ISLAMABAD: Pakistan and China on Monday signed a formal agreement on about $1.5 billion financing for a 3.8 million tonnes per year coal mining project and a 660-megawatt coal-fired power plant in Tharparkar, Sindh.

The agreements were signed by two syndicates of Chinese and Pakistani banks with Sindh Engro Coal Mining Company (SECMC) and Engro Powergen Thar Limited (EPTL) in Beijing for local and foreign loans to finance mining of Thar Coal Block-II and utilisation of its coal for 660MW power generation, according to an official announcement.

Negotiations for the loan financing had been ongoing since signing of term sheets during Chinese President Xi Jinping’s visit to Pakistan in April this year.

Under the loan agreements, a syndicate of local banks including conventional and Islamic financing institutes will be providing Rs52 billion for the mining project being undertaken by the SECMC and Rs22bn for associate power plant of 660MW being established by Engro Powergen Thar Limited.

The syndicate is led by Habib Bank Limited and comprised United Bank Limited, Bank Alfalah Limited and Faysal Bank Limited.

The foreign syndicate comprised Chinese banks including China Development Bank (CDB), Construction Bank of China (CBC) and Industrial and Commercial Bank of China (ICBC). They are providing loans amounting to $820m.

The agreements were cleared by the Ministry of Finance earlier this year followed by approval by the Economic Coordination Committee (ECC) of the Cabinet to issue $700m worth of sovereign guarantee to underwrite the loan taken by the SECMC.

The project’s addition to the China-Pakistan Economic Corridor (CPEC) as ‘priority’ earlier this year paved the way for its early financing.

Separately, the project sponsors have also signed Sponsor Support Agreements for both projects, under which the Sindh government, Engro Powergen Limited, Thal Limited, Hub Power Company, HBL, and China Machinery Engineering Corporation agreed to inject $490m into the project to ensure that the companies have the funds available.

The project is expected to be commissioned by 2018. In phase two of the project, the mine will be expanded to an annual capacity of 7.6 million tonnes and another 660MW power plant facility will be added. This expansion has also been included into the CPEC.

Earlier this month, the Sindh government signed an implementation agreement with the SECMC and water utilisation agreement with EPTL to provide the required infrastructure to facilitate the mining project amounting to $600m (Rs60bn).

An official said financing by local banks had been arranged at Karachi Interbank Offered Rate plus 1.7 per cent and Chinese lending at London Interbank Offered Rate plus 3.3pc.

Arrangement of finances and completion of lending documents are the most critical parts in any project, signifying starting point of actual work on the project.

This is the largest project on the top priority list (early harvest programme) of the $46bn CPEC agenda and the first to have reached such an advanced stage after the signing of CPEC energy project agreements in November last year.

The CPEC accords envisage 14 projects of 10,400MW in the first phase, which are targeted for commercial operation by 2017-18.

The two governments initially focused on the Thar coal mining and power project and completed regulatory approvals between November 2014 and March 31, 2015. The arrangements included a power generation policy approval by the Council of Common Interests, followed by standard security package, including approval of implementation and power-purchase agreements.

To facilitate the project, a supplemental agreement particularly designed for Chinese investment under the CPEC was approved by the Economic Coordination Committee of the Cabinet that entailed creation of a revolving account to provide for a minimum of 22pc of monthly power purchases and a sovereign guarantee recently issued by the federal government.

Total cost of the coal mine upgradation to 3.8 million tonnes a year has been estimated at about $900m and that of the 660MW power plant at $1bn. Pakistan and China have already entered into an agreement for laying a transmission line for evacuation of electricity from the Thar plant to the national grid near Matiari and then onwards up to Lahore.

This will ensure that the first power project begins commercial operation by December 2017 at levellised tariff or 9.5 cents per unit.

Published in Dawn, December 22nd, 2015