ISLAMABAD: The government has declared financial close worth $1.9 billion of a 1,320MW coal-based power project near Karachi without completing prerequisites which may expose the nation to massive liabilities.

This is the first major project under the $46bn China-Pakistan Economic Corridor (CPEC) to have achieved financial close. The plan for the project has been put together by Saifur Rahman, a former chairman of the Ehtesab Bureau and close aide to Prime Minister Nawaz Sharif. The PM laid the foundation stone of the project in April last year.

Mr Rahman himself supervised the ceremony held to mark the financial close of the project jointly sponsored by the Sinohydro Resources Limited of China and Al-Mirqab Capital of Qatar. The Chinese Exim Bank is providing $1.9bn financing for the project.

Know more: $1.9bn power project at PQ achieves financial close

Sources told Dawn that in haste to show the results, the Private Power and Infrastructure Board (PPIB) approved and announced on Dec 22 the financial close in the absence of a Direct Lenders Agreement and legally trustworthy land acquisition.

The implementation agreement (IA) for the project was signed by the sponsors and the government in April last year.

Legally speaking, all clauses of the IA do not come into force at once. Before the approval of the financial close, most responsibilities and liabilities, like those relating to the financing plan, signing of a series of documents, arrangement of water, roads and other infrastructure, land acquisition and start of construction work, rest with the sponsors.

The PPIB has not only approved the financial close but a sovereign guarantee has also been executed even though controversies still remain over the transfer of land title to the project company. In fact, the land issue has pitted the federal authorities against the Sindh government.

While the PPIB, in a written response, claimed that the obligation of land acquisition was “in full force and effective”, the Port Qasim Authority said it had allocated land to the project but it had not been registered with the registrar’s office because of opposition by the Sindh government.

That means that if the land dispute remains unsettled or goes into litigation the project sponsor would be entitled to claim damages for investment loss from the government through international arbitration.

Secondly, the PPIB has not been able to execute Direct Lenders Agreement — a central legal document linking sponsors, lenders and the government in a financial arrangement. Legally speaking, the government of Pakistan does not know who is lending such a huge amount at what terms.

When contacted, Barrister Asghar Khan, who has been involved in finalisation of documents on behalf of the government as head of the PPIB’s legal department, said that “without signing the Direct Lenders Agreement at the time of Financial Closing, acknowledgment of the Lenders and the Financing Documents does not take place”.

Resultantly, financial liabilities and obligations of the government are not locked and there is no legally binding undertaking by the lenders to that effect and release of liens, transfer of power plant and discharge of liabilities in the event of payment by the government is not assured, he said.

On behalf of the water and power ministry, the PPIB confirmed in writing that land acquisition was an obligation of the project company and claimed that “this obligation is in full force and effect and accordingly the company after taking possession of the land has started construction”.

The PPIB said it was not aware of any probe by the National Accountability Bureau over the land acquisition by sponsors from Port Qasim. It also confirmed that “Direct Agreement is a comfort to the Lenders by the GOP as per the customary practices of such transactions, but the lenders did not require execution of such agreement for the financial close”. It said the financial close has been notified after completion of the prerequisite under the IA” and in line with earlier precedents.

Chairman of the Port Qasim Authority Agha Jan Akhtar said the authority had issued an “indenture to lease” for the land to the project sponsors three to four months ago but the sub-registrar had not registered/verified the deed on the orders of the Sindh government.

He said the Sindh government had in the past issued statutory regulatory orders (SROs 73 and 74) to identify this land under the sea and then give it to the PQA because such lands then belonged to the federation and never raised any objection.

He said the authority had committed in writing to the provincial government that the PQA would transfer all funds collected against the land cost to it if at any stage the project land is proven to be its asset.

He said the Chinese Exim Bank had shown leniency for the project and had already released $200 million as the first tranche.

He said the land had been given to project company at Rs2.5m per acre and he had given a detailed briefing to the NAB. The project company would have to spend around $200m in dredging, effectively increasing its cost beyond Rs8m per acre.

Published in Dawn, January 11th, 2016