As Pakistan’s Energy Crisis Worsens, Have Chinese Investments Failed Islamabad?

Successive official reports on Pakistan’s power sector indicate that the country suffers from a shortage of power generation, transmission losses, lack of planning and inappropriate policies leading to an escalating energy crisis. This power crisis in Pakistan is the direct result of massive institutional and governance failure in the form of reckless energy policies over the last three decades.

This begs an answer to the question: what has been the impact of the investments from the China-Pakistan Economic Corridor (CPEC), with its much-touted power projects, on the energy crisis?

Circular debt, higher transmission losses and inefficiency of power firms afflict Pakistan’s power sector, according to the leaked government-mandated report of Pakistan’s National Electric Power Regulatory Authority (NEPRA).

In December 2019, Pakistan’s NEPRA determined tariff hike of Rs 2.44 per unit on account of fuel cost adjustment. Barely a month later in January 2020, it decided on another hike of Rs 1.76 per unit. By March 2020, the price of electricity per unit was further increased by Rs 1.61, taking electricity tariff to Rs 24.47 per unit. These are just a few highlights. NEPRA has revised power tariff 17 times since last year citing monthly fuel and quarterly adjustments. To a large extent, tariff was increased due to capacity payments worth billions of rupees that were made to independent power producers (IPP).

Pakistan’s ‘circular debt’ now exceeds PRs two trillion. This pile-up has not only endangered the viability of IPPs, but also the solvency of local banks – which will be crippled in case of defaults by the power sector.

And if that’s not enough, an inquiry report into suspected contract violations by independent power producers which have cost the Pakistani exchequer billions of dollars, reveals that IPPs have been earning 50% to 70% annual profits, as against the 15% limit set by the NEPRA. Most IPPs had an investment payback period of 2-4 years, profits generated were as high as 18.26 times the investment and dividends 22 times the investment and under the 1994 Power Policy, 16 out of 17 IPPs invested a combined capital of PRs 51.80 billion and earned profits in excess of PRs 415 billion. The governments’ failure to contain the circular debt had cost the country over PRs 4,082 billion in the past 13 years, with an annual loss of PRs370 billion.

These revelations were made by the ‘Committee for Power Sector Audit, Circular Debt Reservation, and Future Roadmap’, which was constituted last August in its report, which it submitted in March 2020 on the state of the power sector in Pakistan.

Beijing hand

The report also alleges financial transgressions amounting to nearly $625 million in the independent power generating sector, with at least a third of it relating to Chinese projects under the umbrella of the China-Pakistan Economic Corridor (CPEC).

Power generation under CPEC approved by NEPRA had assured projects in energy and infrastructure worth $62 billion, with investment in energy projects of $35 billion and expected to bridge the capacity shortfall. For instance, the report reveals that in March 2015, the Huaneng Shandong Ruyi (Pak) Energy Ltd. (HSR) for 2X660 MW coal-based thermal plants submitted a cost assumption of $145.59 million against Interest During Construction (IDC).

After the ‘commercial operation date’, HSR submitted revised tariff rates of IDC in January 2019 amounting to $197.33 million. HSR had claimed IDC based on markup or long-term London Interbank Offer Rate (LIBOR) plus 4.5% during the entire construction period, whereas the financial statements of the company revealed that the company did not borrow any funds in the first year of construction and obtained short term loans at subsequently lower interest rates during the second year of construction.

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