ISLAMABAD: The governments at the Centre and in Sindh appear to be in a sort of competition to develop Thar coal for cheap power generation, but unending circular debt is posing a challenge to the first 600MW power project in Thar.

“For Chinese banks, Pakistan’s risk profile is very high due to the circular debt,” Shamsuddin A. Shaikh, the chief executive officer of the Sindh-Engro Coal Mining Company (SECMC), a joint venture of the Sindh government and Engro Corporation, said at a news briefing.

He said that the risk profile and the resultant higher pricing demanded by Chinese banks and insurance firms had so far hampered the $2 billion project. Mr Shaikh expressed the hope that the issue would be resolved amicably and an agreement for $565 million financing would be signed during Prime Minister Nawaz Sharif visit to Beijing next month.

He said the Chinese banks were reluctant to extend loans by accepting the sovereign guarantee of the Pakistani government. “Chinese banks want Engro to take 50 per cent risk and 50 per cent by Sinosure Insurance, but Engro is not in a position to take the risk because of its existing debt profile,” he said.

He said that talks were in progress to ensure that Sinosure covered 80 per cent risk and leave the remaining 20 per cent for the banks. He said a number of financial institutions would have been ready to provide financing for oil-based projects, but only China had agreed to finance coal-based projects but ‘at a very expensive rate’.

He said the local funding for the project was being provided by most major banks. He said the financial close for the project would be achieved by March 2015 and the project’s completion was now expected in 2018 summer.

“This project is of national importance and all major political parties like Pakistan Muslim League-N, Pakistan People’s Party and PTI are supporting it,” he said, adding that it would help the country save $1.2 billion per annum.

Mr Shaikh put the cost of the coal-mining project at $900 million and that of 600MW power generation at $1.1 billion. He said that three Chinese Bank would provide $565 million.

“We have no issue for local financing of coal mining project as local banks and firms have agreed to extend financing but there is an issue in seeking financing from China to build the Thar coal-based power plant project,” he said, adding that the National Electric Power Regulatory Authority (Nepra) had allowed a spread of 4.5 per cent over LIBOR rate. But he said that Chinese banks did not accept it and demanded 5.5 per cent.

He also said that the regulator had capped an upfront Sinosure fee at 7 per cent, but due to the circular debt situation in Pakistan, it was seeking 9 per cent for credit risk insurance. “Therefore, Sinosure fee cap needs to be aligned with the market rate,” he said.

“The Thar coal project cannot be implemented unless these issues with China are resolved,” he said, adding that China was the only country which had agreed to extend financing as no other country was willing to support coal projects.

He said the company was also facing problems at domestic level as the Economic Coordination Committee (ECC) had approved a package to treat this project on independent power project model but the SRO had not been issued so far.

“Four large vehicles meant for the project have been stuck at the Karachi airport for one-and-a-half months but the Federal Board of Revenue (FBR) was not clearing the vehicles,” he added.

He said that a contract had been awarded to a local contractor to exploit coal from Thar reserves.

“The government of Sindh has allotted 6,000 acres of land for the Thar coal project,” he said.

Published in Dawn, October 25th , 2014