CPEC: Teething Problems

IN APRIL of last year, Pakistan and China signed more than 50 agreements and memoranda of understanding to push forward around $46bn worth of a development roadmap — China-Pakistan Economic Corridor.

As the two nations complete the first anniversary of the landmark opening later this month ahead of convening 6th round of the Joint Cooperation Committee (JCC) in June, it is time for a bird’s eye view of the progress some critical development projects have achieved so far. It is difficult to judge the implementation pace at this stage but it is ironical that executing agencies are still facing different sorts of confusions and difficulties.

Water supply to Gwadar Port is a key challenge. Hence a Rs11.2bn project to develop water treatment, supply and distribution was taken in hand to connect Swad and Shadikaur dams with Gwadar.

As of March 15, the Gwadar Port Authority (GPA) is still not clear on the financial modality of the Swad-Gwadar City Water Supply, nor about its second phase — connecting Shadikaur dam. The GPA is not aware if the project is to be developed through grant, an interest-free loan or a commercial loan from China.

The Rs9.9bn worth of Hospital Upgradation of GDA (renamed China-Pakistan Friendship Hospital) is also yet to take off as Pakistan awaits a feasibility report, the cost estimate of the first phase, supply of equipment for the existing 50 beds, and the nomination of contractor by the Chinese Ministry of Commerce.

The coal-fired power plant at Gwadar is also facing issues of clarity. China had nominated China Communications Construction Company (CCCC) as contractor for a 600MW coal-based project but then agreed on the insistence of Central Power Purchasing Agency (CPPA) and the Private Power and Infrastructure Board (PPIB) for a 300MW plant on public-private partnership mode at a cost of Rs55bn.

Major issues facing this power project include reluctance of the National Transmission and Dispatch Company for connectivity with national grid, letter of intent by PPIB, confusion over who would be the power purchaser and if coal or gas should be the fuel of choice.

Gwadar Smart Port City Master Plan worth Rs410m Chinese grant also has not moved as MOFCOM has not yet nominated consultants and the bidding process could not be initiated so far.

According to an update submitted to the Planning Commission — the focal institution in Pakistan for CPEC ­—, the mega coal-based power project of 1320mw at Port Qasim worth $2.5bn is facing at least five major challenges. Registation of Indenture of Lease by Government of Sindh is still unresolved because of dispute over land ownership with federal government.

Chinese lenders have agreed to extend the deadline of this registration for three months but ultimately all liabilities of the project delays or failures would rest on Pakistan because of haste shown by the PPIB to announce its financial close on December 22, 2015. Transmission line for power evacuation is not in sight and Sindh has also not issued NOC for water supply.

On top of that, issues related to tax exemption for import of plant and machinery and withholding tax exemption on imports are also haunting the project implementation.

Power Purchase and Implementation Agreements for $2.5bn 1320MW Sahiwal Coal Power Project were signed in July 2015 but financial close has not been achieved so far. Its major challenges include coal transportation from Pakistan International Bulk Terminal (Karachi) to Pakistan Railway’s facility at Pakistan Steel while inland coal transportation agreement and issuance of Letter of Intent (LoI) by Sinosure and debt financing from Industrial & Commercial Bank of China is still awaited.

Another important project — Engro Powergen Limited — of 660mw at Thar is yet to achieve financial close and its letter of support has already expired. The PPIB is seeking an assurance from the company for no change in commercial operation date to LOS date while its challenges involve a dispute with the ministry of finance and the FBR over taxation of mining project and security matters.

Salt Range Power Project of 300mw sponsored by China Machinery Engineering Corporation in Punjab is pending over acceptability of determined tariff by the sponsors and availability of coal of the quality and quantity at site. As a consequence, the third extension issue to the project has expired on February 19 this year with no progress since then.

The 1320MW coal-based project of Hub Power Company is also facing issues like Balochistan’s demand for allocation of 3pc of profit for social service, issuance of NOC by the ministry of defence for setting up of jetty, complications with jetty tariff and issuance of letter of support.

Likewise, Shanghai Electric Power Project, the sponsors of 1,320MW at Thar Block-1 have been asked by the power regulator to resubmit their application afresh after fulfilling the requirements and with complete documentation. As a consequence, second extension in LOI has been issued for validity up to May 10, 2016.

The $2bn Sukki Kinari Hydropower Project of 870mw funded by Exim Bank of China and ICBC has been facing major delays of over six months as it missed deadline of Dec 31, 2015 to achieve financial close as KP government faced troubles in land acquisition and Chinese lenders moved slow on financial approvals.

The $2bn Karot HPP of 720mw is also facing delays due to slow land acquisition by Punjab government on its side while both AJK and Punjab seek increasing water use charges enhanced to Rs0.425 per unit in line with new policy instead of Rs0.15 per unit. Punjab’s demand for project takeover after its contract life instead of its transfer to the federal government is another problem.

Kohala Hydropower Project of $2.4bn in Azad Kashmir is moving smoothly so far and its land acquisition is currently in progress and revised technical study under review of the panel of experts.

The South-North Transmission line and Matiari-Lahore Line faces issues regarding payment of minimum tax on turnover and payment of alternate corporate tax for 10 years and the tariffs are yet to be cleared by the National Electric Power Regulatory Authority.

Published in Dawn, Business & Finance weekly, April 11th, 2016