ISLAMABAD: The government allowed on Tuesday unparalleled tax breaks to a $2.1 billion power transmission line being executed by Chinese contractors and approved a Rs193bn financing arrangement to meet liabilities of the power sector.

These decisions were taken at a hurriedly called meeting of the Economic Coordination Committee (ECC) of the Cabinet presided over by Finance Minister Ishaq Dar.

Sources said the execution of the 878-kilometre Matiari-Lahore transmission line project worth about $2.1 billion was facing troubles because of differences among stakeholders over taxation issues and the revolving fund for payments to Chinese contractors. The Federal Board of Revenue (FBR) was insisting on higher taxes under the existing tax laws while the power ministry demanded lower rates.

As a result, Mr Dar did not approve the power ministry’s request for tax breaks at the last ECC meeting held on July 18. He had directed the water and power secretary to get back to the ECC with a consensus after reviewing the Standard Implementation Agreement (SIA) for private-sector transmission lines and project-specific Transmission Services Agreement (TSA) in consultation with the heads of the law ministry, FBR and power regulator.

ECC okays Rs193bn financing arrangement to meet power sector liabilities

To address the reservations of various stakeholders, the ECC approved the power ministry’s request after a series of meetings to modify the SIA under the policy framework for Private Sector Transmission Lines 2015. The sources said the consensus could not be achieved as was evident from a disclaimer in the summary. “National Electric Regulatory Authority (Nepra) also endorsed the terms and conditions as stipulated in SIAs and TSAs to be signed with international transmission companies (ITCs) subject to commitment that these should be consistent to Nepra tariff determinations and special-purpose transmission licence terms,” it said.

Nevertheless, the ECC approved modifications that, as per Transmission Line Policy 2015, the ITC is liable to withhold and pay to the government as full and final income tax liability of its contractors at the rate of 6.5 per cent and 7pc tax, respectively, from corporate and non-corporate contractors. However, present applicable tax rates under Income Tax Ordinance 2001 have been increased. “It was agreed between the FBR and the power ministry that rates of withholding tax for corporate and non-corporate shall be applicable as per ITO 2001.”

Secondly, the power ministry demanded that the reduced customs duty of 5pc on local manufacturing shall not be applicable for a period of three years on the import of machinery and equipment and other capital goods worth $50m for a new transmission line project. The ECC also instructed the FBR to implement this requirement.

Thirdly, the power ministry also desired that sales tax on the import of machinery, equipment and other capital goods, if not exempted under the sixth schedule of the Sales Tax Act of 1990, shall be charged at the rate of 5pc and be non-adjustable/non-refundable. The FBR was ordered to issue an appropriate statutory regulatory order (SRO) to give effect to this demand of the power ministry.

China Electric Power Equipment and Technology Company (CET) is the contractor for the 660kV high-voltage direct current (HVDC) Matiari-Lahore transmission line project that is crucially important to transport more than 4,000 megawatts of electricity from Thar, Port Qasim and Hub to Punjab load centres.

The Private Power and Infrastructure Board (PPIB) had prepared a standard draft implementation agreement whereas National Transmission and Despatch Company (NTDC) prepared a project-specific TSA keeping in view the unique circumstances of a China-Pakistan Economic Corridor (CPEC) project where NTDC had agreed to carry out operation and maintenance services as the project sponsor, CET, declined to undertake these services due to security concerns.

The ECC also authorised PPIB and NTDC to make any amendments to the approved SIA and project-specific TSA to comply with Nepra’s requirements.

LOANS: The meeting also approved the issuance of sovereign guarantees by the Ministry of Finance in respect of Fresh Syndicated Term Finance Facilities for four different loans of Rs30.95bn, Rs40bn, Rs25bn and Rs15bn for Power Holding (Private) Ltd acquired in 2014-15 to set off or adjust existing facilities for various distribution companies.

The finance ministry will be responsible for the repayment of loan and interests while the principal instalment payments would be deferred for two years.

The ECC also approved the extension of tenor and grace period in respect of the Term Finance Facility of Rs82bn for Power Holding (Private) Ltd. The existing Term Finance Facility for the company will also be restructured by extending the tenor of the facility from seven years to 10 years, including extension in the grace period from three years to six years.

Fresh facilities have already been arranged with the banking sector after the power distribution companies expressed their inability to pay loans due to financial constraints.

Published in Dawn, July 26th, 2017