Thar coal mine and power project: Government finally gives sovereign guarantees

Paves way for financial close; Chinese banks will provide foreign currency loan, will be completed by 2018

KARACHI:

The Pakistan government has finally given a sovereign guarantee to the $2-billion Thar coal mine and power generation project, opening the way for its much-awaited financial close, a top official said on Tuesday.

“We received the sovereign guarantee on Monday,” said Sindh Engro Coal Mining Company (SECMC) CEO Shamsuddin Shaikh. “Now we expect to achieve the financial close within this year.”



After years of hollow promises, a landmark agreement was signed in August to finance Pakistan’s first open-pit coal mine in the ‘natural resource-rich’ Tharparkar district, which boasts holding 180 billion tons of coal but could not be exploited due to various reasons since its discovery in the early 1990s.



A consortium of local banks including HBL, UBL and Bank Alfalah have already agreed to lend $500 million (Rs50 billion) - one of the largest project financing deals in recent years - to SECMC, which is a joint-venture (JV) between the Sindh government and five private companies.

The project includes a mine with a capacity to produce 3.8 million tons of coal a year and a 660MW coal-based power plant.

“Sponsors have already allocated $40 million for the initial phase of the mine development,” said Shaikh, adding that 10 to 15 meters of earth has been removed at the site.



“The Ministry of Finance has now approved a draft for foreign currency loan agreement and sovereign guarantee document,” said a statement issued by SECMC.

“Foreign currency loan for the project, which is part of the China Pakistan Economic Corridor (CPEC), is being provided by a consortium of top Chinese banks, led by the China Development Bank.”

“Other banks in the Chinese consortium include Industrial and Commercial Bank of China (ICBC),” it added.



The project was initially a joint-venture between Engro Corporation and Sindh government only, but Engro’s sponsor; Dawood Group, later on was able to woo other private parties as stakeholders, which included the House of Habib (HOH) and Habib Bank.

The inclusion of HOH, which makes Toyota cars in Pakistan, besides having interest in multiple other industries, is viewed as a significant boost for the project.

Work on the mine and power plant will be completed by 2018. With western banks unwilling to back a coal mine in Pakistan, the project would not have been possible without the government’s sovereign guarantee.



Debt from local banks has been raised at an interest rate of Kibor plus 1.7% whereas Chinese lenders have agreed at terms of Libor plus 3.3%.

The project’s total debt component is of $1.5 billion, out of which $800 million will be financed by Chinese banks including China Development Bank and ICBC. Another $200 million will be arranged by the Chinese contractor of the power plant.

SECMC’s sponsors have contributed equity of $500 million.

The development has come at a time when Engro Corporation’s other major project - the liquefied natural gas (LNG) import terminal - has been under intense public scrutiny.

Delay in securing LNG supplies has allowed opposition parliamentarians to batter government. While no one denies the urgency to import gas, unnecessary controversies have overshadowed the project’s significance.

Published in The Express Tribune, November 11^th, 2015.

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