Lack of loan insurance cover: Gwadar power project hits a snag

The government has reportedly failed to convince Chinese government to restart suspended work on 300MW coal-fired power project at Gwadar as M/s Sinosure, Chinese loan insurance company, is unwilling to cover governmental breach risk under the medium and long term buyer credit insurance largely due to delayed payments to CPEC IPPs and delay in opening of revolving account, sources close to Managing Director Private Power and Infrastructure Board (PPIB).

Sharing the details, sources said, PPIB is processing a 300MW imported coal power project at Gwadar, Balochistan by CIHC Pak Power Company Limited (CPPCL), which is included as a priority project pursuant to agreement on China-Pakistan Economic Corridor (CPEC) Energy Project Cooperation of November 8, 2014.

After due approvals, CPPCL was issued Letter of Intent (LoI) on May 26, 2017 and Letter of Support (LoS) on August 23, 2019.

As per terms of LoS, CPPCL signed Implementation Agreement (IA), Power Purchase Agreement (PPA) and Supplemental Agreement to IA (SIA) – the Security Package- on April 8, 2021 after nine-month long detailed negotiations and approval of ECC on January 28, 2021.

As per LoS the Financial Closing (FC) deadline was January 31, 2022, while Required Commercial Operations Date (RCOD) was fixed as June 30, 2023 in PPA.

Subsequent to signing of Security Package, CPPCL started construction activities at site prior to FC, in order to meet agreed RCOD of June 30 2023.

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Meanwhile, Sinosure has reviewed its policy and is not agreeing to cover governmental breach risk under the medium and long term buyer credit insurance, mainly due to delayed payments to CPEC IPPs, delays in opening of revolving account as per SIA for CPEC power projects and renegotiations of PPAs with existing IPPs.

In view of the existing situation, lenders have informed CPPCL that sponsors are required to provide joint and several liability guarantees covering full repayment period, which would greatly exceed the industry practice of providing completion guarantees during construction period. However, sponsors’ stance is that they have already injected substantial equity in the project, and are not willing to accept this requirement of lenders. As a result, construction at site has been suspended until financing arrangement is finalized among lenders, Sinosure and sponsors. Accordingly, CPPCL requested GoP’s assistance for necessary facilitation.

Consequently, GoP has taken up issues of delays in FC of CPEC projects at the level of Special Assistant to Prime Minister on CPEC Affairs, with Chinese Ambassador in Pakistan on September 9, 2021 and through a letter from Minister of Planning Development and Reforms to Vice Chairman NDRC, China on October 15, 2021.

In the meantime, CPPCL conveyed its inability to achieve FC by the deadline of January 31, 2022, and requested extension in FC date up to February 28, 2023 and change in RCOD from June 30, 2023 to 30 months from FC (i.e., end of 2025).

According to the PPIB, the requested change in RCOD will further delay development of Gwadar as an international logistics hub and allied infrastructure since development and operations of Gwadar industrial city is contingent upon reliable electricity supply.

In order to discuss the matter, PPIB convened a meeting with sponsors on October 26, 2021 wherein CPPCL again highlighted its issues with Sinosure and lenders which have stalled progress at site since sponsors are not willing to inject additional equity.

In the meanwhile, PPIB initiated a summary on the matter in November 2021 and forwarded it to Ministry of Energy (Power Division) for onward submission to Cabinet Committee on CPEC with a request to approach relevant agencies of Government of China at appropriate level to resolve issues faced by Gwadar Power Project, for timely achievement of Financial Closing and resumption of construction by CPPCL immediately to achieve RCOD (30 June 2023), as stipulated in the ECC’s approved Security Package.

Furthermore, the matter was also discussed in the 8th Joint Working Group meeting on Gwadar held on December 30, 2021, wherein Chinese assistance was solicited in getting Sinosure approval (in order to achieve its Financial Closing) for the project so that construction activities may be resumed at site. However, reportedly the matter still stands unresolved and construction activities at site are stalled, the sources added.

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