Bumpy road to China
WITH the passage of time, it is becoming increasingly clear that projects under the China-Pakistan Economic Corridor (CPEC) will cost more than what has been assumed thus far. The costs are coming under various heads: requests for allowing higher project costs than what was approved by Nepra in determining the tariffs for the projects, higher-than-anticipated expenditure on special security arrangements that will operate throughout the life of the projects, higher returns on equity being demanded by project sponsors, higher costs of compliance with environmental regulations, and so on.
Examples are growing. The first casualty of faulty planning and differences over financial issues was the Pakistan Power Park in Gadani, a coastal location just over an hour’s drive from Karachi. It was one of the earliest projects envisioned under CPEC, approved in July 2013 by the prime minister and a special purpose vehicle called the Pakistan Power Park Management Company in early August “with the object and purpose to own, develop, maintain and operate infrastructure for the power projects in Pakistan Power Park” according to an announcement on the website of the Private Power Infrastructure Board (PPIB).
The project was huge, involving 10 projects that would generate 6,600MW of electricity from imported coal and would cost up to $8 billion, with additional $5bn for associated infrastructure according to some report sourced to leaked Planning Commission documents. The idea behind situating such a large concentration of power projects at this location was an old one, dating back to the late 1980s when Hubco was originally envisioned. A large concentration of power plants would allow for sharing of the expensive infrastructure required at the site, such as the coal jetty, “switch yard, coal storage, ash pond, cooling water channel / arrangement, transmission, staff colonies etc” according to the PPIB.
The first casualty of faulty planning and differences over financial issues was the Pakistan Power Park in Gadani.
The prime minister personally attended the inauguration and laid the foundation stone, even before most of the studies connected with the project had been completed. Then apprehensions arose in the minds of the Chinese counterparts.
By early 2014, we heard that the number of power plants has been reduced from 10 to four, and the priority of the project has been reduced from the “early harvest category” of CPEC projects, to “actively promoted”. Then by the summer of 2015, a delegation from the water and power ministry told a National Assembly committee that the project had been “put on the back burner”. Apprehensions were technical as well as financial.
That’s how the story began: all fanfare and no homework. Between then and now, we have seen the coal-fired power plant at Pind Dadan Khan, also a Chinese venture, fall through and its generation licence cancelled. The sponsors of Karot Hydropower are petitioning for escalation of project cost as well as a higher Return on Equity, from 17pc granted by Nepra to 20pc demanded by the sponsors. The Thar coal project has run into environmental snags because their plan to evacuate the brackish water that surrounds the Thar coal seam could negatively impact the livelihoods of a large number of local residents, who have moved the Sindh High Court. The project will likely suffer delays, as well as cost escalation, depending on how this works out.
The story is the same with projects in the renewable energy area. Last year, 16 parties submitted review petitions to Nepra regarding the upfront tariff for wind power, asking for a higher tariff. Parties from the Quaid-i-Azam Solar Park have gone into litigation against Nepra, because the government announced one of the world’s highest upfront solar tariffs, ensured that one party — a joint venture between a Chinese company and the government of Punjab — obtained the tariff, then sought to lower the tariff for everybody else, arguing that solar is becoming cheaper around the world.
The litigants argue that they had already obtained all approvals for the original upfront tariff and incurred project expenses as they moved ahead with execution, and then suddenly the government sought to renegotiate the terms.
Now we have news that a large transmission line project has run into similar obstacles. Also part of the CPEC bouquet, the project involves the construction of an 878-kilometre long transmission line capable of carrying up to 4,000MW from Matiari in Sindh to Lahore where it will link up with load centres across Punjab. The line is supposed to carry the additional power expected to be generated from seven different power projects being built in the southern zone, totalling 4,950MW.
The total project cost is $2.1bn, with a debt-to-equity ratio of 80:20 and IRR of 17pc. It is a cooperative project between the state-owned transmission company NTDC and the State Grid Corporation of China. The cooperation agreement was signed in April 2015.
In their tariff petition, the sponsors asked for a tariff of Rs0.946 per kWh. But the electric power regulator, Nepra, didn’t agree with the costs submitted by the sponsors. Other transmission projects in the country typically get a tariff of Rs0.71 per kWh. For perspective, consider that 35bn kWh is the design capacity of the Matiari-Lahore line, which means every paisa increases the cost considerably. So the difference is appreciable, and perhaps we should be grateful to Nepra for being vigilant on costs when evaluating these projects.
Now the Chinese party is reportedly ready to walk away, saying things don’t work out for them at the approved tariff and the government is busy trying to persuade Nepra to change its mind.
CPEC is an important set of projects undoubtedly. But the costs have to be watched carefully if it doesn’t leave us in a Sri Lanka type of situation, where the government signed on to large Chinese projects since 2010, then landed up at the doorstep of the IMF this summer, at least partially in order to meet the repayment obligations connected with these same projects.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn October6th, 2016