The US has intensified its war against China in Pakistan. The target is to derail CPEC and create misunderstandings between China and Pakistan.
Assistant Secretary of State for South and Central Asian Affairs Alice Wells was deputed for this task and shed past sarcastic remarks on several occasions. A new addition is Ex-Pakistani Ambassador Hussain Haqqani, who is known well in Pakistan for his anti-Pakistan sentiments. He has been harming Pakistan’s national interests on and off. According to one of his recent articles dated May 18th, 2020, in The Diplomat:
(i) Excess set-up costs of Rs. 32.46 billion was allowed to the two coal-based Chinese plants due to misrepresentation by sponsors regarding the ‘Interest During Construction’ (IDC).
According to a source, HSR clearly provided in the tariff petition that its construction period was around 27 months instead of 48 months, as assumed in the Upfront Tariff 2014. The company applied for this because the provisions of the Upfront Tariff 2014 itself clearly provided that interest during construction was supposed to be calculated based on a pre-defined disbursement plan by NEPRA instead of actual disbursement plan. NEPRA approved interest during construction based on the provisions of Upfront Tariff 2014. Therefore, there was no misrepresentation ever made from HSR’s side concerning either the construction period or interest during construction.
(ii) IDC shall not be adjusted for any variation on account of actual expenditure percentage during the construction period.
As per the clause above of NEPRA Upfront Tariff 2014, IDC was never supposed to be adjusted based on the actual and entire benefit of early commissioning that was to accrue to the project sponsors.
Here we believe that NEPRA set the 48-month construction period as standard based on its investigation that the worldwide average level is normal practice. Furthermore, the 27-29-month completion period created the record, which was even shorter than the same size project in China. Unfortunately, nobody cares about the huge effort done by the sponsor, the huge risky initial sponsored guaranteed bridge loans which cover almost 60% of total project cost involved before financing closed, the more than 3,000 thousand workers continually working 24/7 each week (who were even considered as Chinese prisoners in the beginning by the media), or some key material and equipment that was used to reduce the time and cost of the project. They also don’t care that its mission was to diminish the more than 10 hours of blackouts in the major load centers of the country and revive Pakistani industries. To determine the economic impact of early commissioning, it may be noted that liquidated damages for late commissioning are typically calculated by CPPA-G based on USD 2.5 per kW per month. Considering such a rate is unilaterally applied to all power projects by CPPA-G despite their availability factor and given that HSR has amongst the highest availability factor, economic benefits to the economy of Pakistan due to early commissioning can be said to be around USD 100 million (USD 2.5 x 1,243,517 kW x 21 months x 1.5) as a bare minimum. Whether the country can maximize the benefits of such availability of power is up to the economic policies of the government.
(ii) Entitlement of an excess Return on Equity (ROE) of $27.4 million annually, over the entire project life of 30 years in the case of the Sahiwal plant.
A higher imputed IDC approved by NEPRA in contrast to actual IDC has been used as the basis for calculating annual excess ROE of USD 27.4 million.
Apparently, this gap has been based on the understanding that excess project cost has been allowed by NEPRA for HSR of Rs. 13.16 billion, the majority of which relates to IDC. According to a source, although the company actually saved on account of IDC, its overall project cost was almost equal to the project cost approved by NEPRA, and the Committee Report misrepresented the financial numbers related to actual project cost of HSR. It has been told that the Committee Report only considered fixed assets capitalized under the “property, plant, and equipment” head of the balance sheet while completely ignoring the costs related to land, Sinosure fee, financing fees and charges, customs duties and taxes, etc. capitalized in other heads of the balance sheet, which amounts to around Rs. 20 billion in cost. This alone seals the false analysis prepared against HSR in the Committee Report.
(iii) The estimated excess payment, keeping in mind the 6 percent annual rupee depreciation against the dollar, works out to a whopping Rs—291.04 billion (approximately $1.8 billion).
The claim of excess payment of Rs. 291.04 billion does not hold anymore when it is established that the actual project cost approved by NEPRA is not more than the project cost incurred by HSR, as explained above.
Moreover, it is highly unfortunate that whenever the government officials feel necessary to justify their claims, they make unrealistic assumptions or continue to accept that Pakistan will continue to remain a faltering state by using weak long-term economic assumptions. In this case, the Committee Report has assumed that the rupee will depreciate from the current Rs. 150-160 per USD to a whopping Rs. 900 per USD in 2046! By way of such an assumption, the company has magnified the number from Rs. 123 billion to Rs. 291 billion.
HSR, amongst other IPPs, is facing a plethora of issues that escalate the risks for the investor. IPPs suffer on account of fuel price adjustment disputes, O&M cost deficit, disapprovals by NEPRA on account of payments made to government institutions (Pakistan Railways, Port Qasim Authority, Customs Office, etc.), excessive delays in payments to IPPs, massive loss due to devaluation of rupee, etc. Such issues seriously erode the earning potential of power projects and undermine the guarantees promised by the government of Pakistan in power policies and tariff documents.
Whatever the motive is of the prevailing media trial against independent power producers, it must be reminded that capital markets never forgive such mistakes. Foreign investors consider Pakistan as a high-risk and broken country to invest in. China has sought to correct this image by promising to invest billions of dollars in Pakistan through CPEC; this is a shut-up call to Western project financiers who are unwilling to invest in Pakistan or contribute towards its development.
There may be some short-term respite found if the independent power producers are generous enough to forgive the government for their foolishness. Electricity cost in the last 2-3 years has risen sharply, primarily due to a higher fuel price, higher interest rate, exchange rate devaluation, under collection by DISCOs from consumers, high transmission losses and cost, and continuance of highly inefficient and expensive GENCOs operated by the government rather than factors attributable to IPPs.
Despite the above grave issues engulfing the power sector of Pakistan on account of the government’s inefficiencies, the media trial has been skewed towards maligning the IPPs. Therefore, it must be made clear who is at fault rather than strong-arming IPPs by conducting a media trial of them. Pakistan will only lose investor confidence and may do so rather permanently this time.
Despite the intensive attacks by the US or India, the relations between China and Pakistan are unchanged. The nature and depth of our relationships are beyond the understanding of others. We are “Iron Brothers,” a unique term used for China-Pakistan relations.
DISCLAIMER: The views and opinions expressed in this story are those of the authors and do not necessarily reflect the official policy of Insider Paper.
