Case

The Build or Buy Decision of Asian Journal of Management Cases

1–23
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Power Limited DOI: 10.1177/0972820120958547
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Zehra Waheed1 and Arif I. Rana2

Abstract
Quaid-e-Azam Solar Power Limited (QASPL) was a public sector, a for-profit company established by
the Government of Punjab in 2013. The company was assigned the task of setting up renewable energy
projects, in general, and solar energy power projects, in particular. The project was part of a wider
initiative by the Government of Punjab under its Punjab 2025 vision to establish a 1,000 MW solar park
in Bahawalpur.

Keywords
Power sector, solar project, service contracts, service procurement, build-or-buy decision

Discussion Questions
1. If you were Arif Saeed, what would your recommendation be?
2. Is it in the financial interest of the company to bring Operations and Maintenance (O&M) services
inhouse?
3. What do you think motivated the senior management to consider bringing O&M in-house? Was it
necessary?
4. Given the current profitability, should the company opt for repaying debt earlier as opposed to paying
dividends?

Introduction
The solar power plant was established through an engineering procurement and construction (EPC) or
turnkey contract, while the operations and maintenance (O&M) was offered to an O&M contractor.

1
Assistant Professor. School of Business, Lahore University of Management Sciences, Lahore, Punjab, Pakistan.
2
Associate Professor. School of Business, Lahore University of Management Sciences, Lahore, Punjab, Pakistan.

Corresponding author:
Zehra Waheed, School of Business, Lahore University of Management Sciences, Lahore, Punjab 54792, Pakistan.
E-mail: zehra.waheed@lums.edu.pk
2 Asian Journal of Management Cases

Apart from these two, the project utilized several consultancies, including that of a feasibility study by
Engineering Consulting Services Punjab (Pvt.) Ltd., quality assurance of photovoltaic (PV) modules
and inverters by the German testing agency PV Lab, among several other technical, legal and human
resources (HR) consultancies. Both the EPC and plant O&M contracts were awarded to a large Chinese
power engineering service provider TBEA Xinjiang Sunoasis Co. Ltd., through an international
competitive bidding process. The request for proposal (RFP) floated for this long-term contract received
three bids, of which TBEA was awarded the complete contract and a power generation license by the
National Electric Power Regulatory Authority (NEPRA) for 25 years. The project achieved Commercial
Operation Date (COD) on 15 July 2015. The plant, however, had been completed before the official
deadline and had started energy production on a pre-COD basis 3 months earlier, from April 2015.
The case centres on the decision faced by the Quaid-e-Azam Solar Power Limited (QASPL) Board of
Directors on whether to continue with the O&M contract versus cancelling the contract and bringing the
function in-house. It was essentially a ‘make or buy decision’, which was the starting point for any pro-
curement. Usually construed to be purely financial, the political and long-term operational implications
of the decision that must underpin such a decision were introduced through the case. The company’s
O&M performance was not only linked to the NEPRA tariff but also impacted its terms of debt as well
as long-term life-cycle costs. Most importantly, it had an impact on the upcoming privatization decision
(which has been stalled for a while, but it was politically sensitive).
Another key understanding that emerged through the case discussion was the realization that O&M
costs rose with time during the 25-year contract. Therefore, a flat-payment O&M contract (like the one
QASPL had) was more expensive in the beginning but proved to be much cheaper later. The actual costs
of repair and maintenance had not been presented/accounted for in the financial analysis presented by the
company’s management to the board of directors.
The obvious financial gains need to be assessed with a fine-toothed comb as well, with the question
pertaining to the quality of in-house technical expertise being the greatest contestable argument against
contract cancellation. QASPL’s technical performance was linked to the price it contracted from the
offtake authority as well as low-cost debt terms. The change in operational strategy could also have
implications for the government’s decision to divest its shares and privatize the company in the near
future, as well as the long-term operational and economic viability of the company.
In June 2018, Arif Saeed, Chairman QASPL’s board of directors, reviewed the proposal made by the
company’s management to cancel the O&M contract with TBEA Xinjiang Sunoasis Ltd. and to bring the
company’s O&M in-house. Spread over 6,500 acres at Lal Sohanara Bahawalpur, QASPL was a solar
power project with a 100 per cent stake owned by the Government of Punjab (GoPb). Completed in July
2015, it had an installed capacity of 100 MW. Being Pakistan’s largest solar power generation project
and one of the GoPb’s flagship energy projects, the project had received considerable public attention
since its inception. The project had utilized the services of TBEA Xinjiang Sunoasis Ltd. for building the
solar plant. This company was a well-established EPC contractor from China and was considered to be
the largest solar EPC company in the world. TBEA was also QASPL’s O&M partner since project com-
pletion in 2015. This meant that while QASPL owned the project, TBEA built the plant, procured the
equipment and also operated and maintained the plant on QASPL’s behalf after commercial operations
commenced.
With an issued capital of PKR 5.3 billion (USD 41.4 million) and a net profit of PKR1 1.3 billion
(USD 9.7 million), the company was in excellent financial position. However, Arif Saeed had been going
over the benefits and downsides of the proposed cancellation of the O&M contract and wanted to discuss
it formally at the upcoming meeting of the company’s board of directors. While he expected the change
to bring in annual savings of over PKR 230 million (USD 1.9 million), Arif Saeed remained aware that
Waheed and Rana 3

the company was going up for privatization soon. He was conscious of the consequences of such a deci-
sion on the company’s privatization prospects. He wanted to evaluate the ‘net’ gains from cancelling the
O&M contract to carry out the job in-house. O&M, he saw, was not a one-off, simple decision. It had
far-reaching ramifications in terms of financial, technical and political risks, and the board needed to be
able to identify and consider all risks as soon as possible, as the management seemed convinced that
bringing O&M in-house was the way forward.

Quaid-e-Azam Solar Power Limited

QASPL, named after Pakistan’s founding father, Muhammad Ali Jinnah (he was called Quaid-e-Azam
which meant the great leader). QASPL was a government-owned, for-profit company established in
September 2013 by the GoPb. Set up as a private limited company under the Companies Ordinance
1984, QASPL was considered to be an independent power project (IPP) tasked with the development
of a 100 MW solar power plant and the subsequent sale of electricity generated by the project to power
distribution companies. At the time when it was completed in July 2015, the power plant was undisputedly
the world’s largest single-solar PV power project and the country’s first utility-scale solar power plant.
Set up at the cost of USD 215 million (EPC of USD 131.15 million and O&M of USD 73 million), it had
an operational life of 25 years.2
QASPL also formed part of Pakistan’s China–Pakistan Economic Corridor (CPEC)-related project
portfolio. CPEC was the largest development project portfolio3 being undertaken in Pakistan historically.
As part of China’s wider Belt and Road Initiative (BRI) that traversed through six major routes across
multiple continents. CPEC, a part of BRI, was a large composite of development projects spread across
three colossal ‘corridors’ weaving across Pakistan, which remained in dire need of investment in modern
infrastructure. This large, complex infrastructure development initiative spread across various sectors,
established much-needed economic and strategic connectivity between Pakistan and China, providing
trade access to Chinese goods via Karachi and Gwadar—Pakistan’s largest seaport on the Arabian Sea.
Power projects, including QASPL, formed part of the wider vision around the one-belt connectivity
through complementary infrastructure.
QASPL’s 100 MW capacity was intended to be the first segment of a much larger 1,000 MW solar
project at Lal Sohanra. Lal Sohanra was situated in southern Punjab in Bahawalpur District and was part
of GoPb’s ambitious PV initiative in the region. The project, the first of its kind in the country, achieved
COD on 15 July 2015. The plant, however, had started production ahead of schedule on a pre-COD basis
3 months earlier—in April 2015—when it seamlessly transitioned from construction to commissioning
and operations.

The Country’s Energy Woes

At the time the project was proposed in 2012, Pakistan was suffering from an energy shortfall of 6 GW,4
while demand was rising by 8 per cent annually. Pakistan had faced acute energy shortage for many
years. Rural areas were especially badly hit, with some struggling to receive power for up to 20 h a
day. Due to the poor energy availability, there had also been insufficient local and foreign investment
in the industrial sector—which regularly faced long power cuts; in fact, industries had faced closure.
The energy mix primarily comprised hydel (29.9%), gas (29%), oil (35.2%) and nuclear, imported and
4 Asian Journal of Management Cases

renewable (together 6%), and the government felt that it was the right time to raise overall energy
capacity while also increasing the role of renewables into the country’s energy mix. At the time, in 2012,
Jhimpir Wind Power Plant (capacity 56.4 MW) and Jhimpir Wind Energy Project (capacity 49.6 MW)
were the only two renewable utility-scale energy plants operational in the country. While Pakistan’s
installed power generation capacity stood at 23,538 MW (NEPRA, 2012), due to various system-level
issues, including circular debt, total production stood at a mere 14,000 MW. This was while demand
stood at near capacity of 20,000 MW.
Technical reports had identified the Cholistan Desert in Bahawalpur (southern Punjab) as an optimal
area for solar power. The area received about 13 h of sunlight daily, while the large flat area of the
desert was a perfect site (geologically) for a large commercial PV project such as the one proposed (see
Figure 1). Another significant advantage of a solar plant in the desert was that a large park (such as
QASPL) could be completed considerably faster than hydropower or thermal project of the same capac-
ity, both of which also required significantly higher maintenance during their operational life cycles.
QASPL could also help reduce Pakistan’s carbon footprint, reducing CO2 emissions by 90,750 tons and
approximately replacing 57,500 tons of coal annually.

Figure 1. Bahawalpur Location and Amount of Radiation Received Annually

Source: QASPL/ National Renewable Energy Laboratory (NREL), US Government.
Waheed and Rana 5

The generation from renewable energy in the country was negligible, and in line with global
Sustainable Development Goals (SDGs) that the government had signed in to, the government had set
targets to produce 10 per cent of the country’s energy mix from renewable sources by 2025. This excluded
hydropower, which already comprised 29.9 per cent of the country’s energy mix. This also translated
strategically into a lesser amount of (traditional) dependence on hydrocarbons—imported oil, gas and
coal from the existing 87 per cent to around 60 per cent of the total. While Pakistan’s economy became
the world’s 25th largest in 2017 (World Data Atlas, 2017) with a gross domestic product (GDP) exceed-
ing USD 1 trillion, the country still contributed less than 1 per cent of the global greenhouse gas (GHG)
emissions. However, carbon emissions had been increasing by 3.9 per cent per annum. By 2020,
Pakistan’s combined GHG emissions was expected to be 650 million tons of CO2e (carbon dioxide
equivalent). Renewables would, therefore, play a significant part in reducing the proportion of carbon
emissions and help the country achieve its SDG commitments. The solar park and its associated eco-
nomic activity were also expected to generate 15,000–33,000 jobs for locals and attract investment to the
region.5

Project Profile
Inaugurated by the then Prime Minister of Pakistan, Mr Muhammad Nawaz Sharif, on 5 May 2015,
QASPL was a politically high-profile project and represented a landmark achievement in the government’s
repertoire. The 100 MW capacity of solar power generation was the first phase of the government’s plan to
add 900 MW in the same area in two further steps through other IPPs. The government planned to solicit
interest from other IPPs once QASPL had been established as the seminal power plant (see Figure 2).
The project was delivered through a turnkey or EPC contract that involved design, construction and
delivery of the requisite power plant by a single technology provider. QASPL’s EPC and a technical
O&M contract was awarded to TBEA Xinjiang Sunoasis Company Limited—a Chinese power engineer-
ing service provider—through an internationally competitive bidding process. The company utilized a
single-stage, two-envelope process, which was customarily used for EPC contracts. An expression of
interest (EOI) and pre-qualification notice were advertised internationally. Through this process of invit-
ing bids, forty-five companies showed interest, out of which twelve had been pre-qualified based on the
evidence submitted by them. To these twelve, RFP was sent. The RFP for this 25-year contract received
three responsive bids, of which TBEA was awarded the complete contract for being the lowest qualified
bidder. TBEA had originally bid USD 152 million for the EPC contract (plus USD 4.7 million for taxes).
Nevertheless, after securing the offer, it had offered a discount of USD 18.7 million ‘on account of per-
petual friendship between Pakistan and China’.6
The project had also employed several consultants. A plant feasibility study conducted by Engineering
Consulting Services Punjab (Pvt.) Ltd., a consultancy providing quality assurance of the installed PV
modules and inverters, was undertaken by PV Lab (a German testing agency), and German consultant
ILF Consulting Engineers took design review and construction supervision consultancy services. There
had been other legal and financial consultancies in place as well.
TBEA had completed the construction of the power plant in 3 months. The 100-MW facility (refer
to Table 1), spread across an area of 568 acres, cost about USD 215 million (EPC of USD 131.15 million
and O&M of USD 73 million). The project’s PV panels had been purchased from JA Solar (a Chinese
manufacturer), while foundation, mounting systems and construction services for the PV panels were
procured from two companies—Clenergy and Powerway Renewable Energy, both Chinese companies
as well. TBEA itself was a large Chinese power equipment manufacturer with a considerable footprint in
6 Asian Journal of Management Cases

Figure 2. Photographs of the Facility

Waheed and Rana 7

Table 1. Plant Technology and Salient Features

Principal activity
Own, operate and maintain the power plant
Installed capacity
100 MW
Location
District Bahawalpur, Punjab
Governance
Independent Board and Professional Management
Technical
1,300 DC Combiner boxes
Specifications
395,120 Polycrystalline photo voltaic (PV) modules (255 Wp each)
200 Inverters (500 kV)
100 Transformers (0.315/33 kV)
33 kV collection system loops (20 feeders)
Net output
160.08 GWh (2015–2016)
160.568 GWh (2016–2017)
Operational efficiency
18.28 per cent (2015–2016)
18.33 per cent (2016–2017)
Off-taker
Central Power Purchasing Agency (CPPA-G)
Applicable framework
Renewable Energy Policy, 2006
Employees
66 (December 2016)
56 (June 2017)
Rating (JCR-VIS)
AA–

transformers and transmission systems globally, with the largest presence being in China (see Exhibit 1).
Quality control and monitoring of individual components to be used at QASPL were carried throughout
pre-manufacturing and through manufacturing also, upon construction on-site and post-energization.
Two German consultants and two independent European testing agencies tested the equipment specifica-
tions and performance at various stages of the project. All the equipment acquired either met or exceeded
the project specifications based on International Techno-electrical commission (IEC) and other interna-
tional standards.
The operational life of the plant required two types of O&M activities. One set covered technical
O&M services, while the other included asset management services. Technical O&M services were a set
of activities (most of them were technical, hence the name) that enabled PV power plants to produce
8 Asian Journal of Management Cases

energy optimally. Asset management services, on the other hand, involved plant ownership and oversight
of all commercial and administrative activities of importance during the lifetime of the plant. At QASPL,
technical O&M was outsourced to TBEA, while the company itself retained asset management. The
company’s internal capacity for asset management was augmented by engineering consultancy services
provided by ILF Consulting Engineers, Germany, an engineering consultancy firm. Local requirements
and standards expected by the National Transmission & Dispatch Company (NTDC), Pakistan, were
also complied with. The technology provider (TBEA) gave performance guarantee of 25 years, that is,
the contractual lifespan of the project.

Project Timelines7
June 2014: Contract signed.
October 2014: Arrival of initial equipment on site.
November 2014: On-site construction and installation starts.
January 2015: Construction and installation completed (3 months).
February 2015: Testing and commissioning completed.
March 2015: 132 kV grid energized.
April 2015: Plant commissioned.
July 2015: Plant achieves COD.

Project Cost and Capital Structure

In all, QASPL project installation and commissioning cost about PKR 14.8 billion (EPC of 131.15
million). The project’s total debt-to-equity ratio had been kept at 75:25. The Bank of Punjab had financed
the long-term debt. The QASPL availed this long-term loan facility (PKR 11.1 billion) over a tenure of
11 years, with an initial grace period of 1 year.8 The license obtained through NEPRA9 also required that
the O&M contractor guaranteed QASPL a certain capacity factor. This meant that the plant’s capacity
was linked to its electricity tariff.
The EPC and O&M agreement between QASPL and TBEA required the maintenance of plant perfor-
mance gauged by a performance ratio (PR).10. In case the actual PR was lower than the agreed percent-
age, the O&M contractor, for example, would be levied a penalty. The contractor, for example, was
levied a penalty of USD 1.14 million in FY 2016 and subsequently USD 1.18 million in FY 2017 for not
being able to meet requisite performance levels.
Quaid-e-Azam Solar was a highly leveraged project (see Table 2). In June 2016 (end of the financial
year), the issued capital amounted to PKR 3.8 billion (FY 2015: no change). Accumulated profit totalled
PKR 606.3 million (FY 2015: loss of PKR 108.8 million), while total equity stood at PKR 4.4 billion (FY
2015: PKR 3.7 billion). Long-term financing for the project (including a portion for the year) contributed
to 84.7 per cent of total liabilities and stood at PKR 10.4 billion at the end of FY 2016 (it was PKR 6.4
billion in FY 2015). The gearing ratio11 was reported at 2.36x (FY 2015: 1.73x). Funds from Operations
(FFO)12 stood at PKR 2.75 billion (FFO–debt ratio remained at 0.26x in FY 2016). QASPL’s FFO was
expected to remain high because of the company’s fixed tariff and profitability outlook. Cash flows had
remained enough for meeting debt obligations on time.13
Due to its tariff structure and guaranteed payments, not only were cash flows adequate, but the com-
pany had also been highly profitable since the year-end 2016, that is, the end of the first operating year
Waheed and Rana 9

Table 2. Income Statement and Balance Sheet

Quaid-e-Azam Solar Income Statement

2017 2016 2015 2014
(PKR in thousands)
Sales 3,053,179 2,956,304 – –
Cost of sales −887,269 −847,227 – –
Gross profit 2,165,910 2,109,077 – –
Administrative expenses −112,208 −99,817 −142,375 −57,131
Other income 350,650 174,294 195,089 41,204
Other operating expenses –2,502 −102,635 −67,079 –
2,401,850 2,080,919 −14,365 −15,927
Finance cost −957,607 −1,038,124 −127 −15
Profit before taxation 1,444,243 1,042,795 −14,492 −15,942
Taxation −54,300 −27,357 −78,380 –
Profit for the year 1,389,943 1,015,438 −92,872 −15,942
Earnings per share-basic and diluted 3.65 2.67 −0.24 –
Others comprehensive income
Items that will not be re-classified to profit/loss – – – –
Remeasurement of net defined benefit liability −1,974 −327 – –
Tax effect – – – –
−1,974 −327 – –
Items that may be re-classified to profit/loss – – – –
Other comprehensive income for the −1,974 −327 – –
year-net of tax
Total comprehensive income for the year 1,387,969 1,015,111 −92,872 −15,942

Equity and Liabilities 2017 2016 2015 2014

(PKR in thousands)
Capital and Reserves
Authorized capital
600,000 ordinary shares of PKR 10,000 each 6,000,000 6,000,000 6,000,000 10,000
Issued, subscribed and paid-up capital 380,978 3,809,780 3,809,780 10,000 10,000
(2016: 380,978, 2015: 1,000) ordinary shares of
PKR 10,000 each
Share deposit money 5 5 3,799,785 3,799,785
Accumulated profit/loss 694,266 606,297 −108,814 −15,942
4,504,051 4,416,082 3,700,971 3,793,843
Non-current Liabilities
Long-term finances—secured 8,860,908 9,678,306 6,090,418 –
Deferred liabilities 10,832 4,592 3,688 868
Long term retentions 24,469 7,800 – –
8,896,209 9,690,698 6,094,106 868
(Table 2 continued)
10 Asian Journal of Management Cases

(Table 2 continued)

Quaid-e-Azam Solar Income Statement

2017 2016 2015 2014
(PKR in thousands)
Current Liabilities
Current portion of long-term finances—secured 841,130 760,652 300,140 –
Trade and other payables 572,043 1,459,357 3,902,550 32,632
Accrued finance cost 187,466 209,122 294,342 –
Provision for taxation 442,207 207,771 47,042 –-
2,042,846 2,636,902 4,544,074 32,632
15,443,106 16,743,682 14,339,151 3,827,343
Contingencies and Commitments
Assets
Non-current Assets
Property, plant and equipment 12,715,213 13,272,433 12,507,304 20,285
Intangible assets 1,595 1,294 308 146
Long term deposits and prepayments 1,447 1,497 1,547 14,174
12,718,255 13,275,224 12,509,159 34,605
Current Assets
Trade debts 1,061,646 823,185 240,959 –
Advances, deposit, prepayments and other 507,670 206,800 10,068 44,944
receivables
Cash and bank balances 1,155,535 2,438,473 1,578,965 3,747,794
2,724,851 3,468,458 1,829,992 3,792,738
15,443,106 16,743,682 14,339,151 3,827,343

for the plant. Revenues amounted to PKR 2.9 billion in 2016 alone, while the gross margin was 71.3 per
cent. So that net income was reported at PKR 1.0 billion (refer to Table 2).

Technical
The completed plant comprised 402,560 polycrystalline PV modules,14 each with a capacity of 255
Wp.15 Each solar panel block was 1 MW, with 100 blocks in total. The panel structures used screw piles
instead of concrete foundations. The plant also utilized 200 inverters16 with a capacity of 500 kW each
and a maximum efficiency of 98.7 per cent. Inverters were required to ‘invert’ the direct current (DC)
produced into the requisite alternating current (AC) that could be distributed through the grid.
Once completed, the plant operated at 18.28 per cent of capacity factor in the first year. An annual
degradation of 0.7 was then applicable to this capacity factor subsequently as the plant got older.
Technically, the solar plant comprised 20,128 strings,17 100 inverters (capacity of 1 MW each) and
associated 100 transformers (33—1,000 kVA each). There were 20 modules18 with a capacity of 255 Wp
Waheed and Rana 11

in each string. The power from each inverter–transformer unit was collected through a 33 kV switching
station using 20 current-collecting lines, each with a 5 MW transporting capacity. The station was meant
to step up the voltage level to the required 132 kV (for the grid—with its 132 kV overhead transmission
line) and fed this into the power grid. The plant site itself comprised components and several buildings,
including the main building, SVC building, the control building and the building for the switchgear.

Quaid-e-Azam Solar Power Limited: Organizational Structure

QASPL, being a for-profit limited company, was led by a chief executive officer (CEO) and was governed
through a board of directors of 13 members led by the Chairman, Arif Saeed. The company’s CEO,
Muhammad Badar ul Munir, was a chartered accountant by profession, with over a decade’s experience
in public and private sectors in Pakistan. The board of directors governed through three committees—
finance and procurement, HR and audit. The company operated through five functional areas: finance,
HR, internal audit, legal and technical operations. The company had two offices, the head office in
Lahore and the site office in Bahawalpur. QASPL employed thirty-six personnel spread across the head
office and site office, comprising both managerial and non-managerial staff (see Table 3).
Additional engineering staff was also hired at the onset with the explicit intent of perhaps utilizing
them at a time when the company may wish to operate the plant itself. Their being on board and liaising
with the primary contractor would build their capacity while keeping them in the know.

Power Tariff and Profitability

On completion, QASPL had obtained a power generation license, allowing it to sell electricity at the
pre-determined rate structure for 25 years. This upfront solar tariff was finalized in January 2015, the
calculation of which relied on project costs furnished by QASPL. NEPRA had fixed the upfront tariff at
PKR 18.8 for the first 10 years. After the 10th year, the tariff dropped to PKR 8.5 and remained so for
25 years. The levelized tariff worked out to be around PKR 15.5 for the 25-year lifespan of the power
project. From the total tariff, PKR 10 was intended for servicing debt, PKR 5 for shareholder returns, the
rest (PKR 3) for O&M costs and related plant insurance. Late payments by NEPRA were subject to an
interest penalty at a rate equivalent to the KIBOR+2 per cent.
The Central Power Purchasing Agency (CPPA) had agreed to purchase the energy generated by
QASPL under an Energy Purchase Agreement that was a necessary compliance tool for any IPP to begin
operations. According to the implementation agreement, tariff payments by CPPA were guaranteed by
the Government of Pakistan throughout the term of the license. This meant that the company had little
payment risk associated with its power production uptake.

Table 3. QASPL Management/Non-management Staff Details

Place Management Non-management Total

Head office 8 15 23
Site office 7 6 13
Total 15 21 36
Source: The authors.
Table 4. Cost Comparison of Outsourcing Versus In-house Options

QUAID E AZAM SOLAR POWER-COST COMPARISON

cost of inhouse O&M cost of outsourced O&M
currency currency
PKR PKR USD
salaries
SALARIES QASP (CURRENT) 24,255,684 TBEA O&M contract for 25 years 8,284,636,340 72,040,316
SALARIES O&M 6,000,000 TBEA O&M contract per annum cost 331,385,454 2,881,613
30,255,684
cost of subcontracting expected savings 214,124,770
PV module cleaning 24,000,000 % of current cost 65%
bi-annual maintenance 4,800,000
annual maintenance 2,400,000
glass cutting 1,200,000
general maintenance 1,000,000
testing charges 3,000,000
36,400,000 current cost of O&M consultant (ILF)+PV 14,490,000
lab (annual)
training and development 5,000,000
miscellaneous/ other
fuel+vehicle maintenance 1,200,000
consumables 600,000
entertainment for visitors 400,000
gardening 500,000
mess expenses 600,000
stationery and printing 300,000
electricity import bill 24,000,000
water bill 1,200,000
36,300,000
one-off CAPEX
testing equipment 1,685,000
Panel Cleaning Machines+Dust Detection System 44,840,000
Opex of cleaning trucks (p.a.)+DDS (?) 7,500,000
54,025,000
annual depreciation (over 5years, straight-line) 9,305,000
p.a. TOTAL cost of inhouse O&M 117,260,684
14 Asian Journal of Management Cases

Because of these financial arrangements, QASPL was in excellent financial position. The resultant
financial standing, for example, could be seen in the company’s financials and was evident through its
market ratings. JCR-VIS Credit Rating Company Limited, for example, gave a long-term ‘AA−’ and a
short-term ‘A−1’ rating to the company because of its high profitability, low variance and relatively low-
risk profile. Medium- to long-term ‘AA−’ rating essentially showed high credit quality for the QASPL
stock and was representative of strong protection factors that worked in favour of the company. Risk, the
rating agency had assessed, was modest but could vary slightly from time to time because of economic
conditions. JCR’s short-term ‘A−1’ rating was given because of the high certainty of timely payment,
strong liquidity factors, good fundamental protection factors and minor risk factors. Rating agencies like
JCR had also factored in the company’s ownership profile (GoPb held 100% stake) and an excellent
record of the EPC and O&M contractor’s (TBEA Xinjiang Sunoasis Co. Ltd.) performing projects into
their evaluation.

Privatization
The company had lately been contemplating privatization of QASPL since the provincial government
(which completely owned QASPL) established a successful solar project and was interested in offloading
its entire stake in the plant to a private entity. The Punjab Law Department had recommended the
privatization of QASPL. The United Bank Limited (UBL), one of the largest banks in the country, had
been appointed as the privatization consultant for this purpose. UBL had advertised to solicit interest
in the privatization and had arranged roadshows locally and internationally. The bank charged PKR 4
million in advance for the marketing plan of the privatization efforts.
The Punjab Privatization Board (PPB), with support from the federal government, invited EOI from
investors who were willing to purchase the entire 100 per cent stake in QASPL. Nine companies showed
interest, which were Jahangir Siddiqui & Co., Orient Electronics, Vitol Dubai Ltd., TBEA Xinjiang
Sunoasis Co. Ltd., Artistic Milliners Private Ltd., Atlas Power, China Huadian Company Limited, Saba
Power Ltd. and Master Textile Mills Ltd. They were then pre-qualified by UBL for taking part in the
formal bidding process. However, due to the expected political change after the upcoming national and
provincial elections in July 2018, the privatization process remained completely stalled. Nevertheless, it
did remain on the books. The company’s contractual arrangements, operational performance and finan-
cial results remained key to a successful privatization. As QASPL was perceived to be a ‘star performer’,
it was important for GoPb to be able to make an excellent sale of this entity. This would not only build
credibility but also pave the way for further privatization of state-owned entities.

Energy Production and Performance

QASPL operated at an average capacity factor of 18.28 per cent. While solar power plants typically
delivered only about 20 per cent of installed capacity during the day, peak production was during midday.
Peak demand, however, usually occurred in the evening when the solar plant was not producing energy
at all. The plant ‘capacity factor’ was then subject to 0.7 per cent annual degradation as it became older
and less efficient. However, QASPL’s technical performance remained higher than the benchmark. The
total energy generated in 2016, for example, exceeded the benchmark by 6,792.59 MWh (see Exhibit 2).
Waheed and Rana 15

Since the start of operations in 2015, the company had continued to outperform NEPRA targets. The
O&M contractor, however, fell short of its O&M performance targets in both 2016 and 2017. As a result,
TBEA faced liquidated damages (LD) for soiling loss due to inter-row spacing. In 2016–2017, QASPL
recovered USD 1.14 million (PKR 119 million) in LD against the energy shortfall for 2015–2016 from
its O&M operator. In 2017–2018, a similar amount (USD 0.57 million) was also levied on TBEA and
recovered from their payments.

The Nature of EPC and Operations and Maintenance Contracts

The QASPL management had decided to use an EPC contract19 with TBEA Xinjiang Sunoasis for
designing and setting up of the solar plant because of the novelty and technical complexity associated
with setting up the country’s first solar plant and the ease that an EPC (turnkey) contract provided. As
such, EPC contracts were the most widely used contractual mode for commissioning the construction of
large-scale and technically novel or complex infrastructure projects globally. Under this contract, TBEA
had to deliver the completed solar project to QASPL (the developer/owner) that would primarily need
to ‘turn the key’ to start operations, hence the alternative terminology for the EPC contract—turnkey
contract. Apart from completing, energizing and handing over a complete facility, the contract was also
a fixed-price one (guaranteed price, guaranteed date) and accompanied performance guarantees. This
meant that QASPL had transferred the bulk of the technical (and thereby financial) risk to TBEA. Under
most EPC contracts, a failure to comply with these obligations resulted in the contractor facing penalties.
While the cost, time and quality constraints operate in most facilities and construction contracts
regardless of type, EPC contracts handle the cost, time and quality requirements with a higher level of
detail than other comparable types of construction contracts. A significant advantage of using these EPC
contracts was to do with bankability, that is, the ability to satisfy funding agency requirements that typi-
cally mean access to better (and easier) financing options for the developer. Another advantage of using
EPC was that it provided a single point of responsibility, that is, the developer had to deal with the con-
tractor alone (and not its subcontractors and suppliers) throughout the delivery process (design, procure-
ment, engineering, construction, commissioning and testing). This was advantageous as the procuring
company had a single point of contact for any issues that could arise in the future, and performance was
usually covered by guarantees and penalty clauses (as was the case with TBEA Xinjiang Sunoasis).
TBEA remained liable to QASPL, thereby considerably reducing financial and technical risk.
An EPC contract also provided a fixed contract price. This risk transfer was contained by a limited
ability, whereby the EPC firm could claim additional funds, where the project owner had been the cause
of delays or had made changes to the works. Another provision was a fixed date of completion. Delay
liquidated damages (DLDs) compensating the project owner for damage borne because of late project
completion would result if these delivery timelines were not met. DLDs were usually part of EPC con-
tracts and were an estimate of the loss or damage that the project owner could face due to late or poor
contractor performance.20
Performance guarantees were another great advantage of the EPC contract. As the project owner’s
operations and profitability centred around the technical and technological dimensions of the plant, the
power plant needed to perform as per its specifications and requirements. These were usually mapped
through output, efficiency and reliability measures. Apart from DLDs, EPC contracts like the one
employed by QASPL contained performance guarantees. These were financial guarantees called perfor-
mance liquidated damages (PLDs) that the contractor paid to the developer in case the plant failed to
16 Asian Journal of Management Cases

meet the expected (guaranteed) performance levels. Like DLDs, PLDs were also realistic estimates of
the cost and loss of revenue that the developer would face over the project’s life in the case the specified
(guaranteed) technical performance could not be reached. PLDs were usually calculated by incorporat-
ing extra expenses or foregone revenues from the net present value (NPV) of the project.
However, there were provisions for the EPC contractors as well, who did not enter EPC arrangements
with unlimited liability. EPC contracts in the power sector tended to cap contractor liability to a certain
percentage of the total contract. At times, liability caps could remain considerably high, but it was rarely
more than the contract price itself.
O&M of solar plants was a generic term and may include many variations. Solar O&M comprised a
range of technical activities necessary for the solar plant to perform optimally. This typically included
routine maintenance (cleaning of dust and sand in the case of QASPL) and addressing any technical
issue that regular operations may bring up.
Management contracts (MC) and O&M contracts were two types of contracts used by plant owners
to procure management services for the running of the power plants. MC/O&M contracts allowed a
contractor to look after a list of technical activities for a specified number of years. O&M contracts were
frequently used in the energy sector in Pakistan. Some O&M contracts may include incentives for effi-
ciency through defined performance targets. The operator tends to be paid a fixed fee, and the contract
may also have a performance-based fee component as well as that for damages for failure to operate the
solar plant within expected performance parameters.

Short-term Extensions for the ILF Consultancy Agreement

ILF Germany was the consultancy firm that operated as the owner’s engineer and was responsible for
ensuring compliance to international and local standards, including those for NTDC (Exhibit 3). QASPL
entered into a consultancy agreement with ILF on 28 April 2014, according to which ILF was supposed
to provide 12 months of O&M services after completing EPC services.
To continue monitoring the ongoing O&M works as per the agreement between TBEA and QA Solar,
TBEA was supposed to repeat the Initial PR test after the first unsuccessful one in September–October
2015. However, due to the delay at TBEA’s end, it was predicted to finish around mid-July. Since the ILF
contract was going to reach completion around the same time, an extension was requested, considering
that the verification and approvals of initial PR test and determination of subsequent LDs on TBEA were
yet to be carried out by ILF. This contract was extended for 3 months (from 14 July 2016 to 14 October
2016). The second extension (from 14 October 2016 to 14 January 2017) was requested on the basis that
QA Solar was still in the process of hiring the technical consultant for the O&M supervision of the con-
tractor. Thus, the extension was requested to allow ILF to continue to monitor the ongoing O&M works
and to perform additional service (if needed) for pending EPC issues.
The third extension (from 14 January 2017 to 14 April 2017) had also ensued, as QASPL wanted time
to engage a long-term oversight consultant engineer. Yet another extension (from 14 April 2017 to 30
June 2017) was approved instead of the following: QA Solar had advertised the pre-qualification process
for hiring an O&M consultant. The deadline for submission of these was 8 May 2017. The Consultant
Selection Committee reviewed these documents, and RPF was floated among pre-qualified firms. After
pre-qualification, the RFP was issued to pre-qualified bidders, and ILF secured maximum marks on the
Quality and Cost-Based Selection (QCBS) method. The contract was finally awarded to ILF on 26
October 2017 for 12 months.
Waheed and Rana 17

The Operations and Maintenance Decision

Bringing in O&M in-house was a major decision that impacted the lean organization that QASPL was
in terms of its capacity and its finances (for financial details, see Table 3). Privatization meant that the
company’s financial as well as operational performance would be under scrutiny very soon and would
affect the purchase price.
Through his conversations with the management, Arif Saeed saw that, on the one hand, the decision
seemed one of saving money on O&M. However, it had several non-financial implications, including the
effect on the possible privatization soon. While privatization had been stalled because of the expected
governmental change after the general elections, it seemed inevitable that having established a highly
profitable public sector enterprise, the government would be keen to sell it to the private sector. As part
of the geopolitically important CPEC route, QASPL’s performance had its political implications. The
ramifications of the company’s O&M decision, that is, termination of the contract with TBEA (Exhibit
4), would greatly impact QASPL’s future. It was perhaps the largest strategic decision the company had
to take before privatization. Arif Saeed, therefore, had a lot to think through before he met the company’s
board.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

ORCID iD
Zehra Waheed https://orcid.org/0000-0001-7725-2693
18 Asian Journal of Management Cases

TBEA is arguably the largest solar EPC company in the world. In 2014 alone, TBEA constructed over 1,500 MW
of solar power plants around the world. It is also the largest manufacturer of transformers in the world, with the
capacity to build large-sized transformers to highest standards.Within China itself,TBEA holds a large market share,
being the largest manufacturer of cables and inverters in the country. The company manufactures combiner boxes
and solar panels as well, complete from processing silica sand into silicon and using its own designs. Its reported
annual sales in 2015 stood at over USD 8 billion.

Exhibit 1. TBEA Profile

Source: Bloomberg.
Waheed and Rana 19

Annual Performance Ratio Analysis

NEPRA has determined a Capacity Factor of 17.38 per cent for the Company for the 2nd year of
operations, while the actual Capacity Factor archived by the Company during the 2nd year of operations
is 18.33 per cent, which is 0.95 above the NEPRA target.

(Exhibit 2 continued)
20 Asian Journal of Management Cases

(Exhibit 2 continued)

Exhibit 2. QASPL Annual Performance and Energy Production

Source: QASPL annual reports.
Waheed and Rana 21

Exhibit 3. ILF Technology Consultancy EOI

Source: QASPL data.
22 Asian Journal of Management Cases

Exhibit 4. Terms for Termination of O&M Contract

The employer (QASPL) may terminate the O&M contract under the following provisions of the EPC and
O&M contract 02-06-2014 (the ‘O&M contract’):

A.   Due to any event or circumstances mentioned in Clause 15.2 of the O&M contract (Annex A) by
giving a 14-day notice to the contractor.
B.  Employer’s entitlement to terminate the O&M contract as per clause 15.5:

‘The employer shall be entitled to terminate this Agreement, at any time for the Employer’s convenience, by
giving notice of such termination to the Contractor.The termination shall take effect 28 days after the later of
the dates on which the Contractor receives this notice or the Employer returns the Performance Security’.

Notes
1. As of May 2018.
2. A plant’s PV modules are usually rated for 25 years, with output decreasing a little bit each year during the
expected lifespan, that is, 20 per cent degradation over 25 years.
3. Portfolio Management is defined as the ‘centralized management of one or more portfolios that enable execu-
tive management to meet organizational goals and objectives through efficient decision making on portfolios,
projects, programs and operations’ (Definition by the Project Management Institute, 2020).
4. A gigawatt is equal to 1 billion, that is, 109 W, with an average tungsten light bulb needing about 100 W of
energy.
5. Government projections.
6. Quoted in Hussain (2015).
7. Source: Company presentation.
8. The principal had to be paid in forty quarterly unequal instalments, with last payment due in July 2025. The
markup was set at 3 months KIBOR +3 per cent. As per the loan agreement, the company was required to main-
tain a minimum Debt Service Coverage Ratio (DSCR) of 1.25 and minimum Current Ratio of 1.0.
The DSCR is also known as ‘debt coverage ratio’. It is the ratio of cash available for debt servicing to interest,
principal and lease payments. DSCR is a popular benchmark used in the measurement of a company’s ability to
produce enough cash to cover its debt payments. DSCR is calculated by dividing net operating income by total
debt service.
The Current Ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term
obligations. It compares a firm’s current assets to its current liabilities.
9. National Electric Power Regulatory Authority is the regulatory body tasked with license issuance for power gen-
eration, establishment/enforcement of industry standards and determining tariffs for power generation, trans-
mission and distribution in Pakistan.
10. The Performance Ratio was stated as a percentage and described the relationship between the actual and theo-
retical energy outputs of the PV plant.
11. The ratio of a company’s level of long-term debt compared to its equity capital/capital employed.
12. The funds from operations ratio is calculated by adding depreciation and amortization to earnings and then
subtracting any gains on sales.
13. Source: Company annual reports.
14. A photovoltaic module is a packaged, connected assembly of PV solar cells put together in a panel.
Waheed and Rana 23

15. Wp stands for watt peak capacity. This is the nominal capacity, or the solar energy capacity, which is realized
under certain test conditions.
16. The configuration was 100 boxes of 2 inverters each.
17. A string is a collection of 20 solar modules.
18. The PV module used was a packaged, connected assembly of typically 6 x 10 PV solar cells.
19. Engineering, Procurement and Construction contracts club all design and construction processes till it is handed
over to a single vendor.
20. DLDs are usually expressed as extra costs incurred per day and/or losses suffered (revenue forgone) for the
same number of days.

References
NEPRA. (2012). State of Industry Report. https://nepra.org.pk/publications/State%20of%20Industry%20Reports.
php
Hussain, K. (2015). Taking a closer look: Chinese solar investments. Dawn. https://www.dawn.com/news/1178967
World Data Atlas. (2017). World Economic Report. https://knoema.com/atlas/Pakistan