THE Economic Coordination Committee (ECC) of the cabinet cleared last week the revised documents — implementation agreement, government guarantee, power purchase agreement, water use agreement and tripartite agreement — of three major hydropower projects involving a total generation capacity of about 2,460 megawatts with an estimated Chinese investment of almost $5 billion.
The formal agreement for the biggest of the three — 1,124MW Kohala hydropower project worth $2.4bn — was signed the same day in the evening. Prime Minister Imran Khan witnessed the signing ceremony.
Two of them with 1,824MW capacity and $3.76bn investment — 1,124MW Kohala and 700MW Azad Pattan projects — are part of the multi-billion-dollar China-Pakistan Economic Corridor (CPEC) Energy Project Cooperation agreement signed on Nov 8, 2014 for ‘early implementation’. Both these projects have binding letters of support (LoS) from the Private Power and Infrastructure Board (PPIB) of the Power Division and are targeted for completion in June 2026.
Another 640MW project of almost $1.3bn estimated investment is equally important but not part of CPEC. The PPIB has issued the letter of interest to the Chinese consortium while the LoS is currently under process. The project is targeted for completion in June 2028.
All three projects are on the Jhelum River, downstream of the 969MW Neelum-Jhelum project now in full operation and upstream of the Mangla dam. All three are being developed on a built, own, operate and transfer basis by the PPIB and are expected to have a positive impact on the energy mix and the tariff basket.
The ECC has been resisting special relaxations, like the exchange rate risk, demanded by the sponsors of Kohala and Azad Pattan projects
The Kohala project will be located on the Jhelum River in Azad Jammu and Kashmir (AJK). It is being developed by Kohala Hydropower Company with China Three Gorges Corporation (CTG), International Finance Corporation of the World Bank and Silk Road Fund. The project’s average 30-year tariff is estimated at 7.85 cents per unit with a total project cost of $2.4bn.
Likewise, the Azad Pattan project will also be located on the Jhelum River on the dual boundary of AJK and Punjab. It is being developed by Azad Pattan Power Ltd with China Gezhouba Group Company Ltd as sponsor. The 30-year tariff for this project is estimated at 7.07 cents per unit, with the project cost of $1.35bn.
The third project — Mahl Hydropower — will also be located on the Jhelum River on the combined boundary of AJK, Punjab and Khyber Pakhtunkhwa. The project is being developed by Mahl Power Company Ltd with CTG and Trans Tech Pakistan.
The ECC has been resisting certain special comforts, particularly the exchange rate risk given a steep devaluation in the last two years, demanded by the sponsors of Kohala and Azad Pattan projects. For example, the ECC decided in October 2019 that “it was not possible for the government to afford any special treatment to an independent power producer (IPP), which will create discrimination. Therefore, all IPPs whose agreements are being finalised will be given the same treatment with respect to the foreign exchange loss or gain arising due to delayed payment by the power purchaser and the delayed payment rate under the power purchase agreement and implementation agreement”.
However, the ECC had agreed in October 2019 that in the power projects being processed under the 2002 power generation policy, including Kohala, which are yet to achieve financial close, the Chinese yuan (renminbi) will be traded as specified foreign currency similar to other specified foreign currencies such as the dollar, euro, pound sterling and yen. Such treatment permits IPPs to arrange financing and making repayments of principal and interest to foreign lenders in the renminbi. Further, indexation in tariff payment with the renminbi similar to the indexation mechanism applicable with respect to the dollar will also be allowed.
The parties kept pressing. The ECC, therefore, gave in on April 8 this year and approved the foreign exchange loss/gain at the rate of 7pc to be absorbed by Kohala Hydropower Company and delayed payment at the rate of 2pc without compounding, which was accepted by the Chinese firms.
In 2018, the Kohala project consortium mobilised an engineering, procurement, construction (EPC) contractor with about 80 Chinese and 200 Pakistani skilled workers and about 150 heaving machines on site for preliminary works. However, the work came to a halt following the environmental issues raised by the AJK government over the anticipated drying up of some parts of the river after the Neelum-Jhelum project. The contractor was demobilised.
Those issues now stand settled and approved by the ECC and the AJK cabinet. A tripartite power purchase agreement (TPPA) was thus formally signed on June 26 by Kohala Hydropower Company and the governments of Pakistan and AJK. AJK will also make necessary amendments to the Arbitration Act of 1940 in the manner to recognise, enforce and execute foreign arbitral awards by the AJK courts.
All these developments took place in a hectic manner at various levels of the government and forums like the cabinet committee on energy and the ECC over the last few days. This was despite the fact that Prime Minister Imran Khan had ordered the immediate finalisation and signing of the TPPA in June 2019. The formalities also have to be completed for the execution of the Azad Pattan project before June 30 in view of the timelines under the commercial code and competitive bilateral contract.
There are still some loose ends. As per the directions of the cabinet committee on energy a few days ago, in case of any modifications agreed under the CPEC framework with the government of China, it will also be applicable to Kohala and Azad Pattan projects. Pakistan has taken up at the highest level certain relaxations in the rate of interest and the loan repayment period after the recent controversy over unfavourable arrangements in the power sector in general, resulting partly to the unmanageable circular debt.
While the matters of public-sector power projects and IPPs — local, Chinese and other foreign — are dealt at three different levels for discounts after an investigation committee led by a former chairman of the corporate sector regulator, the official publication of its findings highlighting over Rs5.7 trillion excess payments was halted at the last moment despite the cabinet’s formal approval and announcement. The investigation had highlighted about Rs485bn undue and unreasonable benefits over 30 years to two Chinese CPEC projects — Rs377bn to Sahiwal and Rs107bn to Port Qasim coal projects.
Published in Dawn, The Business and Finance Weekly, June 29th, 2020