The chairman of the Water & Power Development Authority (WAPDA) has threatened to cancel a power purchase agreement with Kohinoor Energy, local observers report. However, WAPDA would be legally unable to take such a step, the observers say. Kohinoor says that the government has instructed WAPDA to honour its obligations under the agreement.

WAPDA and Kohinoor, a joint venture of the local Saigol Group, Japan's Tomen Corporation and Wartsila Diesel of Finland, are locked in a dispute over Kohinoor's 120-MW private power plant near Lahore. The disagreement is focused on the date on which commercial operation began. The project's independent engineer, Mott Ewbank Preece of the UK, declared that commercial operations began on 20 June. WAPDA disputes this and as a result has refused to make capacity payments to Kohinoor and has not issued a letter of credit or opened an escrow account - measures which the power purchase agreement commits WAPDA to upon commercial operation.

Kohinoor says that the government instructed WAPDA in mid-September to accept 20 June as the commercial operation date and to honour its consequent obligations. Amid speculation that WAPDA wants to cancel the agreement, Kohinoor is currently awaiting WAPDA's official response to the government's instructions. Industry sources say that Kohinoor is to be asked by the government to defer an early completion bonus it is owed, as part of a compromise to resolve the dispute.

Enron Corporation of the US is understood to be considering buying Saigol Group's share in Kohinoor. However, no deal is expected until the dispute with WAPDA has been resolved.

The government of Nawaz Sharif has been critical of aspects of the private power policy developed by former prime minister Benazir Bhutto. Speculation concerning the possible cancellation or renegotiation of power purchase agreements has been damaging to investor confidence (Pakistan, MEED Special Report, 15:8:97, page 41).