ISLAMABAD: Accusing the Government of Pakistan (GoP) of breaching the provisions of agreements, Chinese power sector investors say huge amount of arrears, coupled with the accelerated depreciation of the PKR in recent years, has significantly reduced the nominal return on investment, which has exposed such Chinese enterprises to high audit risks in the future, besides greatly dampening the enthusiasm of other Chinese investors to invest in Pakistan.
This situation has been conveyed by, Zhang Jun, Chairman Energy Investment of All- Pakistan Chinese Enterprises Association (APCEAP) , in a letter to Chinese ambassador to Pakistan and other authorities of GoP, including Planning Minister, Finance Minister, Power Minister, Minister for Investment, Secretary to Prime Minister, heads of PPIB and CPPA-G.
More than ten Chinese investors, who have invested in power projects in Pakistan have established an Association, i.e., Energy Enterprise Association (EEA) on the pattern of Independent Power Producers (IPPs) and have shared their issues, concerns, demands and future proposals.
Recently, Chinese investors, who invested in Gwadar, requested the government to allow them maintain their bank account in RMB due to frequent depreciation of Pak Rupee.
The EEA, in its letter stated that since 2014, the total investment made by Chinese enterprises in power projects under CPEC has reached $19.961 billion, with a total installed capacity of 10,876 MW of which 5,887 MW has already been put into operation. The annual power generation capacity of these power projects is 35.86 billion kWh, which accounts for one-third of the total power generation (about 130 billion kWh) of Pakistan’s main grid in recent years.
The average tariff of CPEC power projects which are in operation is about Cents 8.97 /kWh, while coal-fired power plants’ tariff which are in operation is about Rs. 13.05 per kWh (Cents 8.7 /kWh) calculated at an average exchange rate of Rs 150 per dollar in recent years). The tariff of CPEC power projects is much lower than the system average.
Commenting on return of energy investors under CPEC, the Association maintained that in 2013, NEPRA announced an upfront tariff for imported coal-fired power plants inviting investors from across the world, which turned out to be unattractive to the investors given the high risk in Pakistan. In 2014, NEPRA revised the upfront tariff and adjusted the Return on Equity (RoE) to 27.2% for imported coal-fired power plants. Therefore, three coal-fired power plants under CPEC were put into operation one after the other since the end of 2017. By 2022, Huaneng Sahiwal Power Plant is in operation for about 5 years; Port Qasim Power Plant for about 4 years; China Power Hub for about 3.5 years. However, as the operation phase keeps progressing, especially after the new government came into power in 2018, these coal-fired power plants started accumulating more and more losses due to increase in arrears at an alarming rate and the sharp depreciation of the PKR. So far no dividends have been distributed to the shareholders by these coal-fired power plants since Commercial Operation Date (COD), and the actual investment income is zero. On the contrary, the shareholders of each power plant have injected millions of dollars to operate these projects.
In addition, due to the arrears, the inventory of coal for the power plants has seriously depleted resulting in huge amount of liquidated damages for each plant, and the financial losses have seriously affected the ability of the companies to service the debt, which is very likely to lead to a company/ sovereign default.
Commenting on return of hydro and wind power projects, the EEA said that according to the relevant Power Policies, the IRR (Internal Rate of Return) of hydropower and renewable power projects is 17%, but in fact, due to the difference in cost determination between China and Pakistan, the nominal IRR for Chinese investors is just around 15%, which is slightly higher than the return rate of national treasury bond of Pakistan.
For example, the first wind power project of the China Three Gorges Corporation (TGF) has been in operation for 8 years since 2014. The arrears are piling up day by day due to the serious circular debt of the Pakistan power sector. Coupled with a huge amount of arrears, the nominal IRR has been less than 10% due to the depreciation of the rupee. Therefore, judging from the above ground realities, the nominal RoE of Chinese investors is much lower than 30% .
The EEA contended that the management of all Chinese power investors is facing tremendous pressure from their respective headquarters due to huge amount of arrears and no dividends after COD for several years.
The huge amount of arrears, coupled with the accelerated depreciation of the PKR in recent years, has significantly reduced the nominal return on investment, which exposes such Chinese enterprises to high audit risks in the future, and has greatly dampened the enthusiasm of other Chinese investors to invest in Pakistan.
Zhang Jun, in his letter, explains that due to the huge amount of arrears from power purchaser, the three coal-fired power plants injected about $ 600 million to ensure continuous power supply. However, due to delay in payments by Pakistani agencies adequate amounts could not be remitted in US dollars to the coal suppliers, which resulted in no further supply of coal, and the power plants faced the risk of shutdown.
“ With respect to the project investment agreements, the Government of Pakistan has already breached the provisions of the agreements and the relevant coal-fired power plants have the right to stop power generation and take corresponding legal measures,” he said adding that considering the friendship between China and Pakistan, the Chinese enterprises are still trying their best to operate the power plants and help Pakistan overcome the current power crisis even though the cash flow is marginal and not even close to adequate.
He says, unfortunately instead of cooperating, the power purchaser deducted the capacity payments of the projects on the grounds that the projects cannot met the dispatching requirements regardless of the fact that underlying reasons for no dispatch is actually caused by poor payments by power purchaser.
As of to-date, ( July 20, 2022) the projects are still suffering from a huge deduction of capacity payment of about $ 500,000 per day for a single unit, which has further aggravated the bankruptcy risk of each project.
For projects which have recently achieved COD, the significant depreciation of rupee in recent years, the US dollar tariff is less than half based on the current exchange rate as per the EPC stage tariff (Korat HPP), which is not sufficient to meet the operation maintenance cost and debt service expenses causing great pressure for operation and maintenance guarantee and debt repayments. ‘It is hoped that NEPRA will approve the COD tariff for such projects, as soon as possible, and give the medium-term tariff relief in time.’
Meanwhile, NEPRA issued tariff true-up decision for China Power Hub Power Company in June 2022, which is not in line with the Upfront Tariff Policy of 2014, particularly with respect to construction period, fixed RoE, incremental cost of European Boiler. In the upfront tariff announced by NEPRA, the construction period for the generation facility of 660 MW is 48 months, the Return on Equity shall be 27.2%, and incremental cost of European boiler is @ USS 0.1 million per MW.
The EEA claims that all Chinese investors of power projects are facing a lot of difficulties; hence, they request Government of Pakistan to resolve the following problems as early as possible: (i) set up a revolving account in accordance with the CPEC agreement; (ii) ensure availability of foreign exchange, as and when requested by Chinese investors according to signed agreements;(iii) relevant Institutions to implement the recent directions of the Prime Minister in letter and spirit, and not to deduct the capacity payments due to the huge arrears and return the deducted capacity payments to each Project Company; and (iv) NEPRA to approve the COD tariff for projects, which are in operation, as soon as possible, and give the interim relief of tariff in time.
Commenting on future energy investment from China , the EEA has suggested that from the perspective of power supply and demand balance, Pakistan needs hydro, solar and local coal-fired power projects to replace the 6500 MW of oil and gas-fired power plants, which are expected to retire shortly.
“Four projects under CPEC have so far not achieved financial close, because Sinosure has not approved the guarantee, due to the problems faced by the existing projects by Chinese investors,” it concluded.
Copyright Business Recorder, 2022