Money Matters

Murky affairs

By Ihtasham Ul Haque
Mon, 03, 17


The Pakistan Muslim League-Nawaz (PML-N) government is racing to complete numerous development projects, including some of the early harvest schemes related to the $46 billion China-Pakistan Economic Corridor (CPEC) that has recently alarmed many about its ultimate mammoth cost.

Coupled with the evolving over Rs430 billion circular debt, CPEC a game changer and potentially a lasting legacy, is drawing the attention of experts and economists to calculate the methodology about its subsequent cost, which some believe could be as high as $90 billion by 2030.

The controversy emerged due to the non-transparent evaluation of the cost of CPEC, the latest value of whose 67 projects tops $50 billion and consists of strong network of road expansion, power generation, mass transit, port development, and the building of special economic and industrial zones.

It all started recently when a research report published by Topline Securities claimed that Pakistan will have to repay $90 billion for the $50 billion Chinese investment. It calculated a $3 billion figure, to be annually repaid. Some said it would be close to $3 billion while former governor central bank Dr Ishrat Hussain calculated the eventual cost of $3.5 billion every year. One must not forget that China’s investment is not a free aid, and Pakistan will have to pay for building the enormous infrastructure of roads and industrial zones. In return China will gain access to a new seaport next to Gulf, and the origin of most of their oil imports.

A major question is whether there is consensus among the officials of the planning ministry, central bank and the Economic Affairs Division (EAD) about the cost of the project or not. The State Bank of Pakistan (SBP) continues to keep quiet about the project burden on foreign exchange reserves in terms of outflows, while the International Monitory Fund (IMF) believes CPEC would help add up to 0.4 percent of GDP per year.

It is time the ministry of planning came forward to allay the increasing apprehensions about the ultimate financial size of the project. Why is the project fraught with uncertainties? How much investment has been made in the project by the government during the first eight months of 2016-17 and how much it contained Chinese investment? So far there are no answers for such questions to be offered by the central bank, the ministry of finance, EAD or the planning and development ministry.       

Insiders, however, maintain had the minister for development Ahsan Iqbal and his ministry done their job transparently, there would have been no controversy without having to justify the account of loan, equity and investment of the CPEC. “If CPEC has not been negotiated secretly, then there is no harm to inform the public about the details and conditions attached to it,” said a former senior official of the ministry of finance.

But still there is a broader consensus that the project is bound to strengthen economic integration with the world’s largest trading nation –China and will substantially boost intra-country trade within Pakistan in addition to have an improved connectivity that will reduce the costs of transportation and curtail travel time.

Out of original $46 billion CPEC, $35 billion worth of projects relate to the power sector, while the remaining $11 billion are being utilised for greater road and railway connectivity. Once all the coal-fired and oil and and gas-based projects are completed and commissioned, they would be generating additional 15,000MW of electricity.

Have the authorities concerned worked out details of the surplus electricity after catering to the current 5,000MW shortfall, would it be exported? And what are the related implications on balance of payment issue that is already fast becoming a bigger problem for the government considering the widening gap between imports and exports and declining home remittances and depleting foreign exchange reserves.

Independent power producers (IPPs) are struggling to recover their over Rs430 billion due to rise in the infamous circular debt which is gravely threatening the power sector. The new power plants involve huge cost of fuel import, gas and coal import which have scary consequences for the balance of payment problem. These power plants contain 25-38 percent rate of return and as such are considered very expensive. How would that ensure competitiveness and how could the interests of the consumers be protected?

Another major issue is the country’s timeworn and decaying power infrastructure. Critics say the existing transmission lines cannot take the burden of an additional 15,000MW of electricity. Reports suggest a debate is going on in official quarters that a huge foreign investment would be required to replace the current crumbling transmission lines to take the burden of the new electricity load.

On top of that, 13 IPPs have decided to invoke sovereign guarantees of the government of Pakistan because of not receiving their dues on account of providing electricity.

The government is not unmindful of the fact that Rs430 billion circular debt which was Rs414 billion in February this year, would have exceeded Rs500 billion if international prices remained at the May 2013 level. The failure in containing system losses, including increasing power thefts have increased the amount of circular debt. 

Now, when power companies are giving advertisements to cash sovereign guarantees, one does not see the authorities concerned moved to resolve the issue, though they know that the solution lies with the finance minister, who has to decide about it before the next election. The government apparently looks determined to drastically cut down, if not totally eliminate, load shedding at the end of 2017.

How does it plan to address the issue? Back in 2013 the previous Rs490 billion circular debt was done away with by making a one-time payment to the IPPs. That payment is still a mystery as it was not paid out from the budget. The government which was implementing IMF’s proposed $6.2 billion Extended Fund Facility (EFF) got away with any scrutiny or oversight over circular debt due to what many believe US State Department’s intervention meant to favour Islamabad to avoid any economic instability in the region. 

One of the reasons often cited is that the Ministry of Finance avoided sharing the power sector subsidy and that without doing that, it would be hard to resolve the issue of circular debt one way or the other. Another interesting question is why is furnace oil stock piling up while off take is close to half what it supposed to be and that whether the officials of the ministries of finance and water and power are taking any notice of it.

Some people are warning of bigger power crisis if the supply chain is not ensured and new actions taken to stop the piling up of the growing circular debt. The government often gets annoyed, perhaps rightly so, over the IPPs failure to run their power plants to their maximum capacity for want of recovering dues.

Going forward, the completion of energy sector reforms was must, without which there cannot be any respite to the government. The sooner the government realises this, the better it would be, considering the elections are around the corner. These polls, insiders believe, could hasten the election process further, notwithstanding who wins or losses in the Panama scandal process.

The writer is a senior journalist based in Islamabad