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Energy crisis and CPEC contribution

Five years back, there was severe load shedding in Pakistan and foreign investors were reluctant in investing in the infrastructure sector especially in the power sector of Pakistan. Despite having vast energy resources especially coal reserves and water yet Pakistan couldn’t utilize these indigenous resources due to lack of policy framework and lack of funds. Due to load shedding, economic activities in the country were slowed down and caused a public unrest. As per analysis, capacity utilization in some of the key industries was fallen to nearly 50 percent, worst affected sectors were fertilizertextile and agriculture.

In 2013, China’s President, Xi Jinping, proposed establishing economic corridors linking China with Central Asia, West Asia and parts of South Asia called the “One Belt One Road (OBOR)”. Governments of China and Pakistan thereafter deliberated, negotiated and finalized a China Pakistan Economic Corridor (CPEC), which was widely viewed as a game changer for Pakistan and for the region. This economic corridor is to connect Kashgar in the northwestern Chinese province of Xinjiang with Pakistan’s Gwadar port in Balochistan through a vast and complex network of roads, highways, railways measuring over 3,000 km and with other infrastructure projects including power projects. Through this route, China will save considerable amount every year by shortening its route for energy imports to and from Middle East and will get greater access to the Indian Ocean. Whereas, Pakistan expects elimination of power outages, infrastructural enhancement and establishment of industrial estates to be established on this route.

Power outages of over twelve hours or more on a daily basis affected GDP growth rate and industrial and commercial output therefore, the then federal government issued a power policy in 2013, which had three major policy plans of energy production — short, mid and long-term plan for acquiring the sustainable energy.

Chinese and Pakistani governments formed a “CPEC Energy Planning Expert Group” in 2013 and since then its meeting is regularly held bi-annually. Adding and removing projects are done on the basis of recommendations presented in this expert group. Initially work was started on early harvest projects where China offered Pakistan to finance, construct and operate power projects under CPEC. All of the power projects under CPEC are done under non-recourse, project finance basis where debt was provided by the Chinese commercial banks. China Export and Credit Insurance Corporation (Sinosure) charges a maximum interest rate of 7 percent to the power projects. It is a one-time charge to be paid in 10-15 years post completion of construction, therefore it is no more than 0.5 percent annually. As Chinese state owned entities are mainly participating in CPEC from the China side therefore Government of Pakistan (GoP) should have negotiated and convinced Government of China not to charge Sinosure (which is basically a risk insurance) on those projects. Power tariff is determined and issued by National Electric Power Regulatory Authority (NEPRA) but margin (spread) on long term debt should have been better negotiated with the Chinese banks.

As a matter of fact, no financial institution or investor from US, Europe or Middle East was investing or lending to coal and hydro power projects in Pakistan in 2013 hence Pakistan didn’t have any other option but to grab the Chinese offer. Return on investment is largely dependent on the supply and demand situation and Chinese effectively capitalized the situation, where Pakistan was in need of funds and China was the only funds provider. Out of 21 early harvest energy projects of 10,400 MWs, nine are coal power plants, seven wind power plants, 3 hydropower and remaining two are HVDC Transmission Line Projects.

 

There were primarily three prerequisites to make CPEC a success; controlling terrorism, ensuring supply of electricity to the industry and public and establishing reliable logistic network. All of these targets have been achieved to a large extend in the last five years where we see control over terrorism and suicide bombing, addition of over 10,000MW in the power system and a number of motorways and highways. Out of USD 46 billion under China Pakistan Economic Corridor (CPEC) framework, projects worth more than USD 16 billion had already hit the ground, while remaining schemes are in advanced stages of the pipeline.

Pakistan’s exports have dropped from USD 25 billion in 2012-13 to only USD 20 billion in 2017-2018. It is said that if power supply had kept pace with manufacturing, exports could have touched USD 35 billion in 2017-2018. Power sector circular debt is over Rs 1000 billion due to low recovery, high losses, and mismanagement. The circular debt in the energy chain, which stood at Rs. 105 billion in 2008 is now at Rs 582 billion despite clearance of Rs. 480 billion worth of debt in 2013. Last government imposed several surcharges up to Rs. 2.3 per unit to clear the debt of power distribution companies. According to officials, total circular debt as on September 30, 2018 amounted to Rs. 1.3 trillion, which includes Rs. 596 billion of debt and Rs. 582 billion parked in Power Holding Private Limited (PHPL).

It would be wrong to put the entire blame of current energy crisis to CPEC. Major contributors to this crisis are the line losses of approximately 18.3 percent in the transmission system of electricity where NEPRA only allows recovery of 16.3 percent, which contributes around Rs. 200 billion in the circular debt and non-recovery of electricity bills by DISCOs, besides few other factors.

Ministry of Finance (MoF) has recently showed interest to extend a Rs 20 billion credit facility for establishing revolving account for CPEC projects. China maintains that eight energy projects have been completed so far but are facing financial crises due to non-payment of dues. According to an ECC decision dated February 18, 2016, Finance Ministry is required to give GoP guarantee up to 22 per cent monthly invoices of CPEC related energy projects if Central Power Purchasing Agency Guaranteed (CCPA-G) i.e. power purchaser fails to place or maintain the required amount in the revolving account.

Power projects, road and railway infrastructure, Islamabad and Gwadar airports and Gwadar port have been completed under CPEC framework. Most of the power projects have already been completed or are at near completion of the construction. These CPEC energy projects have created employment opportunities, improved supply of electricity in the country and brought socio economic dividends. As per Chinese Embassy, CPEC has created 70,000 direct jobs in Pakistan since 2015 and by 2030 over 800,000 new jobs will be created in the planned 21 energy projects. It is expected that CPEC will be completed by 2030 and will ultimately be a win-win for both the countries. China has repeatedly mentioned that they come to Pakistan not for profits only but also give importance to the development of local industries and helping them to become more sustainable.

CPEC is providing unlimited chances for investment in Pakistan and other adjoining countries. On one side, we witnessa lot of activity in the infrastructure sector and on other certain challenges hindering the growth which includes weak decision making, red tapism, low local investment, and lack of experts and professionals in the relevant sectors. It is important for the current government to take CPEC at a next level where work should be done on the establishment of industrial zones and control over circular debt thus it will ultimately revive the economic activity in the country.

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