Despite energy price fall, China investors allowed higher returns

Investors working on coal-fired power plants win preferential treatment

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) has allowed a higher return to Chinese investors working on coal-fired power plants in preferential treatment under the China-Pakistan Economic Corridor (CPEC), which comes in stark contrast to the prevailing low energy prices.



“The disclosure was made by the Ministry of Water and Power in a meeting of the Economic Coordination Committee (ECC) held on February 22, which was considering a higher rate of return on the power transmission line from Matiari to Lahore,” a ministry official said while talking to The Express Tribune.

The ministry highlighted the return on coal power plants in a bid to press for exemption from withholding tax on dividends from the transmission line project.

On the contrary, Nepra had made a drastic cut in the tariff for solar power plants over the past few years.

A representative of the Ministry of Water and Power told the ECC that the Private Power and Infrastructure Board (PPIB) had submitted a tariff petition for coal-based power plants on February 3, 2012, recommending that the withholding tax on dividends should be considered a pass through keeping in view the earlier stance of Nepra.

In its original determination on June 6, 2013, Nepra allowed 17% return on equity in the case of plants to be run on imported coal and 20% return on local coal-fired plants. However, it did not give the go-ahead to the pass-through mechanism for withholding tax.

Following a review request from the government and comments of stakeholders on equity returns and withholding tax, Nepra on June 26, 2014 increased the return on equity to 27.2% for imported coal-based plants and to 29.5% for a local coal power plant of 600 megawatts.

In the tariff determination, the regulator included the simple return on equity based on generic drawdowns and other reference parameters that also ensured adequate internal rate of return for imported coal and 18% for local coal.

Though Nepra did not include the withholding tax on dividends in the tariff determination, calculations revealed that the 17% internal rate of return was equivalent to the net withholding tax in case of imported coal and 18% in case of local coal.



Hence, it was understood that the higher return on equity was allowed to cover the impact of withholding tax on dividends as the CPEC agreement called for offering the most preferable incentives to Chinese investors.

Published in The Express Tribune, March 16^th, 2017.

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