Thar project: Chinese lenders refuse to accept sovereign guarantees
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 25th, 2014.
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COMMENTS (16)
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We are dreamers. Chinese are no friend. They are business people. If it does not make money or have their long term geo political interest involved, they are not interested. Wake up and look out for your national interest.
It may be a better/cheaper idea if pakistani business engage private player from India to take part in Thermal power generation. It can be mutually beneficial. Asif Zardari for all his plus and minus was in favour. Politics and ego will kill the idea in Pakistan
Experienced revolutionary China will never do business with Nawaz-gang they need guaranteed with serious nationally recognised govt in Ir Pakistan, Go System Go, Go Nawaz Go
Thar Coal....was...is...and will be....a political gimmik.
Thar coal is economically not viable.........that's why nobody is interested in developing it...
ET has earlier published a full report dealing with this matter..........& comments on that article makes it even more informative............the link for that article is:- http://tribune.com.pk/story/325560/chasing-a-pipe-dream-three-reasons-why-thar-coal-will-not-save-pakistan/
Coal is perhaps the largest source of energy on the planet and large coal projects are developed all over the World with no govt financing. The reason that Thar coal has been in limbo for all these years is simple - it's not economically viable. Information on Thar Coal is readily available on the internet - most of the coal lies under a deep layer of water which makes it too expensive to mine - that's why many were focusing on coal gasification but unfortunately the technology hasn't been developed sufficiently to implement on a large scale.
May I suggest that instead of looking for friends to get $0.5b financing, why don't we ask Mansha, Sharief, zardari to make a consortium and finance this project. I believe that for them it's just a small investment.
Stop Chinese loans as we are getting into another trap where the china will dictate us on every aspect of economic front. If it suits china interest than they are ready to invest to use the Pakistan geographical location to enhance their economic agenda. They are not interested in the well being of Pakistan and its people. Please deal with China with keeping in mind the Pakistan interest otherwise Pakistan will regret the Chinese investment and it influence in very near future. They are on ones friend and Pakistan should come out of this false perception as soon as possible.
People were pooh poohing the 'small' amounts committed during Kerry Lugar hill which were outright grants of $1.5 billion per year for 5 year. Yet here the taller, higher sweeter friend is unwilling to ive a loan of $0.5 billion despite getting sovereign guarantee.
@Muhammad Shoaib Chishti: You perhaps did not read. China is UNWILLINGnto accept Pakistan'smsovereign guarantee.So what do you want PMN-L to do.
The criterion for sovereign guarantee that should be met is that the capital markets are not willing to finance the project at a reasonable price without State support. Typically, this applies to large-scale projects that require long-term financing, i.e. loans with a term of more than 10 years, projects involving appreciable political risks and projects which are difficult for the market to assess due to its unique character. Therefore PML N should come forward and give guarantee, if they are really working for the national interest.
The criterion for sovereign guarantee that should be met is that the capital markets are not willing to finance the project at a reasonable price without State support. Typically, this applies to large-scale projects that require long-term financing, i.e. loans with a term of more than 10 years, projects involving appreciable political risks and projects which are difficult for the market to assess due to its unique character. Therefore PML N should come forward and issue this guarantee issue if they really are working in the national interest
Why don't rich arab Muslims give interest free money to Pakistan under Islamic financing? I heard lot of Muslims brag about Islamic financing.
"but the real issue was the Chinese funding for developing the coal-based power plant,"
If you can save 1.2 billion $s a year by reducing furnace oil imports, why don't you approach ADB or WB or just take loan from a friendly country like KSA, UAE? A saving of 1.2 billion $s a year gives a good ROI from forex savings point of view for countries like Pakistan and India. Just a thought.
Engro has hoped that the govt would finance this project from Day 1 - refuses to put any of it's own money in the project and using the authors words "Engro could not take commercial risk". Thar Coal isn't going anywhere.