Court China with care, tally up the costs & benefits

Khurram Husain

LET’S  clear up some misconceptions that have been doing the rounds since President Xi Jinping dangled a $46-billion carrot before us. The money being offered is project financing, not aid and not concessionary loans. To get a good idea of what that means, take a look at one project that was approved and documents for which were signed during this visit: The Karot hydropower project.

Karot is a run-of-the-river hydropower project with a total generation capacity of 720MW. It is located on the river Jhelum, just south of Rawalpindi. The project was initiated in 2006, when a consortium of Associated Technologies (Pvt) Ltd and China Three Gorges International Corporation, the main sponsor of the project, applied for a Letter of Interest (LoI) from the Private Power Infrastructure Board (PPIB). The LoI was granted in early 2007. By 2009 a technical and financial feasibility study of the project had been completed by the project sponsors and approved by PPIB. Two years later, in 2011, the consortium applied for a generation tariff from Nepra, in which they detailed the technical and financial parameters. The project was supposed to be financed according to a debt-to-equity ratio of 80:20. Equity was going to amount to $284.87 million and the debt component of the project was $1139.5m at the time. All debt financed by Chinese banks is subject to Sinosure fee, which is China's official export credit insurance agency, and all projects executed using Chinese funds require that they be insured using this agency. Its charges in this project were 1.2 per cent per annum for both debt and equity investments throughout the project life. Additionally, interest during construction was calculated at six-month Libor plus 4.75 per cent.

The project sponsors asked for an internal rate of return of 20 per cent, which at the time was higher than  that given to thermal power plants. The equity had a gestation period of four years, and an investment horizon of 50 years. As an aside, it should be mentioned that return on equity for another coal-based power plant coming up in Sahiwal that has just had its upfront tariff for two 660MW plants approved on March 31, 2015, is 27.2 per  cent, and interest during construction is on the same terms as the Karot project: Libor plus 4.5 per cent. Compare that to the country's largest commercial bank, which had one of its most profitable years in 2014, and announced a return on equity of 20 per  cent. The levelised tariff the sponsors of Karot were seeking in 2011 was 7.5 cents per kilowatt hour for the project life of 50 years. There is no information on what levelised tariff the project has been finalised on today. “The Pakistan government promised a sound return after recovering construction and operation costs,” says a statement by the Silk Road Fund, which is injecting the capital into a subsidiary of China Three Gorges Corp. There is no indication on what the return is. This is not to suggest that the terms being offered are exorbitant. In fact, they sound somewhat reasonable considering what IPPs currently in the system get, and the kinds of return on equity the sponsors were asking for then and now are high by global standards, but not unusual in Pakistan. These are not aid, nor concessionary funding lines but commercial ventures, project financing, on commercial terms. The concessionary nature of the proposed investments comes in when you consider that hardly anybody else is willing to invest in Pakistan. The World Bank has tired of funding large infrastructure projects, and most bilateral assistance from donor countries now prefers to go into small programmes with high visibility. Foreign direct investment into large infrastructure projects in Pakistan is not feasible since no private investor is ready to acquire large stakes in this country, given its realities.

So we have a bilateral commitment from China instead, which is part governmental in that the Silk Road Fund and the China Three Gorges South Asia Investment, a subsidiary of the China Three Gorges Corporation, is being directed by the government to make the investment. The fund and the company in question will comply with the directive of their government. But they will also seek a return on their investment in line with commercial considerations. If they cannot get that return, the project will not materialise. The Chinese have developed the template of fusing investment and aid and are applying it around the world. 

A lesson from our experiences with the IPPs is worth bearing in mind. When the private power policy was announced, and all the investment in private power generation poured forth under it, the government of the time presented the whole enterprise as a big victory. Hubco was hailed as the “deal of the year” by Euromoney magazine. The government bragged that Pakistan had a surplus in generation capacity. The reality hit home when the bills from these IPPs came in. The new government of Nawaz Sharif discovered that the tariffs had capacity charges, meaning you had to pay them even if you did not want to buy any of the power produced. 

Most of us remember how the private power policy went from being the panacea to all our problems, to being public enemy number one. Let's not be foolish about it this time and understand that we are being offered a historic opportunity.  Let's also tally up the costs and benefits clearly upfront, and keep our commitment to procedures and transparency as we take advantage of this opportunity.

By arrangement with the Dawn