ENERGY
The January 9, 2017 marked a major milestone for the China-Pakistan Economic Corridor (CPEC) as the 870MW Suki Kinari, the first and the largest hydropower project under the programme, achieved financial close. The project is being constructed at an estimated cost of $1.956 billion by China Gezhouba Group on EPC (Engineering, Procurement and Construction) contract basis. The debt portion of the project is being financed by China Exim Bank and Industrial and Commercial Bank of China (ICBC) on commercial terms. Currently under construction, the project has attained significant physical progress, and is scheduled for commissioning in 2022. It is also the first hydro Independent Power Producer (IPP) project in the Khyber Pakhtunkhwa (located in District Mansehra).
CPEC, with $33.728 billion funding for 22 energy-related projects, focuses on power generation through energy resources of hydropower, coal, solar and wind farms. In the first phase, projects of cumulative capacity of 10,350MW are being developed under the “early harvest” programme with an outlay of $21.601 billion, while actively promoted power projects of total capacity of 5,875MW are planned for implementation in the second phase costing $12.127 billion. Nonetheless, out of 10,350MW cumulative capacity power projects being developed on priority, only about 500MW electricity will be added to the national grid by March 2018, according to the official sources. Hydropower, in spite of its vast potential for development, constitutes just 15 percent to 16 percent share in total power generation planned under the CPEC using all the energy resources.
World-over, hydropower is considered a source of major electricity production, as it is renewable, sustainable, clean and environmental-friendly, besides many other economic and social benefits. Hydropower generation cost, which remains at constant rate, is less than electricity produced from fossil fuels like gas, coal and oil. It is therefore unfortunate that hydropower projects could not be given priority in real terms, and instead, coal-based power plants, mostly using imported coal, are being implemented on fast track under the CPEC programme. It is ironical that China itself has abandoned major coal-fired power stations since it is one of the dirtiest forms of electricity. Furthermore, China has recently cancelled construction of new 103 coal-based projects of combined capacity of 54,000MW, which were planned, including those on which construction had already started. Currently, hydropower is the second-largest resource for power generation in China.
Also, hydropower projects are somehow excluded from the CPEC priority list, though these were initiated in 2005 under the Policy for Power Generation Projects 2002. Indeed, the hydropower projects have long gestation period and involve geo-hydrological and other risks. But, in this case the projects had achieved many milestones already, and the forthcoming Chinese foreign direct investment (FDI) is brownfield investment and not greenfield investment. Letter of Interest (LOI) for the raw-site Suki Kinari project was issued by the Private Power and Infrastructure Board (PPIB) in November 2005 through international competitive bidding.
It is being developed on Build-Own-Operate-Transfer (BOOT) basis by SK Hydro (Private) Ltd, on 25:75 equity/debt, its main sponsors are Aljomaih Holding Co of Saudi Arabia; the others being Eden Inc Berhad of Malaysia and China Gezhouba Group, besides Pakistani investors. On completion, the power station will generate average net 3,048GWh energy annually at Cents 8.8415/kWh for 30-year term.
The other ongoing hydropower project being developed in Pakistan under the CPEC framework is 720MW Karot Hydropower in Azad Jammu and Kashmir, targeted for commissioning in 2020. It has an installed capacity of 720MW (4x180MW) with an average net output of 3,174GWh annually.
The project is being developed by Karot Power Co, with China Three Gorges South Asia Investment as the main sponsor, whereas a consortium of Yangtze Three Gorges Technology and Economy Development Co (TGDC) and China Machinery Engineering Corp (CMEC) is the EPC contractor. The project is being developed on 20:80 basis, and debt amounting to 80 percent of total project cost is being financed by the Chinese banks on commercial terms. Project is estimated to cost $1.698 billion, whereas its lenders are China Development Bank, ICBC and Silk Road Fund. Land for the project has been acquired, while the financial close, earlier scheduled in August 2016, is still under process. The National Electric Power Regulatory Authority (Nepra) has allowed a 30-years’ levelised tariff of Cents 7.5746 per unit.
All project debt financed by the Chinese banks is subject to SINOSURE Fee. China Export and Credit Insurance Corporation (SINOSURE) is the official export credit insurance agency, and all projects executed using Chinese funds require that they be insured using this agency. Thus, total project cost of the two hydropower projects is overburdened with additional cost of overseas investment insurance on debt, at 0.75 percent to 1.5 perent per annum, which works out to $94.585 million in case of Suki Kinari project and $59.2203 million in case of Karot Hydropower.
The sponsors of both the projects had also asked for SINOSURE Fee on equity portion as well, which was not allowed by Nepra.
Likewise, the projects sponsors had asked for 20 percent return on equity (ROE) based on IRR (internal rate of return), but were allowed 17 percent as per policy. Among the six power projects being implemented in the second phase, there is only one hydropower project—1,124MW Kohala. The project is being developed on Jhelum River in AJK on BOOT basis by China International Water and Electric Co (now China Three Gorges Corp has replaced the main sponsor) for which LOI was issued by PPIB in 2009 and letter of support (LOS) in 2015. The project with an estimated cost of $2.4 billion is expected to achieve commercial operations in 2023-24.
In the wake of release of funds for various projects being implemented under the $46 billion CPEC framework, China has emerged as the largest bilateral donor of Pakistan during July-December 2016 period. Nonetheless, it is not yet certain whether all the CPEC-related inflow amounts are in the shape of investments or loans to Pakistan. On the other hand, Pakistan government has provided Rs28 billion against the budgeted allocation of Rs130 billion for the financial year 2016-17.
The writer is ex-chairman of the State Engineering Corporation
