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CPEC

November 9, 2014: PM Nawaz Sharif met China’s President Xi Jinping and Premier Li Keqiang at the Great Hall of the People in Beijing. Pakistan and China signed a total of 19 agreements, including the ‘CPEC Energy Projects Cooperation’ agreement. The total committed amount under CPEC is said to have gone up to $50 billion, of which $35 billion is being allocated for energy projects and the remaining $15 billion for infrastructure.

February 4, 2017: The Ministry of Water and Power submitted financing details of eight power sector projects being built under CPEC to the National Assembly’s Standing Committee on Planning and Development. For the record, this is the first time that such financing details have been made public.

Projects: Engro Powergen Thar Coal-II, Port Qasim Power Plant, Thar Coal Power Plant, Hubco Coal Power, Thar Energy Limited, Sahiwal Coal Power, Suki Kinari Hydro and Karot Hydro. The projects will have a cumulative generating capacity of 7,680MW and will cost a total of $12.5 billion. Of the $12.5 billion roughly $9.5 billion will be debt and the remaining will be contributed as equity by the sponsors.

Financing cost: The Ministry of Water and Power disclosed that the debt amount of $9.5 billion shall carry an interest rate of LIBOR (London Interbank Offered Rate) plus 4.5 percent. In effect, the Chinese loan shall bear an interest rate of 6.21 percent (as the current one-year LIBOR hovers around 1.71 percent). Additionally – and amazingly – the Beijing-based China Export & Credit Insurance Corporation will charge an insurance premium of 7 percent (even though the Government of Pakistan has guaranteed to purchase each and every unit of electricity that will be generated).

Return on equity: The return on equity in the Sahiwal Coal Power Project “shall be 27.2 percent” and the return on equity in the 1,320MW Thar Coal Power – by Shanghai Electric Power – stands at 34.49 percent. For the record, these dollar-denominated, Government of Pakistan-guaranteed rates must be among the highest on the face of the planet-and an investor’s dream come true.

Financing burden: The annual financing burden for these eight projects will be around $2 billion plus an insurance premium of $650 million. And assuming that the entire amount of $35 billion is utilised for energy projects the annual financing burden shall go up to $5.3 billion plus an insurance premium of $2 billion (Budget 2016-17 allocated a total amount of $1.1 billion as ‘mark-up on foreign debt’).

National Savings Schemes: The Government of Pakistan’s guaranteed Bahbood Savings certificates for Pakistan’s widows and senior citizens are being paid 9.36 percent. Then why has the Government of Pakistan guaranteed Chinese and Qatari investors up to 13 percent (first year) on debt and up to 34 percent on equity?

China’s investments in the US: For the record, China has invested more than $1.2 trillion (trillion not billion) into US Treasury instruments earning an average of 1.9 percent a year. Then why is Chinese money invested in Pakistan earning up to 13 percent (first year) on debt and up to 34 percent on equity?

Cost of electricity: The cost of electricity produced by power projects – projects that will be paying a high rate of interest on debt and up to 34 percent return on equity – will be one of the highest on the face of the planet. The mother of all questions is: what will we do with such expensive electricity? Is it a case of ‘privatising gains, socialising risks’?

The writer is a columnist based in Islamabad.

Email: farrukh15@hotmail.com. Twitter: @saleemfarrukh