After years of hollow promises, a landmark agreement was signed on Monday to finance Pakistan’s first open-pit coal mine in the natural-resource rich Tharparkar district, which boasts holding 180 billion tons of coal but could not be exploited since it was discovered in the early 1990s.
A consortium of local banks that include HBL, UBL and Bank Alfalah will lend $500 million (Rs50 billion) – one of the largest project financing deals in recent years – to Sindh Engro Coal Mining Company (SECMC), a joint venture between Sindh government and five private companies.
This agreement is part of the $2-billion project, which includes a mine with a capacity to produce 3.8 million tons a year of coal and a 660MW coal-based power plant.
This has all but sealed the project’s financial close, which is expected to be finalised in the next two months.
“When we started work on Thar coal, no one believed in our ability to achieve the target,” said Sindh Chief Minister Syed Qaim Ali Shah, addressing a ceremony held for inking three key agreements related to the project.
“There were doubts about quality of coal. Even Prime Minister (Nawaz Sharif) was in doubt. But we persisted, took coal samples to Berlin where experts verified its quality. Eventually the Prime Minister backed us.”
The other two documents included the Master Shareholder Agreement between Engro, House of Habib’s Thal Limited, Hub Power Company, HBL Bank and China Machinery Engineering Corporation. This agreement covers common equity subscription of SECMC by the five private sponsors.
The other one is the implementation agreement between SECMC and the Sindh government, which also holds majority stake in the company.
SECMC CEO Shamsuddin Shaikh said work on the mine and power plant will be completed by 2018. “It has been almost eight years and people everywhere asked me ‘when are we going to see the coal?’ Well I can now say we’ll see that very soon.”
With the western banks unwilling to back a coal mine in Pakistan, the project wouldn’t have been possible without government’s sovereign guarantee, he said.
“And let me assure everyone that when it comes to emissions, we will follow the guidelines of the World Bank and IFC.”
Debt from local banks has been raised at an interest rate of Kibor plus 1.7% whereas Chinese lenders have agreed at terms of Libor plus 3.3%.
Hussain Dawood, the chairman of Dawood Hercules, which in turn controls Engro and Hubco, thanked Chinese banks and companies for taking part in the project, which was abandoned by other international lenders.
The electricity shortage in the country along with technological advancement taking place will increase demand for power in coming years, he said.
Asked why Dawood Group exposed itself to a risky project that remained dormant for so many years, Hussain said sometimes an investor has to take a step, which might initially appear “illogical.”
“Say, if I had put the money in textiles … fine I would have increased exports a bit. But what would that textile unit do if there is no energy?”
The realisation of needing urgent megawatts is not lost on him. No wonder then that even at the important ceremony held at a local hotel and amid all dignitaries, he reminded them that they had faced three outages in a span of two hours.
The project’s total debt component is of $1.5 billion, out of which $800 million will be financed by Chinese banks including China Development Bank and Industrial and Commercial Bank of China. Another $200 million will be arranged by the Chinese contractor of the power plant.
SECMC’s sponsors have contributed equity of $500 million.
Published in The Express Tribune, August 18th, 2015.