Power plants: Chinese investment promised higher return

Beijing had sought an increase in credit risk insurance due to circular debt

ISLAMABAD: The government has agreed to offer Chinese investors a higher return on investments worth billions of dollars in the power sector, the cost of which will be recovered from honest consumers through a small increase in electricity tariff.

According to sources, the federal government has decided to take the upfront fee ceiling to 8% for a Chinese company on account of risk premium, but this step will push up power tariff by five paisa per unit for the consumers.

Earlier, the National Electric Power Regulatory Authority (Nepra) had capped the upfront fee for Sinosure, an export credit insurance company of China, at 7%, but because of the presence of circular debt, the company asked for 9% for credit risk insurance.

“The higher cap will result in recovery of Rs3 billion per annum from the power consumers,” an official said.



Prime Minister Nawaz Sharif had also given the go-ahead to the Ministry of Water and Power to offer China a rise in the upfront fee for credit risk insurance, he said.

Nepra will be asked again to increase the risk insurance cover after Pakistani and Chinese authorities reach a settlement.

China is expected to pump $14 billion into setting up power plants with a combined production capacity of over 10,400 megawatts. However, Chinese banks are seeking to cover the risk to their loans to be injected into the energy sector which is plagued by a heavy and unending circular debt.

The issue of risk cover arose after Chinese banks refused to provide a loan for Sindh Engro Coal Mining Company’s power generation project in Thar as they did not accept sovereign guarantees of the Pakistan government.

Following the refusal of the banks which included Exim Bank, China Development Bank and Industrial and Commercial Bank of China (ICBC), the project was placed in the high-risk category.

However, the matter was settled during the prime minister’s visit to China, but Beijing sought an increase in the insurance premium. Now, the Pakistan government has agreed to raise the upfront fee to cover the credit risk.

Though the government after coming to power in June last year had cleared a huge amount of inter-corporate debt, the energy sector is again facing a liquidity crunch. Recoveries of power distribution companies have gone down as average collection of bills fell 10 percentage points from 90% in 2012-13 to 80% in 2013-14.

The decrease in the recovery of bills is driven by the drop in collections of the Tribal Areas Electric Supply Company (Tesco), Islamabad Electric Supply Company (IESCO) and Gujranwala Electric Power Company (Gepco).

Overall receivables of energy companies have increased Rs100 billion in a year. They were Rs384 billion in 2012-13 and jumped to Rs485 billion at the end of the next fiscal year. Now, the receivables stand even higher at Rs581.32 billion with the private sector a major defaulter.

Published in The Express Tribune, December 17^th, 2014.

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