How Pakistan’s energy future lies in Chinese hands

CPEC China Pakistan

China’s promise of making Pakistan a regional power hub through the China-Pakistan Economic Corridor (CPEC) is proving to be as hollow as its numerous other commitments.

CPEC was launched with much fanfare in 2015 with maximum hype surrounding the power projects. The fact that the power projects were the first ones to take off and be complete also signified Pakistan’s compulsion to act in tune with China’s wishes.

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Aided by timely and generous power purchase agreements with Pakistan, the Chinese companies went on an installation spree and set up two dozen power plants in the last six years.

At the heart of Chinese interests have been the agreements which ensure a very high rate of return to the Chinese power producers.

However, these returns also meant higher outflows from Pakistan to China as construction of most of the plants involved substantial Chinese debt.

Repayment of this Chinese debt needed recovery through electricity tariffs which invariably meant higher burden for consumers leading to a severe circular debt problem for Pakistan.

As per the data of Pakistan’s Power Division, the total power sector circular debt was around $15 billion at the end of May 2021, registering an increase of more than 10 % since July, 2020.

Earlier this year, it was reported that the power projects under CPEC were hit by the circular debt and that the government has not been able to clear around $1.2 billion due in payments to the Chinese companies.

Special Assistant to Pakistani Prime Minister on Energy Tabish Gohar recently acknowledged that Pakistan is scheduled to make principal repayments of nearly $3 billion to 12 Chinese independent power producers in three years.

However, the government plans to request China to consider restructuring this amount to about 10 – 12 years.

Increasingly feeling burdened by the rising circular debt, Pakistan is desperately looking every possible way to survive this energy challenge.

Last year, the government convinced the 47 local Independent Power Producers (IPPs) to agree to a tariff restructuring deal which involved a recalculation of assured return to them.

Through the deal that was announced in August 2020, the government extracted concessions in future payments to these IPPs, which were set up between 1990 and 2013.

The consensus was secured in exchange for assuring a payment of $2.5 billion that it owes these IPPs.

Under this arrangement, the government is required to pay a third of the amount in cash; and the remainder will be disbursed equally through a 10-year bond and a 5-year Sukuk.

The power producers are eventually expected to get 40 per cent of their money upfront after signing ‘binding agreements’ by revising the terms of their original power purchasing agreements and the rest within a span of six months.

However, this proposal with the IPPs did not resonate well with the CPEC companies.

In fact, the Pakistani Ministry of Energy recently acknowledged that unlike the local companies, the CPEC power producers did not agree for any reduction in their rate of return.

Resultantly, the tariffs they charge the consumers in Pakistan continue to be significantly higher than those charged by non-CPEC power producers.

Showing little concern for Pakistan’s precarious financial conditions, the Chinese firms maintain that any change in tariffs would amount to a violation of the spirit of the CPEC and sanctity of the contracts signed between the two countries’ entities.

Moreover, China’s cold response to Pakistan’s expectations of a probable restructuring of repayments has caused much disappointment and is likely to aggravate the problem of rising indebtedness of the country.

At present, significant payments are due against the Kohala hydropower project, Karot hydropower project, Suki Kinari power project, Port Qasim power project, Sahiwal power plant, Hubco power plant and Engro power generation project among many others.

No doubt, China’s visible reluctance to pour in more investments into new projects in the South Asian country has already put a question mark on the future of CPEC financing.

The country’s efforts to reach out to the West for monetary relief have also been largely marred by the opaqueness of its existing funding arrangements with China and increasing Pakistani aggression against the European Union in their defence of Turkish interests.

With the drying up of all its existing sources, Pakistan seems to be virtually at the brink of losing its sovereignty by mortgaging its strategic assets to China in the pursuit of gaining energy security for its people.

It seems only time will reflect the consequences of the choices Pakistan has made for itself.

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