KARACHI: The Chinese mine operator in Thar whose output feeds coal-based power plants generating 1,360 megawatts has reportedly cut its production by half over non-payment of dues to the tune of $60 million.

The China Machinery Engineering Corporation (CMEC) — which works under an offshore agreement with Sindh Engro Coal Mining Company (SECMC) as the operator of an open-pit lignite mine in Block-II of the Thar coalfield — has formally informed SECMC about its “limitation of operation” that may lead to a complete mining halt within one month.

Sources told Dawn the Chinese contractor hasn’t received any payment since May 2022.

SECMC, which is backed by the government of Sindh, owes the Chinese contractor dollar-denominated payments under the heads of operation and maintenance (O&M) as well as engineering, procurement and construction (EPC) for the second phase of Block-II, which achieved commercial operations in October 2022.

Firm says govt restrictions on converting rupees into foreign currency caused backlog of dues amounting to $60m

The senior management of SECMC has taken up the issue at the highest levels of fiscal and monetary authorities, but they’re said to be reluctant to sign off on the payment in view of a shortage of foreign exchange.

Pakistan has been facing a severe dollar shortage as the loan programme with the International Monetary Fund (IMF) remains on hold. As a result, the government has put in place formal and informal restrictions on the outflow of dollars as a stop-gap measure to survive the liquidity crunch.

“SECMC has no shortage of liquidity. It’s cash-rich. The problem is that the finance ministry and the central bank aren’t letting it convert the local currency into dollars for onward payment to the foreign contractor,” said one person familiar with the issue.

According to the reconciliation of associated companies in which Engro Corporation Ltd holds material investment, SECMC posted a net profit of Rs8.47 billion in 2022. Its current assets, which consist of cash and other assets that can be converted to cash within a year, stood at Rs104.4bn at the end of 2022, up 38pc from a year ago.

“The fuel bill for operating the same 1,360MW power plants on imported coal will exceed the outstanding dues of $60m within one month,” said the source.

That’s because Thar coal is available to the local power plants at a significant discount. Its price isn’t pegged to the global market. SECMC earns an internal rate of return or IRR of 20pc above the project cost. The price of indigenous coal is around $42 per tonne in the ongoing second phase versus the international rate of around $135. The rate of Thar coal will further drop to $27 per tonne when the third phase is completed by April 2024.

In a recent letter to SECMC, CMEC representative Zhao Wenke said the Chinese company’s cash flows were in “bad condition” as dues of $60m constitute a “huge amount for any contractor”.

“We suffer serious financial shortage… the payment we received can hardly keep works continue, not mentioning pay off our subcontractors and suppliers, such as CRCC, HongDa, Tonly, TEC, CHCIC, JPPE and etc,” the letter said.

The Chinese contractors also warned the Pakistani company that the mounting dues would result in “significantly” hampering the mine expansion for Phase-III. “If that happens then power plants will have to use imported coal instead of Thar coal,” Mr Zhao wrote.

SECMC extracted 3.8m tonnes of coal annually and sold its entire output to Engro Powergen Thar until recently. It doubled its mining capacity to 7.6m tonnes per year last year, which coincided with the commissioning of the 330MW Thar Energy plant. Another power producer of 330MW, ThalNova Power Ltd, recently started producing electricity, ensuring 100 per cent consumption of the enhanced output of SECMC’s mine in Block-II of the Thar coalfields.

With the mining block’s third-phase expansion next year, SECMC’s output will increase to 12.2m tonnes a year. The increased mining will supply fuel to the 660MW power plant that Lucky Electric Power Company has just commissioned at Port Qasim.

Sindh Energy Minister Imtiaz Ahmed Shaikh, who also serves as chairman of SECMC, told Dawn he wrote a letter to Finance Minister Ishaq Dar two days ago, requesting him to allow the payment.

“It’s a fair demand on the part of the Chinese company. We understand the foreign exchange situation is tough, but the payment issue can’t be left unresolved,” he said, adding that the Sindh chief minister will personally take up the issue with Mr Dar shortly.

Dawn reached out to the Ministry of Finance and State Bank of Pakistan for comment. A media relations officer for the ministry said the secretary was in Washington DC on official business and would respond upon his return. Finance Minister Ishaq Dar did not respond to a similar request.

There was no response either from an SBP spokesperson until the filing of this report.

Published in Dawn, April 19th, 2023