China keeps on ignoring Pakistan’s pleas to renegotiate power agreements

INTERNATIONAL DESK: The power sector of Pakistan continues to crumble under the ever increasing burden of Chinese debt. Islamabad attributes the mountainous debt to the faulty power purchase agreements (PPAs) it signed with the Chinese companies. According to recent estimates in Pak media, the country owes PKR 350 billion (around $1.27 billion) to the Chinese independent power producers (IPPs) and the liability has become a sore point in the bilateral relations. Further, the issue is being regularly raised in Pakistan’s negotiations with multilateral lenders, casting a shadow over the fiscal health of the country. The liability and its potential impact on state finances has also been a contentious domestic political issue.

In 2020, a ‘leaked’ report of an internal committee formed by the Pak government had exposed the exploitative nature of power sector deals and lack of transparency under CPEC. The report indicated gross irregularities and profiteering in power projects including Huaneng Shangdong Ruyi Energy (HSR) and the Port Qasim Electric Power Company Ltd (PQEPCL). According to the report, the projects have common inherent problem of very high rates of return on investment assured to the Chinese companies. Moreover, the burgeoning capacity payments which are fixed and indexed to exchange rate, inflation and interest rate add to the circular debt. Apparently acting on the report, Pak government pushed for renegotiating the tariffs under existing power purchase agreements. However, the attempt led to adversely impacting foreign investor’s confidence apart from concerns about the long-term contract sanctity in the country. Beijing also seemed irked by the Pak assurances to the IMF of trying to receive concessions from the CPEC power plants either through reduction in the profit rates on investment or by rescheduling the loan repayments.

Meanwhile, non-clearance of their dues by Pakistan is making Chinese power sector investors jittery with many of them accusing Islamabad of breaching provisions of the agreements. The investors complain that huge amount of arrears, coupled with the continuous depreciation of the Pakistani currency has significantly reduced the nominal returns on their investments. More than ten Chinese investors in power projects have established an

sssociation called ‘Energy Enterprise Association (EEA)’ on the pattern of lPPs to raise their issues. Notably, the IPP association has 39 power producers as its members.

Unmoved by repeated Pak requests, the Chinese power producers were recently reported to have refused to renegotiate the PPAs. The massive pile up of dues has also made the Chinese state-owned insurance company, Sinosure reluctant to extend insurance coverage to any new power project. The company has also sent a ‘displeasure’ letter to Islamabad after emergence of ‘rumours’ that the Pak government is urging Chinese IPPs to renegotiate “expensive PPAs.” The development comes after some reports that the sponsors of the projects had not entertained Pak Power Division’s informally requests for renegotiating the PPAs. Unconfirmed media reports further suggest that a committee is being constituted to deal with this issue. According to some sources quoted in media, caretaker Prime Minister, Anwar-ul-Haq who is visiting China for attending BRI summit 2023, had sought status update on payment to the IPPs. The Pak PM is believed to be trying to apprise Chinese leadership regarding huge increase in capacity payments under power projects.

Just before the current activity in Islamabad around the power dues, the issue also figured in a meeting of the Minister for Planning, Development and Special Initiatives on CPEC energy projects held on October 10, 2023. The topics discussed included revolving account and overdue payment for CPEC IPPs and Sinosure’s clearance for power projects. Pakistan’s frantic efforts withstanding, the lingering issue is hampering the prospects of further Chinese investments in the power sector. Reluctance of Sinosure in extending guarantees has complicated the problem further. Islamabad now seems struggling in simultaneously addressing the concerns of Chinese IPPs, multilateral lenders and domestic power consumers. With the stance of Chinese agencies against Pak requests for concession getting firmer, the situation is not likely to improve in the near future. (TSP)