Windfall for Chinese on coal fired projects

Published: February 15, 2017
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ISLAMABAD: In what appear to be heavily China-favoured deals, Pakistan has offered up to 34.5 per cent annual profit on equity invested in coal-fired energy projects of China-Pakistan Economic Corridor and loans have been obtained at six per cent interest rates, excluding insurance cost.

The official documents revealed that by including the cost of insurance, also paid to a Chinese insurance company, the cost of borrowings would surge to 13 per cent. Adding insult to injury, the government has already exempted income of Chinese financial institutions from dividend income tax.

Several China-sponsored power projects hit snags

The Ministry of Water and Power on Tuesday submitted details of terms of conditions of financing and tariff structures of energy projects in a meeting of the National Assembly’s Standing Committee on Planning and Development, shedding some light on these deals.

The ministry provided financing details of eight energy projects having cumulative generation capacity of 7,880 megawatts and being set up at a cost of $12.54 billion. Their sponsors have obtained $9.5 billion loans at an interest rate of London Interbank Offered Rate (Libor) plus 4.5 per cent, according to these documents. The six-month Libor rate was 1.34 per cent and one-year Libor was 1.71 per cent. This would translate into an interest rate equivalent to 5.84 per cent to 6.2 per cent.

The debt to equity ratio for all these eight projects is 75 per cent debt and 25 per cent equity except in case of Karot hydropower project where the debt ratio is 80 per cent.

Besides, China Export and Credit Insurance Corporation (Sinosure) would charge seven per cent fee on the insurance of the loans given to these companies.

Pakistan and China had signed CPEC Energy Framework Agreement in November 2014. Out of $55 billion estimated cost of the CPEC, an amount of $35 billion is earmarked for energy projects.

However, the alarming thing was the return on equity that in case of coal-fired power plants was in between 27.2 per cent to 34.49, almost double the standard 17 per cent rates. In case of hydel-based projects, the internal rate of return (IRR) was 17 per cent. The high return on equity had to be given to make these projects attractive, as people were not ready to invest in coal-based projects, said Omer Rasul, Additional Secretary Ministry of Water and Power after the meeting.

Pakistan, China ink agreement for coal project

In his article, “Financing burden of CPEC”, former Governor State Bank of Pakistan, Dr Ishrat Husain recently wrote, “The loans would be taken by Chinese companies, mainly from the China Development Bank and China Exim Bank, against their own balance sheets”.

Dr Husain estimated that at 40 per cent equity and 17 per cent guaranteed return on these projects would entail annual payments of $2.4 billion from the current account.

But the details showed that the equity is 25 per cent while the return is as high as 34.55 per cent. So far, National Electric Power Regulatory Authority (NEPRA) has approved tariffs for eight CPEC energy projects, said Safeer Ahmad, Director Finance of Private Power Infrastructure Board (PPIB).

Pakistan has approved 30.65 per cent return on Equity for 660MW Engro Powergen Thar coal-II project. The project cost is $995.4 million and the sponsors have taken $746.55 million loan at almost 6 per cent interest rate. The project got tariff of Rs8.5 per unit.

The government did not approve a separate policy for CPEC energy projects as these plants are set up under the existing energy policies, said Ahsan Iqbal, Minister for Planning and Development, at the floor of the Senate.

The government gave 27.2 per cent return on equity to 1320MW Port Qasim Power Plant. The total cost of the project is $1.92 billion and the sponsors have arranged $1.44 billion loan at 6 per cent interest rate.

The 1320MW Thar Coal power plant by Shanghai Electric Power got the maximum return on equity at 34.49 per cent. The total project cost is $1.92 billion and the sponsors have obtained $1.44 billion loan at 6 per cent interest rate. However, the 1320MW Hubco Coal power, being built in collaboration with China Power Hub, having same cost and debt-equity ratio would get 27.2 per cent return on equity.

The 330MW Thar Energy Limited project, having $497.7 million cost, would attract 30.65 per cent return on equity. The sponsors have got $373.3 million loan.

Pakistan, China to build 350MW coal power plant in Karachi

The 1320MW Sahiwal coal power project would get 27.2 per cent return on equity and the sponsors have obtained $1.44 billion loan, according to Ministry of Water and Power.

Omer Rasul said that the CPEC energy projects were in IPP mode and there was no public financing involved. He said that the average tariff of coal-based power plant was Rs8.3 per unit.  However, energy experts said that the actual tariff was far higher than this, as the NEPRA calculated the tariff at 85% plant capacity.

The 870MW Suki Kinari hydro project, having $1.7 billion cost would get 17 per cent internal rate of return. The project will be completed by obtaining $1.3 billion loan at 6 per cent interest rate. The 720MW Karot hydro power project will also get 17 per cent internal rate of return. Its debt-equity ratio is 80-20 and the company has got $1.4 billion loan to complete it.

Published in The Express Tribune, February 15th, 2017.

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Reader Comments (26)

  • just_someone
    Feb 15, 2017 - 9:26AM

    Wow, just wow!Recommend

  • VINEETH G
    Feb 15, 2017 - 9:51AM

    When you have only one country to depend on for your needs, this sort of subservience is natural. Pakistan needs to build up its image and need to actively seek investments from nations with best technical know-how, other than the usual lot like China and Turkey.Recommend

  • AA
    Feb 15, 2017 - 10:20AM

    Sheer exploitation by Chinese. Real tariff will be much higher at 13% cost of borrowing and 34.5% profit margins. Recommend

  • VGP
    Feb 15, 2017 - 10:49AM

    Next wait and see how the Chinese recover money on the roads and the port and allied infrastructure etcRecommend

  • Feroz
    Feb 15, 2017 - 11:10AM

    The cat will come out of the bag slowly and when it is dark so no one can see it. The CPEC is going to be a bonanza for anyone who can get a foot onto the gravy train. Now comes the real question ——- at what price will power have to be sold to service all the guarantees given and who will buy this costly power ???Recommend

  • Adnan Siddiqui
    Feb 15, 2017 - 11:36AM

    China wants 34.5% returns and just compare it with the investments that the hated Americans made. Recommend

  • Arsalan
    Feb 15, 2017 - 11:38AM

    CPEC will make China great again !!Recommend

  • Tyggar
    Feb 15, 2017 - 11:45AM

    CPEC is truly a game changer. Nowhere else do you see such contractsRecommend

  • Zahid Qadeer
    Feb 15, 2017 - 12:12PM

    At that time of crises when no one was ready to invest in Pakistan due to law and order, unstable political scenario and clashes on boarder with India, even that sort of investment could have been considered as blessing but in future, some policy measures need to be reviewed as on-ground situation is getting better day by day.Recommend

  • kamal
    Feb 15, 2017 - 12:31PM

    WOW..superb dealing by China.. We Indian feel jealous of China. Recommend

  • vinsin
    Feb 15, 2017 - 2:18PM

    @Zahid Qadeer:
    Not true. Pakistan was getting loan from 8 to 12% interest rate in those times. It is a loan not investment. No industry has been set up by China as of now. It is mostly a security deal with China. Recommend

  • Nael
    Feb 15, 2017 - 2:25PM

    If this is return on equity over the life of the project then it is reasonable. If it is an annual return then Pakistan has made an absurd and disastrous deal. Recommend

  • Afzaal Ansari
    Feb 15, 2017 - 2:41PM

    despite of the political and terrorism disturbance and uproar, chines feverishly invested in Pakistan to stabilize the financial and political distress for their own objectives as well our country. The same facilities may also be offered to the our business nationalism for enticing the investment activities with invigorations.Recommend

  • Pakistani bloach
    Feb 15, 2017 - 3:56PM

    It works both ways and whats wrong if chinies makes some money? because of this investment pakistani gdp is touching 5.5 percent and it will be around 7/8 percent once these projects are completed so its a win win for pakistan and china.Recommend

  • Solat
    Feb 15, 2017 - 9:15PM

    Why Indians are so much obessed with CPEC. They only comments here when there is CPEC and blasts news :)Recommend

  • Cuban
    Feb 15, 2017 - 9:53PM

    Nice article. I suspect that as more information is revealed about the secret CPEC deals the Pakistani public maybe disappointed. High interest rates combined with enormous guaranteed equity returns means that electric rates are going to increase maybe dramatically. It’s time for full disclose of all of these deals.Recommend

  • hamza khan
    Feb 15, 2017 - 10:20PM

    @vinsin:

    no its actually not, the early harvest projects are being implemented now. the actual investment portion of it will begin from later this year. keep your veggie belt on there prakash. Recommend

  • hamza khan
    Feb 15, 2017 - 10:27PM

    @Nael:
    its def over the life of the project. i’ve heard ahsan iqbal say this and you can email him to confirm. ignore the hyper ventilation being done here which is causing indians to jizz in their pants. Recommend

  • Raj - USA
    Feb 15, 2017 - 11:10PM

    @Nael:
    The very first line in this news says it is 34.5% annual profit. What is not said here is that this annual profit applies for 43-45 years. So, China will be earning 34.5% annually, every year for the next 43-45 years which is nearly 1500%. For every $100 invested in CPEC projects, China will be getting about $35 every year or $1500 over the next 43-45 years from Pakistan. These are coal based projects and it is imported coal and not That coal that will be used. You will read in the future that there is contract with China to import coal also or China will be importing coal from other countries for CPEC projects. China will earn a lot for providing these services too. Also, all Managerial staff employed in these projects will be Chinese and Pakistanis will only be employed in lower end jobs. Recommend

  • hamza khan
    Feb 15, 2017 - 11:59PM

    @Raj – USA:
    complete lie, the jobs for managers and manager level jobs and up are going to pakistanis. i like that indians, who have zero credibility, are somehow authentic sources on CPEC. hahahaha…Recommend

  • Amar
    Feb 16, 2017 - 2:38AM

    ok get India to invest in Pakistan China is asking for a high return because its investing in a country that has too many problems corruption and many more it only takes a 17.5% return when it goes to invest on its own will not when our leaders are begging China to come and investRecommend

  • Mehran Siddiqui
    Feb 16, 2017 - 5:15AM

    Oh boy — This is bad…
    Pakistan has offered up to 34.5 per cent annual profit… I hear the loan terms are for 30 years or more? We are doomed. Even Jagirdaar’s don’t charge so much interest… Recommend

  • Faz
    Feb 16, 2017 - 6:47AM

    By the time these coal power plants are ready to generate, they will get outlawed by global powers. Chine itself is no longer using these so enjoy, Pakistan.Recommend

  • Sabi
    Feb 16, 2017 - 9:39AM

    According to this ‘wonderful’ report Pakistan is so resourceful that it will give billions of dollars in subsidies to local consumers while paying back tens of billions to Chinese companies without any problem.
    So naive was also Chines leadership which had not seen a country ridden with extreme terrorism and almost at the edge of bankruptcy while cutting deals worth 55 billion dollars. Man! It doesn’t go like this it simply doesn’t work like this. If you quote figures like this ( By anti democracy forces as we all know it) then
    nothing can be said. Thing is, it’s almost like a gift from China in return for the corridor to Gawadar which going to be game changer for China in next 20 years.
    Knowing the huge savings that Chinese companies would be making through this very safe very short route Pakistani financial managers have successfully cut a deal for soft loans for its energy projects that’s why it’s called a gift from our Chines brothers.Recommend

  • Sultan Durrani
    Feb 16, 2017 - 10:08AM

    Its not only that Chinese will make but our champions will also get loins share. All this loan money is being wasted on discarded coal technology because our elites are behind such redundant projects to make windfall. Had anybody of them been sincere and loyal to Pakistan, this money should have been used for generating cheap & environmental friendly Hydro power electric generation. People of Pakistan will know the true impact once they start paying through their nose for purchasing electricity at explainable high rates, beside damage to an environment. Recommend

  • Raj - USA
    Feb 16, 2017 - 10:56AM

    @hamza khan:
    “complete lie, the jobs for managers and manager level jobs and up are going to pakistanis. i like that indians, who have zero credibility, are somehow authentic sources on CPEC. hahahaha…”

    Have you or anyone seen even one advertisement in any newspaper in Pakistan for even one job for any CPEC project?

    Back up what you say with news reports or any other proof.

    Chinese bring their own employees from China for all CPEC projects.Recommend

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