Why Pakistan Needs a smart deal on Chinese IPPs debt?

ISLAMABAD: Pakistan is all set to seek alteration in contacts of Chinese Independent Power Producers (IPPs) but it requires tough and lengthy government-to-government (G2G) negotiations to achieve desired objectives.

Minister for Finance and Revenues Mohammad Aurangzeb along with Minister for Power Awais Leghari are scheduled to visit China this week to hold parleys on two important issues first for seeking debt restructuring of Chinese IPPs and second seeking rollover in deposits as well as arrangements for launching Panda bond during the current fiscal year.

“The Chinese debt matters a lot as the Pakistani delegation will discuss issues related to power sector and Panda bond” one top official of PML (N) led coalition government said.

Why restructuring of Chinese IPPs is important?

There are a total of 21 power projects financed under China Pakistan Economic Corridor (CPEC) including 8 coal power projects, 4 hydel power, 8 wind power, and 1 transmission line project.

According to the official presentation, the current power tariff structure concentrates debt service repayments in the first 10 years, placing a substantial financial burden on consumers during the project’s initial phase. By Extending the Debt Tenor, the Burden can be unloaded and initial estimates suggest that the government could reduce the tariff by Rs 3 per unit in order to bring some kind of relief to voiceless consumers.

The government does not have another solution on an immediate basis to reduce the power tariff under the existing arrangement of cash- bleeding power sector except moving towards a drastic action to scrap the IPPs contracts unilaterally. It’s not so easy keeping in view sovereign guarantees extended by the government to IPPs.

It is also the wish of the incumbent regime to shift the coal power plants from imported to local coal. So far it’s a pipe dream because it requires rail infrastructure from Thar to destinations where the power plants are located. It requires several years to construct the infrastructure for the transportation of local coal, having a far-reaching impact on the de-gradation of the environment.

Now Pakistan wishes to extend the tenor of Chinese IPPs debt for five years. If Pakistani side prefers to make a formal request to China for extending the tenor of IPPs debt for five years it will seek extension from maturing period of 2036 to 2041 so the repayments will be staggered.

Then G2G negotiations will commence and finally, the IPPs will negotiate to alter the existing contracts.

Official estimates showed that the total Chinese IPPs would be standing at $15.3 billion till 2036 and if the debt repayment tenor extended by five years up to 2041 then the total cost would go up to $16.618 billion. In rupee terms, the total debt would go up by Rs377 billion.

On the tariff front, it is estimated that till the year 2029, there will be a reduction of Rs 1.1 per unit, from the year 2030-2040, there will be a reduction of Rs 0.9 per unit, and from the year 2024 to 2040 there will be a reduction of Rs 0.18 per unit in electricity prices.

It will help reduce consumer burden, improve cash flows, and stimulate economic growth by jacking up demand.

Mehtab Haider