Wednesday July 06, 2022

Solving the energy crisis

May 29, 2017

On May 13, China and Pakistan signed the agreement on the CPEC energy project list adjustment during the Belt and Road Forum for International Cooperation. The adjustment is based on substantial research and scientific analysis on CPEC as well as the recommendations of the CPEC Energy Planning Expert Group that were made at their second meeting in February 2017.

In 2013, ‘energy’ was the need of the hour in Pakistan. Some regions had loadshedding for 20-22 hours each day and foreign direct investment (FDI) was kept at bay. The energy crisis cost the national economy dearly. It not only led to the loss of GDP growth rate, but also resulted in the reduction of industrial and commercial activities due to flight of capital.

In November 2014, China and Pakistan agreed to build a series of early harvest energy projects with a total capacity of 10,400MW under CPEC in order to meet Pakistan’s urgent need and overcome the bottleneck of its economic development.

According to the new agreement, after the adjustment there shall be 15 CPEC prioritised energy projects with the installed capacity of 11,110MW. The Three Gorges Pakistan Second Wind Power Project (50MW), the Three Gorges Pakistan Third Wind Power Project (50MW), the Hubco Coal Power Plant (1,320MW) and Oracle local coal power plants (1,320MW) are included in the prioritised list.

As a major pilot project in the Belt and Road Initiative (BRI), CPEC has so far 19 early harvest projects that are either under construction or have been completed. This is the largest number of projects under the BRI.

There are four sectors under CPEC – energy, transportation, infrastructure and industrial cooperation. Energy projects have made the most rapid and visible progress. Among these 19 projects, 11 are from the energy sector with a total capacity of 6,810MW. They include one solar, four wind and four coal power plants with a capacity of 6,651MW, which could be completed before 2019-2020. They also include two hydro power stations with a capacity of 1,590MW, which started construction in 2016 and need at least five years to complete. The design of this energy mix considered both near- and long-term needs of Pakistan.

The year 2017 will be one of early harvest of CPEC energy projects. With the gradual completion of CPEC energy projects, the issue of loadshedding will be reduced.

The Chinese investment in the energy sector will bring electricity, employment opportunities for locals and taxes for local and federal governments. These projects are going to be operated by investors for up to 20 years. Wang Binghua, Chairman of the Board of China Power International Development Limited – which is building the Hub Power Plant in Balochistan – said, “We come to Pakistan not for profits only. We attach more importance to development of local industries, helping them to become more sustainable”.

All energy projects under CPEC are FDI projects in line with international practice. The investors borrow from commercial banks at internationally acceptable rates. As per international practice, banks never approve a large foreign investment unless the payment is insured by professional insurance firms. China Export and Credit Insurance Corporation charges a maximum premium rate of 7 percent for CPEC energy projects. The insurance premium is a one-time charge for 15-18 years, therefore it is no more than 0.5 percent annually.

Some ‘experts’ came to the conclusion that the cost of a CPEC project is 13 percent which is untrue. They simply added 7 percent to a presumed 6 percent of interest rate. However, these two are from totally different categories. For instance, the cost of the Karot Hydro Power Plant is only around 5.6 percent. Here is the rundown: the interest rate is LIBOR (1.3) +3.8, plus insurance fee 0.4 percent (7 percent for 17 years).

It is international practice that projects break ground only after the financial close and the first tranche of loan from the banks. In order to help Pakistan overcome the energy crisis, most of the Chinese state-owned companies have been implementing CPEC energy projects from their own equity well before the financial close. For instance, the Sahiwal Power Plant started construction in May 2015 and the financial close was achieved in February 2017 – only four months before its completion. The Karot Hydro Power Plant, the Port Qasim Power Plant and many other projects have similar stories to tell. This has fully demonstrated the sincerity and goodwill of Chinese companies to the people of Pakistan and their ardent desire to meet a true friend’s urgent needs.

To solve the energy crisis is only the first step of the long march. Pakistan’s economic growth rate has reached 5.3 percent this year. This is not far from the economic take off threshold of 7 percent. The future of Pakistan lies in rapid industrialisation. CPEC energy projects will lay a solid foundation for Pakistan to accelerate this process, achieve Vision 2025 and accomplish the dream of becoming the ‘Asian tiger’ at an early date.