ECC approves treaty to protect Chinese investors

The ECC also approved to keep withholding tax on banking transactions by non-filers to 0.3% till end of this month

Shahbaz Rana February 18, 2016

ISLAMABAD: Pakistan on Thursday approved a supplemental treaty to the China-Pakistan Economic Corridor (CPEC) framework agreement, binding the country to make timely payments to the Chinese and their local partners in return for the 17,000 megawatts of electricity they will produce as part of the megaproject.

The Economic Coordination Committee (ECC) of the Cabinet approved the supplemental agreement to protect the Chinese and their local partners from the adverse impact of chronic circular debt.

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Under the agreement, a revolving account will be set up to cover 22% of the monthly electricity billing. The 22% is the difference between the billed amount at the time of generation and actual recovery from the consumers.

The high ratio is also the reason behind current load-shedding in the country, as the finance ministry is reluctant to fully utilise installed power generation capacity due to its implications on budget.

The ECC decision heightens the issue of discriminatory treatment being meted out to independent power producers (IPPs), which are generating roughly 6,000MW of electricity under the 2002 power generation policy but are not being paid on time.

Interestingly, some of the partners in energy projects being set up under CPEC also operate plants under the 2002 policy. The supplemental agreements’ local beneficiaries include Arif Habib Group, Nishat Group and Engro Group among others.

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This is the second supplemental agreement under CPEC. A similar decision last April gave guarantees to coal-based power plants being set up under CPEC. Now the scope of these guarantees has been extended to all the projects, including wind, solar and hydro.

According to the agreement, power purchasers will open and maintain the revolving accounts and in case they default on payments to Chinese and local partners, the finance ministry will pay the amount. The revolving account will be opened within a month of commercial operation of the project, according to the framework agreement.

According to the amendments to Article 7, the terms of Supplemental Agreement shall be commensurate with the terms of the Implementation Agreement.

According to another clause of the supplemental agreement of April 2015, in case a plant is unable to generate electricity due to non-availability of fuel due to delayed payments for a certain period, the producer will be entitled to idle capacity payment equivalent to 80% return on equity component of the tariff.

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The Pakistan Muslim League-Nawaz government has failed to fully address the root causes of circular debt – high line losses and shortcomings in bill recovery. This has resulted in circular debt of over Rs665 billion, including arrears, even after paying Rs480 billion in June 2013.

China had refused to set up power plants until the government agreed to an arrangement where Chinese investors or projects funded by Chinese financial institutions were protected against circular debt.

Other decisions

The ECC also approved to keep withholding tax on banking transactions by non-filers to 0.3% till end of this month.  It also approved allocation of 60MMCFD Mari shallow gas to Fauji Fertilisers, Fatima Fertilisers and Engro Fertilisers with effect from February 22. The ECC waived off the outstanding loan of Rs51.5 million of Shahdadkot Textile Mills as the unit has been liquidated.

Published in The Express Tribune, February 19th, 2016.


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