Pakistan Considers Five-Year Extension of Chinese IPPs’ $15.36B Debt

• The Chinese government, the consent of IPPs is mandatory to amend existing contracts.
• The government will require lengthy negotiations if it decides to make a formal request.
• The outstanding liability would escalate to $16.61 billion in the event of an extension.

ISLAMABAD: With the arrival of an International Monetary Fund (IMF) team to gauge Islamabad’s ability to repay escalating debt, Pakistan is considering options to seek a five-year extension on the outstanding debt of Chinese Independent Power Producers (IPPs). . $15.36 billion.

The consent of the Chinese government as well as its TPOs operating in the country is mandatory to amend existing contracts, which may require lengthy negotiations to achieve the desired results.

“If the government decides to make a formal request to China, then lengthy negotiations will be required. One of the options is to reduce the tariff for consumers by Rs 1.1 from 2024-2029 and Rs 0.9 from the year 2030 to 2040. So overall, the average tariff will be reduced by Rs 0.18 kWh from 2024 to 2040 with a five-year extension of the debt from 2036-2041,” confirmed senior official sources speaking to The news on Thursday.

According to the official work done by the relevant ministries, which are currently being considered at the highest level for making requests to China, if the debt of the Chinese IPPs is extended to the duration of the existing debt, then the outstanding liability will escalate from $15.36 billion to $16.61 billion, an increase of $1.3 billion over five years. In rupee terms, the cost of IPP debt will increase by Rs 377 billion over five years.

Pakistani authorities have argued to convince the high-ups and argued that the current power tariff structure concentrates the debt service repayments in the first 10 years, putting a heavy burden on consumers during the initial phase of the project. By extending the duration of the debt, the burden can be offloaded and scaled over a longer period of time.

A total of 21 IPP projects are underway in Pakistan under the China-Pakistan Economic Corridor (CPEC), including eight coal projects, four hydel power projects, eight wind power projects and one transmission line. The total outstanding debt of Chinese IPPs stands at $15.36 billion.

To seek an extension of the IPPs’ debt tenure, Pakistan should initiate intensive government-to-government (G2G) negotiations and subsequently with the Chinese IPPs. It could help reduce the burden on consumers, improve cash flow for consumers and boost the economic growth of Pakistan. Funding costs will increase by $1.257 billion after lengthy negotiations with IPPs, lenders and contract amendment.

The bifurcation of outstanding Chinese IPP liabilities revealed that in FY 2023-24, Sahiwal Coal’s outstanding loans and liabilities stood at $740 million with an interest margin of 4.5%, the remaining liability of Port Qasim coal project $872 million with an interest rate difference of 3.5%. China Power Hub Coal Project $965m outstanding at 4.08% interest spread, Engro Power Thar $491m outstanding at 4.32% & 3.5% interest spread, Thar Energy Coal $350m outstanding at spread 4.5% interest rate , Thal Nova Coal outstanding obligation $362 million with 4.5% interest margin, TCB-1 Coal project outstanding obligation $1.369 billion with 4.5% interest rate, Gwadar Coal outstanding obligation $287 million with interest margin 4% interest rate, Karot Hydro outstanding liability of $1.255 billion, Sukki Kinari hydro project outstanding liability of $1.28 billion at 4.5% interest, Azad Patan hydro $1.01 billion, Kohala Power outstanding liability of $2.07 billion, Pak Matiari-Lahore Transmission Company Transmission Line $1.15 billion.

Eight wind projects have outstanding obligations ranging from $40 million to $88 million on each project.

Meanwhile, the IMF has asked Pakistan to explicitly share its outstanding liabilities for pensions, state-owned enterprises (SOEs) and subsidies for the next five years because large outstanding liabilities were left unaccounted for, making it difficult for it to measure the actual outstanding public debt and obligations.

On power tariffs, the National Electricity Regulatory Authority (Nepra) briefed the IMF team to ascertain the basic tariff during which a heated discussion took place. To conclude the deal, the government will have to seek the consent of the visiting IMF team to start formal negotiations on a new rescue package, because the IMF has not yet turned the negotiations into formal talks.

If the base tariff is agreed to increase by Rs 5 to Rs 7 per unit, the average charge of Rs 29 per unit will rise to Rs 35 or Rs 36 per unit. The natural gas tariff will also increase by an average of more than 60% from July 2024.

Originally published on The news