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The government has reportedly failed to convince the Chinese government to restart suspended work on 300MW coal-fired power project at Gwadar as M/s Sinosure, the Chinese loan insurance company, is unwilling to cover governmental breach risk under the medium and long-term buyer credit insurance largely due to delayed payments to CPEC projects in the power sector and delay in opening of a revolving account.

This project has a history of eight years, starting in 2014. This project was selected as a priority project pursuant to an agreement on China-Pakistan Economic Corridor (CPEC) Energy Project Cooperation of November 8, 2014. After a cumbersome process of approvals, the Chinese company, CPPCL, was issued a Letter of Intent (LoI) in May 2017 and a Letter of Support (LoS) in August, 2019.

CPPCL signed an Implementation Agreement (IA), a Power Purchase Agreement (PPA) and a Supplemental Agreement to IA (SIA) — the Security Package in April, 2021 after nine months of long detailed negotiations and approval by the Economic Coordination Committee (ECC) of the Cabinet in January, 2021.

The deadline of Financial Close (FC) was fixed as January 31, 2022 and Commercial Operations Date’s (RCOD’s) as June 30, 2023 in the PPA.

As a gesture of goodwill, CPPCL commenced construction activities at site prior to FC in order to meet agreed RCOD of June 30 2023. The status, after eight long years, is that the project is not off the ground yet and is at a standstill as the Chinese insurer, Sinosure, has reviewed its policy and is not agreeing to cover governmental breach risk under the medium and long-term buyer credit insurance, due to delayed payments to CPEC IPPs, delays in opening of revolving account as per SIA for CPEC power projects and renegotiations of PPAs with existing IPPs.

Protracted delays and non-payments constitute the critical issue with other power projects under the CPEC, notably the other two coal-powered projects installed in Punjab by PML-N at the tail end of its last tenure, as well. The payment issue has escalated to the highest level in China.

Hamstrung by the ever-rising circular debt and growing financial crunch in the power sector, the government simply does not have the capacity to pay. It is struggling to save face through piecemeal measures. Unfortunately, however, this is no longer working, to say the least.

Normally, a loan is taken with the intention that it would be utilised for a healthy revenue generation from which loan is paid back and the remaining is profit to reinvest into the business. But, this is not the case in Pakistan nor are the loan seekers sensitive to the payback mechanism. It is just one-sided narrow and mindless approach that is insensitive to profit and loss. This is the reason that the country constantly remains under the endless cycle of loans — irrespective of which government is in power.

Ever since the roll out of the CPEC there has been a mad rush to go for mega projects, notably, in the energy sector and infrastructure which include thermal and hydropower projects, Lahore mass transit system and some infrastructure projects under public-private partnership (PPP) mode.

Majority of the projects were rolled out in the absence of required strategic planning, realistic technical and financial feasibility study. Moreover, no financial mechanisms were put in place to repay loans. It was based entirely on whims and politics.

It is important to note that thermal power projects based on imported coal are not financially feasible in Pakistan. Lahore mass transit system (Orange Line) in the public sector is a subsidised transportation for the masses with hardly any margin in its meager revenue to payback the massive loan of over $ 1 billion.

Constructing mega hydropower projects in the north of Pakistan, which is a strategic necessity to retain claim on water resources and where other lenders are reluctant to finance, is the right approach to creating public infrastructure. Most of these projects are under suppliers’ credit and the government is insulated from liabilities.

There is some relief that the incumbent government has stayed away from rolling out mega projects under CPEC and instead focused on Special Economic Zones to spur industrialisation in the country. The progress is slow and Chinese interest appears to be waning which generates the perception that the CPEC has slowed down. The CPEC has indeed slowed down to the extent that eye-catching mega projects are as yet not on the screen. Pakistan’s financial constraints and the checks put up by IMF (International Monetary Fund) simply do not permit this glamour.

The government, therefore, required to come up with a strategy to honour its past financial commitments on projects under the CPEC. The best approach would be to truthfully share the payment issue with the Chinese contractors and lenders and work out a realistic way forward.

(The writer is former President, Overseas Investors Chambers of Commerce and Industry)

Copyright Business Recorder, 2022

Farhat Ali

The writer is a former President, Overseas Investors Chamber of Commerce and Industry

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