dev. Corp. -1 _ _ 8 1

SubtotaForeignEquity 1is LI 12 31 m 15

HUB Caverble Bonds IQ 1 _fSboaEquity X 2Q 12 31 D 1

Debt

PSEDF 355 26 - 52 407 26Syndited cmmecial bank kas 249 19 51 60 360 23ExpctCrediAgencies 300 24 - - 300 21Cmmonwealth Dev. Corp. 2X _ _ 1

Subtotl Foreign Debt A 211 a a 102 21

LOcalBanks IVQ £ IZ Subo Debt in4 a 112 22

TOrAL 1342 100% 68 150 1560 100_ _ = _

1Figures may wudgo min adjus_me2Take as a p rcnm3e of the total cost of the Complex, which includes interest during consucto and other

fimewd tedcoss

- 14 -

ScheduleB(Page I of 1)

PtAKISTAN

UP TO lJvSA MILLION OF A

IQ THE REED =F PN

PrcrmentArrngmeS(US$ Million)

Item WI LIa Dg law

A. Project Development Costs before Construction - 21 21B. Twnkey Construction Contract 439 - 429 888C. Engineerig and Coordination for HPG - - 72 52D. Prooperational Capitalized O&M Costs - 19 19D. Workdng Capital 14 14

Total Project Costs 439 0 SSS 994

Of which PSEDF (Bank & JEXI 1 (296) - (296)

Does not include IDC and fnancing costs.

Schedule C - Page 1 of 2

THE STATUS OF BANK GROUP OPERATIONS IN PAKISTAN

A. STATEMENT OF -ANK LOANS AND IDA CREDITS(As of June 30. 1991)

Amount (USS million)Loan Fiscal (tess cancetlations)go. Year Borrower Purpose Bank IDA Undisbursed

fifty-three loans and eighty-one credits fully disbursed 1,730.71 1,537.64

of which SECALS, SALs and Program loans a/

Ln. 2155-PA 1982 Republic of Pakistan Structural AdJustment 60.00Cr. 1255-PA 1982 Republic of Pakistan Structural Adjustment - 80.00

Sub-Total 60.00 80.00

Cr. 0754-PA 1978 Republic of Pakistan Salinity Control and Reclamation - 70.00 20.01Cr. 0877-PA 1979 Republic of Pakistan Salinity Control and Rect. (Mardan) - 60.00 10.05Ln. 2247-PA 1983 Republic of Pakistan Reservoir Maintenance Facilities 10.20 - 0.47Cr. 1243-PA b/ 1982 Republic of Pakistan Baluchistan Minor Irrig. & Agr. - 14.00 5.59Cr. 1348-PA bi 1983 Republic of Pakistan Lahore Urban Development - 16.00 9.50Cr. 1374-PA bl 1983 Republic of Pakistan Karachi Water Supply - 25.00 3.98Cr. 1373-PA b/ 1983 Republic of Pakistan Fourth Drainage - 65.00 58.75Cr. 1461-PA bl 1984 Republic of Pakistan Integrated Hill Farming Dev. - 21.00 11.16Cr. 1487-PA b/ 1984 Republic of Pakistan Command Water Management - 46.50 24.74Cr. 1499-PA bl 1984 Repubitic of Pakistan Second Small Industries - 50.00 3.93Cr. 1532-PA bl 1985 Republic of Pakistan Left Sank Outfall Drain - Stage 1 - 150.00 159.25Cr. 1533-PA bl 1985 Republic of Pakistan Baluchistan Agricultural Extension - 8.30 3.83Ln. 2499-PA 1985 Water/Power Auth. Fourth WAPDA Power 100.00 - 11.94Cr. 1602-PA b/ 1985 Republic of Pakistan Second Primary Education - 52.50 43.1?Cr. 1603-PA bf 1985 Republic of Pakistan Second On-Farm Water Management - 34.50 0.19Ln. 2556-PA 1985 Water/Power Auth. Fifth WAPDA Power 100.00 - 17.67Ln. 2648-PA 1986 Republic of Pakistan Industrial Imvestment Credit 148.00 - 6.21Cr. 1646-PA b/ 1986 Republic of Pakistan Industrial Investment Credit - 2.00 0.96Cr. 1652-PA b/ 1986 Republic of Pakistan Karachi Special Development - 70.00 49.44Cr. 1670-PA b/ 1986 Republic of Pakistan Second Vocational Training - 40.20 29.22Cr. 1693-PA b/ 1986 Republic of Pakistan SCARP Transition Pilot - 10.00 5.02Cr. 1699-PA b/ 1986 Republic of Pakistan Agric. Dev. Bank of Pakistan VI - 55.00 3.12Ln. 2698-PA 1986 Water/Power Auth. Kot Addu Combined Cycle 90.00 - 17.43Ln. 2743-PA 1987 Republic of Pakistan Telecommunications V 100.00 - 21.57Cr. 1755-PA b/ 1987 Republic of Pakistan Third Technical Assistance - 7.00 5.22Cr. 1762-PA b/ 1987 Republic of Pakistan AS. Extension IV - 42.10 31.64Cr. 1821-PA b/ 1987 Republic of Pakistan Third Primary Education - 145.00 129.56Ln. 2792-PA 1987 Water/Power Auth. Power Plant Efficiency 70.00 - 44.99Ln. 2814-PA 1987 Republic of Pakistan Fourth Highways 152.00 - 104.88Ln. 2839-PA 1987 Republic of Pakistan Industries III 54.00 - 44.15Ln. 2842-PA 1987 State Petr. Petroch. Refinery Energy Conservation 21.00 - 17.75Ln. 2884-PA 1988 Republic of Pakistan Cement Industry Modernization 96.00 - 70.47Ln. 2884-1 c/ 1991 Republic of Pakistan Cement Suppl. 56.40 - 56.40Cr. 1888-PA b/ 1988 RepublIc of Pakistan Second irrigation Systems Rehab. - 79.50 65.83Cr. 1895-PA b/ 1988 Republic of Pakistan PunJab Urban Development - 90.00 70.32Cr. 1936-PA b/ 1988 Republic of Pakistan National Oilseed Development - 20.00 16.82Ln. 2973-PA 1988 Republic of Pakistan National Ollseed Development 31.40 - 31.40Ln. 2982-PA 1988 Republic of Pakistan Private Sector Energy Oevelopment 150.00 - 149.84Cr. 1982-PA bI 1989 Republic of Pakistan Industrial Investment Credit III - 2.00 1.09Ln. 3019-PA 1989 Republic of Pakistan Industrial Investment Credit III 148.00 - 112.95Cr. 1987-PA b/ 1989 Republic of Pakistan Karachi Water Supply - 125.00 107.26

*Ln. 3029-PA 1989 Republic of Pakistan financiat Sector Ln. II 150.00 - 75.00*Ln. 3107-PA 1989 Republic of Pakistan Energy Sector Loan II 250.00 - 129.15wLn. 3107-1 e/ 1991 Republic of Pakistan Energy Sector Loan II Suppl. 28.00 - 28.00

Cr. 2003-PA b/ 1969 Republic of Pakistan Flood Restoration - 40.00 17.15Cr. 2004-PA bl 1989 RepubtIc of Pakistan Private tubeMwell - 34.40 19.29Ln. 3147-PA 1990 Water/Power Auth. Power Transmission & Extension 162.00 - 155.42Cr. 207B-PA b/ 1990 Republic of Pakistan Rural Electrification - 37.00 38.34Ln. 3148-PA 1990 Republic of Pakistan Rural Electrification 123.00 - 123.00

Schedule C - Page 2 of 2

THE STATU OF lANK GRMUP OPERAUTIONS I PAKNfISN

A. STATE ET OF SANK LNKLS AND IDA CREDITS(As of June 30. 1991)

A-mowt (SmlI Ion)Loan Ffecat (to"s caSfneatfons)No. Year gorrower Purpose Bank IDA Undisbursed

Cr. 2tO2-PA bf 1990 Repubtic of Pakisten Sindh Primary Ed4catian 112.50 105.42Cr. 253-PA bf 1990 Repstlto of Pakistan Agriculture Credit MOso 1.58Ln. 3226-PA 1990 Republic of Pakistan Agriculture Credit 148.50 148.50Cr. 2154-PA b/ 1990 RepubLc of Pakistan Agriculturat Reearch 57.30 58.50

*Ln. 3241-PA 1990 RepLblic of Pakistan Transport Sector Investients 184.00 184.00Ln. 3252 1991 Repshlic of Pakistan Corp. Restrtwturing 130.00 - 124.32Ln. 3252-1 el 1991 Repiublic of Pakistan Corp. Restructur1ng Stppl. 60.00 - 60.00Cr. 2228-PA bYc/1991 Rephltc of Pakistan Rurwl sater Supply & Sanitation 136.70 127.02Ln. 3318-PA c/ 1991 Repbtic of Pakistan Microenterprise 26.00 . 26.00Cr. 224-PA b/c/1991 Repubilc of Pakistan Family Heelth 45.00 41.90Cr. 2245-PA b/c/1991 RepbhLic of Pakistan Third On-Farm Nanagement 47.30 44.01Ln. 3327-PA ct 1991 Rephbtic of Pakistan Third On-Fan Management 36.30 - 36.30Cr. 2247-PA b/c/1991 Repubilc of Pakistan Second Scerp. Transition 20.00 19.S0Ln. 3335-PA c/ 1991 Repubtle of Pakistan Karachi Port Noderizaticn 91.40 * 91.40

Total 4,446.91 3,369.94 3,231.S7of which has been repaid W.8S 129.61

Total now outstanding 3.6806 3,240.3Amests sold 33.46 12.00

of which has ben repaId 31.75 12.00Tootl now held by the Sank and IDA 3,664.60 3,228.33Total undisburs.d 3,231.57

a/ Approved during or after FY80.bI IDA Credits begf ming with the 6th Replenishmant are denominated In SR, snd are shoum in USS equivalents at

the time of negotiations. Disbursed amounts are cosputed at the exchange rate applicable on the transctiondates. Undisbursed amouts are valued at the exchange rate apptfeable on the date of thfs statement.

cI Not effective at the time of this statement.* SAL, SECAIL or Program Loan.

Au:fS,1I:l1Cm0TNER,PAs5M00.T3LASt 29, 1991

Schedule D - Page 1 of 1

THE STATUS OF BANK GROUP OPERATIONS IN PAKISTAN

B. STATEMENT OF IFC INVESTMENTS(As of June 30, 1991)

Amount (Smiltion)(tless cancel lations)

Date Borrower Purpose Loan Equity Total

1959 AdamJee Textiles 0.75 0.00 0.751987/89 Anglo-Suisse Petroleum & Gas 0.00 6.80 6.801983/88 Asbestos Cement Cement manufacturing 4.02 0.51 4.531979/82/84 Attock Petroleum & Gas 15.00 0.86 15.861965 Crescent Jute Rope & twine 1.95 0.11 2.061969/89 oawood Fertilizers & Pesticides 18.30 2.92 21.221991 Exxon Chemical Fertilizers & Pesticides 40.95 8.50 49.451981 Fauji Plastic manufacturing 1.78 0.00 1.7819*88 Fecto Cement Cement manufacturing 18.58 0.00 18.581990 FIIB Mortgage/housing/Savings Bank 0.00 0.68 0.681962/65 Gharibial Cement manufacturing 5.25 0.42 5.671981 Habib Arkady Grain mill products 3.15 0.16 3.311989 Hala Textiles 3.26 0.66 3.921986 Mari Gas Petroleum & Gas 46.53 0.00 46.531979/87 Mi tkpak Food/Berage/Tobacco 2.40 0.40 2.801988 Millat Tractors Agric. mach. & equipment 4.90 0.00 4.901985 NDLC Leasing 5.49 0.37 5.861965/81/82/87/88 Packages Container manufacturing 26.00 1.01 27.011980 Pak. Oltfields Petroleun & Gas 14.00 1.19 15.191967 Pakistan Paper Paper manufacturing 5.38 2.02 7.401990 Pak. Suzuki Motor vehicles manufacturing 17.46 0.00 17.461963/75/89 PICIC DFC 0.00 0.63 0.631987 PICIC-AL Small & medium ent. 0.00 3.00 3.001991 PILCO Leasing 5.00 0.00 5.001983/85 PPL Petroleum products 104.50 1.56 106.061980 Premium Board Sawnills planing 2.70 0.00 2.701991 Prudential Securities Mkt. Financing 0.00 0.41 0.411990 Rupali Resins & Plastics Mfg. 22.38 2.00 24.381960 SCP Basic Metals 0.63 0.00 0.631989 Shams Textile Textiles 2.76 0.00 2.761989 Surai Cotton Textiles 2.76 0.00 2.76

Total Gross Commitments 375.88 34.21 410.09'C

Less: Cancellations, Terminations 255.69 14.07 269.76Exchange adjustments, Repayw.ientsWriteoffs and Sales

Total Conmitments now held by IFC 120.19 20.14 140.33

Total Undisbursed IFC 69.56 7.79 77.35

N:\em1co\other\pak\sifc. tbl

Aug t. 101

LAHORE RING u. S s R , CHINA \% _-- . -

IAt SHAM KAKU > -mp~ ~ ~ ~~~.

W~~~ ,:2 .,-

ZDtAQ ZSH K7 AfG ,_fAXPNEDIOINNINANEN

o \ PAKISTAN 1*

.- r* UNDER EXIENSFON ANINDIAD

O ° ., ' t / EXIS~~~~TINGO PApNDPROIECT

NEW KO 70.LAKH ~~~~~~~~~~~~~~~~~~~~JAM4MU

FAISALABAD RING ENG

F- T. /Ibd0 @ HEM

C7

CHINIO c:I~~~~~~~~~~~~~~ AOOW

VI~~~~~~~~~~~~Io

/ 1 IAOLORE *W 0W .00 LA.-OAT

91

;..,EXPANDED COFINANCING OPERATION1 .'~~0IIr(I(UR / ~ FOR THE HUB POWER COMPANY

/ ~~~~MAIN POWER STATIONS AND TRANSMISSION LINES

TRANSSMITSOON

UNDER ETENSIO AND SNSO XITN 50

CONSTRUCTION ROEERFSTATIONT

OR PLANNEDLPROJECT

EXISTING L~-.- ERANATISIONA BOUNDAIE

DADU 500 kV~~~~~~~~~~~010 20MIE

-26- 26,~~~~~~~~~~~~~~70.2