Officials in Islamabad and Beijing announced last Saturday that they had decided to postpone Chinese President Xi Jinping's visit to Pakistan because of the political impasse in the country. President Xi was due in Islamabad on 15th September for a two-day visit as part of a regional visit inclusive of a visit to India and Sri Lanka. The two governments reportedly were to sign loan framework agreements and MoUs for projects worth around USD 35 billion.
It has been reliably learnt that around USD 25 billion is dedicated to the energy sector, of which USD 3.5 billion is for the two hydro power projects of 870 MW Suki Kinari Hydropower plant (SK Hydro) and 780 MW Karrot Hydropower plant (Three Gorges) while the major portion is for coal-based power plants and some for renewable power projects. The remaining USD 10 billion is for the infrastructure projects.
It is interesting to note that as per the 2002 power policy hydel power plants are being implemented on BOOT basis ie, Built, Own, Operate and Transfer. The concession period allowed is 30 years on completion, of which the ownership of the hydro power plant stands transferred to the government at a nominal value of Rs 1/- . As the productive life of Hydro plant extends well beyond this period, the 2002 policy is of significant value to the future generation of the country to obtain cheap power as the present generation is availing the benefits out of Tarbela and Mangla Power Plants.
The government will do good if they divert more of the available Chinese project financing towards hydropower even if it means diverting the funds from coal power plants as this country's future is hydro and hydro alone. For coal we will remain dependent on imports as we are today dependent on oil. The difference is only that for coal we will be paying somewhat less. Further, coal is no longer the choice fuel for power generation. Even China and India are moving out of it towards environment-friendly fuels like hydro, nuclear and renewable energy. The Saarc countries have established a hydropower plants belt. Pakistan must try to be part of it.
The financing offered by China to support energy and infrastructure projects is primarily through the Exim Bank of China/China Development Bank (CDB) solely or in consortium with other financing agencies. It is largely project financing and not foreign direct investment (FDI) as reported by some government functionaries. It is learnt that this project financing carries a tag of 4% + LIBOR making a total of around 4.6% and is payable in 12 years with an additional grace period of 6 years (total 18 years). The terms are in line with global benchmarks of commercial financing for large projects.
The said project financing covers the debt portion of the project and is directly dedicated to the project sponsors based on the strength of the project bankable feasibility study covering the technical and financial aspects of the project. The loan is reportedly to be on the lenders risk with no recourse to project sponsors or government's guarantees, if any. In some of power projects, there is also a good component of equity from the Chinese partners of the sponsors' consortium, which can be termed as investment.
The funding is expected to generate employment opportunities, development of local industry and enhancement of the country's revenues. What is most important is that the power projects seeking to secure the project financing should all be subjected to International Competitive Bidding (ICB). The same check should be also for infrastructure projects inclusive of application of PPRA rules. The civic bodies should keep a close tap on it.
Furthermore, all power projects should be subjected to Nepra public hearings to fix the tariffs in a transparent manner. This process makes it mandatory for the investors to follow ICB and PPRA rules. While the hydro power projects, by and large, proceed through Nepra hearing, ICB and due process of negotiated tariff determination, the coal-based power plants, however, have been provided the option to accept the upfront tariff, which at the moment is 8.5 cents/unit. Same is the case for solar power plants where the upfront tariff at the moment is around 17 cents/unit but limited to a total capacity of 50 MW which is reported to be well consumed. No tariff has yet been announced for the 1000 MW Quaid-e-Azam solar park being established in the public sector and sponsored by the Punjab government.
Investors opting for upfront tariffs are exempted from making transparent the technical aspects or the financials of the project nor are they obligated to undergo competitive bidding (ICB). As coal-based power plants worth over USD 10 billion are planned, it is in public interest to make transparent all technical aspects and the financials of coal-based power plants inclusive of ICB and PPRA rules compliance, failing which, the nation will experience escalation in power sector cartelisation, which already is reported to be bad enough.
While understanding that the Chinese project financing is dedicated to the project sponsors but its effective utilisation and transparency is in the public's interest due to the tariff that is passed on to the public who at the end of the day pay for it. The wound of rental power plants are still not healed and public suffering on account of loadshedding, circular debt, electricity price have increased by 30% and inflated bills are reaching a breaking threshold. The citizens of this nation have no appetite to swallow more of it. This should serve as a note of caution to the energy managers and developers.
Foreign Direct Investments ( FDI) have largely not returned back to Pakistan since 2007 when FDI touched a peak of USD 8 billion, which largely supported the country's GDP growth of over 7%, one of the highest in South Asia at that time. Thereafter, it sharply declined and touched the bottom of USD 750 million in FY 2013-14. The country now badly needs FDI to meet its FY 2014-15 target of over 5% GDP growth.
USA remains the largest FDI investor in Pakistan while European countries hold the next five top positions. Traditionally, over the last six decades Pakistan's energy sector was funded largely by the World Bank, IFC, Asian Development Bank, JIBIC of Japan, KFW of Germany. This funding had mostly been bilateral, country to country, based on long-term soft loans, grants or the combination of two and mostly backed with sovereign guarantees by the government of Pakistan for giant dams and power plants like Tarbela, Mangla, Ghazi Barotha, Kot Addu and others. IFC also funded IPPs like Hubco and others. In addition, lately OPIC of USA has also shown interest to support private sector energy and infrastructure projects in Pakistan.
While the funding of the energy sector by the World Bank, IFC and ADB is still very strong, there is not much interest visible lately from KFW and JIBIC. One reason is that the European and Japanese suppliers are lately finding it difficult to compete with the Chinese suppliers in Pakistan's market.
Since the last five years, USAID is also extensively supporting the energy, agriculture and infrastructure projects of Pakistan through grants. China's initiative to support Pakistan's energy and infrastructure projects through project financing is a welcome step and demonstrates the solid friendship and common interests between the two countries. The project sponsors and the government of Pakistan must ensure transparent and cost-effective utilisation of these funds in true sincerity to the Government of China and in the best interests of the people of Pakistan.
The Chinese embassy said last Sunday that a new date schedule of the President's visit would be worked out after the political situation in the country returns to normal. All parties engaged in restoring normalcy must make this happen without losing further time.
(The writer is Chairman Avant Ventures and former President OICCI and ABB - Asea Brown Boveri)
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