Thar project: Chinese lenders refuse to accept sovereign guarantees

Want Sindh Engro Coal Mining Company to take 50% of risk.

THAR:

The coal mining and power generation project of Sindh Engro Coal Mining Company (SECMC) in Thar could get delayed as it faces an uncertain future following reluctance of Chinese banks to provide loans and accept sovereign guarantees of the Pakistan government.

“Chinese banks want Engro to take 50% of the risk and the rest by Sinosure (an export credit insurance company of China), but we are not in a position to bear the risk,” said Shamsuddin Ahmed Shaikh, Chief Executive Officer of SECMC, during a press briefing.



Engro had already taken loans from domestic banks and hoped that the issue would be resolved during the visit of Prime Minister Nawaz Sharif to China in November, he said and suggested 80% of risk should be borne by Sinosure and 20% by banks. Engro could not take commercial risk, he remarked.

“This project is of national importance and major political parties like Pakistan Muslim League-Nawaz (PML-N), Pakistan Peoples Party (PPP) and even the Pakistan Tehreek-e-Insaf (PTI) are supporting its implementation,” he said. The country would save $1.2 billion per annum in the import of furnace oil after the project comes on stream.

Shaikh announced that SECMC would invest $2.2 billion including $0.9 billion in coal mining and $1.1 billion in power plant while Chinese banks were to give $560 million.

“The Thar coal project is part of the Early Harvest Programme to be implemented with the cooperation of China,” he said. “Despite that, Chinese banks including Exim Bank, China Development Bank and Industrial and Commercial Bank of China (ICBC) are reluctant to offer loans and the project has been placed in the high-risk area.”

The company was encountering no problem in acquiring finances for coal mining as domestic banks and firms had agreed to make the funds available, but the real issue was the Chinese funding for developing the coal-based power plant, he said.

The National Electric Power Regulatory Authority (Nepra) has allowed a spread of 4.5% over the London Interbank Offered Rate (Libor), but, according to Shaikh, Chinese banks did not accept it, instead they sought 5.5%.

He pointed out that the regulator had capped upfront fee for Sinosure at 7%, but because of the presence of circular debt, the company asked for a fee of 9% for credit risk insurance. “The cap on Sinosure fee needs to be aligned with the market rate,” he suggested.

Shaikh declared that the Thar coal project could not be implemented unless issues with China were resolved as Beijing was the only country that had agreed to extend financing.

On the domestic front too, Engro is facing different problems. The Economic Coordination Committee (ECC) has approved a package to treat the project on the basis of the Independent Power Plant (IPP) model but a notification has not been issued so far.

Apart from that, the Federal Board of Revenue has failed to clear four vehicles for the project that have been stuck at the Karachi airport for the last one and a half month.

Speaking about the efforts made to tap Thar coal deposits, Shaikh said a contract had been awarded to a local contractor for extracting the coal reserves and 1% work had been completed so far.

The Sindh government has allotted 6,000 acres of land for coal mining and Engro has asked the province to waive royalty payments until the time coal prices reach international levels.

At present, the installed power production capacity in the country is 20,213 megawatts and demand will rise to 113,695MW by 2030 with an annual increase of 35%.

In India, 70% of electricity comes from coal and Pakistan has the seventh largest coal reserves in the world which could also be consumed to generate electricity.

“Projects that are listed as a priority in the Pakistan-China Economic Corridor programme should receive some fiscal benefits as well as incentives,” he added.

Published in The Express Tribune, October 25^th, 2014.

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