ISLAMABAD: Dissatisfied with the tariff approved by the regulator, the government on Wednesday allowed blanket exemption from withholding tax on dividends to $1.5 billion Matiari-Lahore Transmission Line Project to be built by a Chinese firm under the China-Pakistan Economic Corridor (CPEC).

The government had earlier asked the National Electric Power Regulatory Authority (Nepra) to allow withholding tax on dividends to the 878-kilometre transmission line as a pass-through item in the tariff to ensure guaranteed 17 per cent return on equity to China Electric Power Equipment Technology Company (CET).

Nepra did not oblige while citing a lack of precedent. The government last week authorised the Private Power and Infrastructure Board (PPIB) to issue a formal letter of interest (LoI) to a Chinese company for the transmission line considered crucial to transport more than 4,000 megawatts of electricity from Thar, Port Qasim and Hub.

In contrast, a Nepra official said the regulator had not submitted any proposal to the ECC on the subject and had in fact twice declined the pass-through in the tariff while issuing tariff determinations for the transmission line. Nepra, however, understood that the government had the executive authority to grant tax exemptions.

Documents seen by Dawn suggest the Ministry of Water and Power submitted a two-paragraph summary to the ECC. It said the ECC had directed the water and power secretary to examine the issue holistically in consultation with the finance secretary and revenue board chairman and resubmit the case for a policy decision.

The three stakeholders met on Feb 16 and recommended the ECC might allow exemption from withholding tax on dividends to transmission line projects under Transmission Policy 2015.

In the absence of this exemption, the government believed the Chinese firm might not materialise the project.

The government had earlier requested Nepra to allow the withholding tax on dividend as a pass-through item as had been committed by the power ministry under the transmission service agreement with CET. Nepra wrote that in the recent tariff determinations it had not allowed the withholding tax on dividends as a pass-through item and hence it would remain consistent in its decision.

The regulator also asserted that globally the risk profile of the transmission line was considered more similar to that of a distribution business. Presently, equity returns are being allowed to distribution companies at 16.6pc. Even then, Nepra “decided to allow a 17pc return considering this project is the first high-voltage direct current (HVDC) transmission line venture in Pakistan and can be allowed a return slightly above the return offered to already running setup of DISCOs”.

The regulator also said the return on equity (ROE) and return on equity during construction (ROEDC) will be adjusted at the commercial operation date on the basis of actual equity injections during the approved project construction period.

In a review petition, the government again requested to allow withholding tax on dividends as pass-through without any caps. It said the withholding tax rate for the transmission line project is 12.5pc compared to 7.5pc for other projects, which will consequently have a bigger impact on the equity internal rate of return (IRR) for the developers. The government submitted that if withholding tax on dividends is not allowed, the guaranteed IRR by the government of Pakistan to CET will not be 17pc as agreed in the Cooperation Agreement.

The regulator, however, held that the return of 17pc stood allowed whereas the withholding tax on dividends was the individual liability of shareholders on profits earned by them. Therefore, there was no justification for burdening this cost to end-consumers. Also, it had already taken a principle decision through its recent upfront tariff and cost plus determinations in the matter of 747MW Guddu Power Project, small hydropower projects, solar projects and, hence, would stick to its determination.

The ECC also approved the allocation of $25 million equivalent of funds for the National Disaster Risk Management Fund (NDRMF). The Economic Affairs Division (EAD) has set up the fund to have a government-owned sustainable mechanism to support disaster risk financing instruments that can enhance the country’s resilience to natural calamities.

The Asian Development Bank (ADB) has shown an indicative assistance of $1.2bn as loan for this fund. The EAD and ADB had signed a loan agreement for $200 million in December 2016 as the first tranche against the total amount.

The ECC also approved a grant of Rs12m as equity share of the government of Pakistan to clear liabilities and financial obligations to facilitate the wind-up process of Pakistan Textile City Limited.

Published in Dawn, February 23rd, 2017