Why is China shutting down coal plants in China and setting up new ones in Pakistan?
Dozens of projects under CPEC continue to be shrouded under a thick veil of secrecy. On February 14, the Ministry of Water and Power submitted details on the financing and tariff structures of eight energy sector projects during a meeting of the National Assembly’s Standing Committee on Planning and Development. Here are the details:
Eight projects: The power sector projects for which the details of the financing and tariff structure were disclosed are: the Engro Powergen Thar Coal-II, the Port Qasim Power Plant, the Thar Coal Power Plant, the Hubco Coal Power Plant, the Thar Energy Limited, the Sahiwal Coal Power Project, the Suki Kinari Hydropower Project and the Karot Hydropower Station.
Cost: The eight projects will cost a total of $12.5 billion. Of the $12.5 billion, roughly $9.5 billion will be debt and the remaining $3.125 billion will be contributed as equity by the sponsors. Generation capacity: The project will have a cumulative generating capacity of 7,680MW. The cost per MW amounts to $1.6 million (similar projects in Bangladesh cost around $1.1 million per MW and, in India, the cost per MW is under $1 million).
Debt: The rate of interest that has been agreed upon is around six percent (Libor + 4.5 percent). In addition, the China Export & Credit Insurance Corporation will charge a premium of seven percent as ‘insurance premium’ for the loan (even though the entire loan has been guaranteed by the government of Pakistan).
Equity: The return on equity guaranteed by the government of Pakistan on the eight projects range from 27 percent per year on Hubco coal power plant being built in partnership with China Power Hub Generation Company to 34 percent per year on the 1,320MW Thar Coal Power Project by the Shanghai Electric Power Company.
Debt and equity payments: The annual debt repayment on $9.5 billion will be around $840 million per year (principal plus interest). For the first year, Pakistan must also pay an amount of $665 million as ‘insurance premium’ to the China Export & Credit Insurance Corporation. The annual return on equity on the equity of $3.125 billion will be around $900 million per year every year. In the first year, the total payment that Pakistan will have to make will be $2.4 billion followed by an annual payment of $1.8 billion thereafter.
Tariff: The average tariff for coal-based power plants has been disclosed as Rs8.3 per unit. The catch here is that Pakistan’s National Electric Power Regulatory Agency (Nepra) has calculated the tariff at 85-percent plant efficiency while independent energy experts claim that the efficiency factor will be much lower and, thus, the actual tariff will be much higher.
Questions: How will the eight power projects create a surplus of $2.4 billion during the first year, enabling Pakistan to pay the principal, interest and the insurance premium? Why is the capital cost on a per MW basis higher in Pakistan than what it is in Bangladesh and India? Why is China shutting down coal plants in China and setting up new ones in Pakistan? What will happen if Pakistan is unable to make the payments that we have promised (in Tajikistan the Chinese demanded land in return)?
The writer is a columnist based in Islamabad.
Email: farrukh15hotmail.com
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