We commented last week on Refinitiv’s latest report on aggregate numbers for China’s Belt & Road Initiative. Now comes news from Islamabad that a Prime Ministerial committee has accused two IPPs built and financed under the China Pakistan Economic Corridor of overcharging for power sold to the state. The committee considers that set-up costs of $204 million and “misrepresentation” of interest add up to some $3 billion of overcharging over the life of the two 30 – year PPAs.
Sahiwal is a 2 x 660 MW supercritical coal-fired power plant, Pakistan’s first, in Punjab province. The coal is imported via Port Qasim, 1,000 km away; cooling water comes from a nearby canal. Commercial operations began in 2017. It is owned 51% by China Huaneng, a major SOE, and 49% by Shandong Ruyi (a textile company – how did they get here?) with debt led by ICBC. As you would expect, the various contractors and operators are all Chinese.
Port Qasim is also the location for the second 2 x 660 MW supercritical coal-fired power plant, outside Karachi in Sindh province. This time, the imported coal and cooling seawater are adjacent. Commercial operations began in 2018. Ownership is 51% China’s Power Construction Co and 49% al – Mirqab (not to be confused with the superyacht of the same name, also owned by Qatar’s Sheikh Hamad bin Jassim bin Jabr Al Thani). Debt was led by ChEXIM. The various contractors and operators again are all Chinese.
Information is patchy and no one who knows is talking which leaves the rest of us to speculate but this is what we can say:
In terms of structure, these two look pretty standard BOT contracts which were negotiated before BRI was launched so rebranded as part of its “Early Harvest” program. CPEC has long been the biggest and baddest of BRI projects, however, fuelled by allegations of overcharging, bribery and corruption, low standards of ESG and other colour.
Were set up costs unreasonable? Prima facie, this is not the government’s problem. Sahiwal quotes the price at which it sells its power as 8.36 US cents / kWh, PQ as 8.12 US cents / kWh. We don’t know whether these figures are averages, inflation – linked, etc but WAPDA, the SOE offtaker from both plants, will know. Thus, it can test for reasonableness by comparing these prices to the prices of the 40 or so other IPPs which are up and running in Pakistan. This will involve adjusting for differing technologies, fuel supply chains, risk structures and more but Pakistan has been using IPP structures since HubCo back in 1997. (This wouldn’t work if all of them had inflated their costs, I guess …).
Were interest rates too high? China does not pretend to offer concessionary rates. Interest rates are just one element of the engineering / financing package offered by China, to be compared to those packages offered by other countries. Pakistan needed to choose one / none of them (a complex process which Logie Group can assist with).
Was there bribery and corruption involved? Was this so significant and so immediate (i.e. don’t worry if it is between subcontractors) as to affect the price paid for the power being sold? We couldn’t possibly say.
So, expect more of this on CPEC. China will probably agree to reschedule debt terms somehow. Sadly, we will probably never learn quite how.
