IMF worries over CPEC energy deals still loom large

Pakistan has assured the International Monetary Fund (IMF) that it would try to receive concessions from the China-Pakistan Economic Corridor (CPEC) power plants in the shape of either reduction in the profit rates on investment or rescheduling the loan repayments.

The issue of reopening of the purchase agreements of the power generation plants set up under the multi-billion dollar CPEC is unlikely to die down in the near future. The previous PTI government had also made a similar commitment with another global lender – the World Bank (WB) – for the sake of a $400 million loan in June last year.

The assurance to seek concessions from the Chinese investors was given by Pakistani authorities to remove one of the bottlenecks in finalisation of a staff-level agreement with the IMF, government sources told The Express Tribune.

They added that Pakistan had informed the global lender that it would try to renegotiate the CPEC deals. However, the chances of that happening are dim because of the political sensitivities involved in the process.

CPEC is the flagship project of the Belt and Road Initiative of the Chinese government – a reason that the Chinese leadership has already ruled out the possibility of reopening these deals. The sources said the government had assured the IMF that it would also try to explore the possibility of seeking an extension in debt repayments against the loans that Chinese investors had obtained from financial institutions in their country for setting up these plants.

One of the irritants in the early conclusion of the staff-level agreement was that the IMF authorities were asking for clear commitments to reduce the power generation cost and the circular debt that had increased by another Rs850 billion during the last fiscal year.

Neither the finance ministry nor the IMF responded to the requests for comments. The PTI government had also made an attempt to receive similar concessions – which the Chinese leadership refused to extend at that time.

READ Why is CPEC phase 2 crucial for Pakistan?

The sources said the PTI government and the Chinese authorities had discussed a proposal to set up a joint fund to settle the energy payments. At that time, the estimated size of this fund was $1.4 billion.
The joint fund proposal was different from the revolving fund that the government is contractually obligated to open to save Chinese investors from the circular debt but has failed to achieve this.

The IMF has in the past linked the outstanding energy payments to the Chinese power plants with the concessions that non-CPEC projects had extended to the previous government. Pakistan owes around Rs300 billion to the Chinese independent power producers (IPPs) and the IMF was keeping track of every payment made to them.

So far, 11 Chinese IPPs, set up with an investment of $10.2 billion, are operational, having a total generation capacity of 5,320 MW. Last month, the IMF had denied that it asked Pakistan to renegotiate CPEC IPPs contracts but said it supported the government’s multipronged strategy to restore energy sector’s viability. It had added that the move shared the burden of restoring viability across all stakeholders – the government, producers, and consumers.

The Pakistani authorities fear that the West would not change its policy to keep pressuring it on the issue of CPEC and keep pursuing its agenda through diplomatic channels and international financial institutions. For the sake of the $400 million budget support loan, the PTI government had already conceded to reopen all the power deals signed in the past, according to unclassified documents of the WB.

The WB-funded $400 million Programme for Affordable and Clean Energy (PACE) requires revision of generation tariffs of almost all the IPPs. About 32 deals have already been sealed. It was the requirement of the PACE that by December 2023, Pakistan would ensure that fixed costs of 75 power generation plants would be revised downward, according to the WB documents.

Bringing down the fixed costs, which includes debt repayments, would necessitate the reopening of these deals. According to the WB documents, the realignment of power purchase agreements with the IPPs must be done in an orderly and transparent manner consistent with Pakistan’s contractual and legal obligations, by mutual agreements between the government and private entities.

The sources said that at the time of the signing of the PACE loan agreement, the country was under immense pressure to agree to a binding reopening of the Chinese deals. However, the government did not explicitly agree to it but gave a commitment that 75 deals would be renegotiated.

READ IMF deal helps Pakistan avoid default

The same report stated that in the private sector, Pakistan held discussions with 47 IPPs (out of total 67 operational IPPs) that signed a memorandum of understanding in August 2020. Revised agreements had been signed for 32 IPPs.

The IMF is now using the renegotiated 32 IPPs deals as a pretext to reopen the Chinese deals. The IMF and WB want Pakistan to receive concessions through lowering capacity payments by reducing allowed return on equity as per certain power policies.

Agreements reached so far with IPPs give estimated savings in capacity charges of 8.7% on average over fiscal year 2022 to 2024, according to the WB. In April 2020 the government secured concessions from local investors through use of various tactics and pressures.

The PACE loan document stated that under the worst-case scenario where the circular debt arrears were not settled by the Pakistani government in a timely manner, the IPPs had the option of calling on the sovereign guarantee of the power purchase agreements and going for international arbitration.

Under such circumstances, an international court could order immediate payment of all outstanding and future arrears (circular debt flow for the coming years) from the government to the IPPs, according to the report. The capacity charge is projected to increase to 70% of the total cost of power.

The reduction of capacity charges of private IPPs is also essential to reach a significant overall reduction of power generation costs, according to the WB. There are also five wind power plants that have been set up by US investors in Pakistan.

Under the same arrangement, the US International Development Finance Corporation (DFC) has reportedly shown willingness to revise power purchase agreements of its sponsored wind power projects subject to concessions from the Pakistani government.