CPEC facing teething problems

Published October 26, 2015
Problems are coming to light, requiring a lot of legal and procedural clarifications and adjustments.—Planning Commission of Pakistan
Problems are coming to light, requiring a lot of legal and procedural clarifications and adjustments.—Planning Commission of Pakistan

Now that the initial euphoria of ‘higher than the Himalayas and deeper than the deepest sea’ is over, the $45bn China-Pakistan Economic Corridor is beginning to hit the ground realities.

As is expected of such a major initiative, some teething problems are coming to light, requiring a lot of legal and procedural clarifications and adjustments. Most of these seem to be exposing the general lack of preparedness and casual handling of projects that has be­come the hallmark of our bureaucratic culture.

Also read: CPEC to benefit entire region, say analysts

This has resulted in repeated project delays, cost overruns and unquantifiable lost economic opportunities. Cost rationalisation, according to Planning Minister Ahsan Iqbal, had alone created a Rs490bn cushion in the last fiscal year.

Pakistan has been struggling to convince Chinese authorities to accept around a 10pc cost overrun for the $1.5bn Lahore Orange Line Metro Train even though the project has yet to take off

While dealing with external players, such lethargy and poor project handling can have exponential costs. Pakistan has been paying substantial commitment charges without utilising loans from development lenders every year and this has to be taken care of on an urgent basis.

Following the 6,600MW Gadani Power Park debacle arising out of a half-baked plan, the two sides seem to have learnt the lesson to take up ‘early harvest’ projects that are ready to take off immediately and could be expected to deliver results before the PML-N goes into the next polls with a success story on having reduced the power shortfall.

Focal persons are now being appointed in all the ministries and agencies concerned with the CPEC to expeditiously process any hitches and glitches.

Meanwhile, a mega coal-based project previously being pushed for Sahiwal is reported to have faced financing problems because of the infrastructure requi­red for transporting coal. It has now been replaced, at least on paper, with two sma­ller coal power projects at Thar and Hub to compensate for Sahiwal’s lost capacity.

Pakistan has recently been struggling to convince Chinese authorities to acc­ept around a 10pc cost overrun for the $1.5bn Lahore Orange Line Metro Train even though the project has yet to take off.

The Chinese Exim Bank was insisting on a loan agreement of $1.48bn to be signed with the Punjab government as originally discussed, but Pakistani authorities want this to be increased by another $147m to meet contingencies that arise during the project’s implementation.

The local authorities have to be blamed for originally negotiating the project for $1.48bn with the Chinese before getting the cost escalated to $1.63bn through the Executive Committee of the National Council. Unless an arrangement for the ‘additional requirement’ is made, the project cannot achieve financial close. The financing cost of the 27km Rs165.2bn project is also reported to be on the higher side despite it being in the ‘concessional category’.

On top of these, the Chinese have sought tax exemptions on insurance and financing on almost all CPEC projects.

At the heart of the problem is the IMF’s condition under which the government has withdrawn the powers of the taxation authorities to grant exemptions through statutory regulatory orders.

At present, no tax exemption is permissible on insurance premiums paid to non-resident companies because only a low rate of 5pc is applicable, while all CPEC projects are mostly covered by the state-owned Chinese firm Sinosure. The Chinese authorities want the insurance premiums paid to Sinosure to be exempted from the income tax.

The tax authorities have, however, made arrangements with focal persons for a speedy processing of issues related to customs and other taxes to avoid problems at the field formations to facilitate Chinese contractors.

The Chinese contractors are also seeking input tax adjustments to process Thar coal, though initially only for the Engro coal project. Under existing law, input-tax adjustment is not permissible for local coal and an exemption could only be secured through a special decision of the Economic Coordination Committee (ECC) of the cabinet, subject to a subsequent act of parliament.

To certify power-plant machinery and equipment beyond 25MW, the tax authorities require the Engineering Development Board to issue capacity certificates despite the fact that the EDB has clearly stated that it is not a certification agency and it cannot oblige.

The CPEC-related companies are also seeking tax exemptions on the dividend income of their shareholders even though this facility is not available under the existing law for coal mining and coal-based power projects.

Another relief being sought by the Chinese is the exemption from sales tax on vehicles imported for use on project sites. These vehicles are exempt from customs duty but not from sales tax under the existing law. All of these issues may have to be initially decided by the ECC on the premise of ‘emergency situation or prior foreign commitment,’ and then subsequently confirmed by parliament through the finance bill or a separate act.

The issue of income tax on interest payments to the Industrial and Comm­ercial Bank of China appears to have been resolved for coal-based energy projects, provided the two governments are able to sign a third protocol under a treaty for the avoidance of double taxation.

The tax authorities in Islamabad and Beijing are reported to be in the final phase of talks on this protocol to facilitate the CPEC projects. The prime minister has reportedly given a go ahead.

Meanwhile, the power sector authorities are also pushing for speedy notifications to give legal cover to the fiscal incentives announced for the transmission projects.

Published in Dawn, Business & Finance weekly, October 26th , 2015

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