CPEC power dues turning into a contentious issue between China and Pakistan

The power projects under the much-hyped China Pakistan Economic Corridor (CPEC) have long been considered a harbinger for closer Sino-Pak cooperation by the two countries. While the progress on most of the infrastructure components remained sluggish since CPEC’s inception in 2015, the power sectorwas seen as an outlier for the timely completion of projects under it. This made the two countries aim for emulating the success in other parts of project.

However, as things turned out, the early completion of power projects was drivenmore by Chinese intereststhan the infrastructure needs of Pakistan. Though most contents of the agreements covering CPEC projects are guardedmore than state secrets by the Government of Pakistan, occasional spills through its different organs, become a matter of local political interest and global scrutiny.

In 2020, a ‘leaked’ report of an internal committee formed by the Pak government put some light on the exploitative nature of power sector dealsand lack of transparency under CPEC. According to the report, the projects have a common inherent problem i.e. very high rates of return on investment assured to the Chinese companies. Thehigh returns conditiontranslates into exorbitant power tariffs which further lead to unpaid dues at the end of power purchasing entities in Pakistan. In this manner, the rates of return in projects have substantiallyaided the ballooningcircular debt in country’s power sector.

Pakistan’s Fiscal Health

The piling up ofpower sectordebt is casts a shadow over the fiscal health of Pakistan and the issue is being regularly raised in itsnegotiations with multilateral lenders. As part of recentdiscussions with Pakistan in July 2022 for releasing a loan tranche, the International Monetary Fund (IMF) was reported to have asked the country to seek some concessions from China. The country owes around PKR300 billion to the Chinese independent power producers (IPPs) of which is being closely watched by the IMF. Similarly, the earlier PTI government had also assured to reopen all the past power deals for the sake of the $400 million loan under World Bank (WB) funded Affordable and Clean Energy (PACE) programme.The WB programme requires revision of generation tariffs of almost all the IPPs. Both IMF and WB want Pakistan to receive concessions through lowering capacity payments by reducing allowed return on equity as per certain policies. Pakistan has assured the IMF that it would try to receive concessions from the CPEC power plants either through reduction in the profit rates on investment or by rescheduling the loan repayments.

On the other hand, non-clearance of their dues by Pakistanis making the Chinese power sector investors nervous and many of them have started accusing Islamabad of breaching provisions of the agreements. They complain that huge amount of arrears, coupled with the accelerated depreciation of the PKR has significantly reduced their nominal return on investment. According to a report in Pak media, during a meeting with Pakistan’s Minister for Planning and Development Ahsan Iqbal, the Chinese IPPs protested about the build-up of their dues and warned that without upfront payments they would be forced to shut down. Some of them rued that the authorities were pressuring them to maximise generation which is impossible in view of serious liquidity issues.

The future of CPEC

Reportedly, the Chinese grievance was also conveyed by, Zhang Jun, Chairman Energy investment of All-Pakistan Chinese Enterprises Association (APCEAP) to various institutions including PMO. More than ten Chinese investors, who have invested in power projects have established an Association viz Energy Enterprise Association (EEA) on the pattern of independent Power Producers (lPPs) raised their issues. Moreover, the Chinese investors, who invested in Gwadar aredemanding to allow them to maintain bank account in RMB due to depreciation of PKR.

The issue is also impacting the prospects of furtherinvestments by the Chinese in power sector. At least four projects under CPEC have not achieved financial closure so far because Chinese company, Sinosure has not approved the guarantee, due to the problems faced by the by Chinese investors in existing projects. In the present scenario, it is highly uncertain how Pakistan would simultaneously address the concerns of Chinese IPPs, multilateral lenders and domestic power consumers. The only certainty seems to be an impediment to power sector’s growth due to drying up of investment flow from China.