Overdue receivables, rising coal rates: IPPs under CPEC may default, warns CPECA

ISLAMABAD: The China Pakistan Economic Corridor Authority (CPECA) has urged the Central Power Purchasing Agency-Guaranteed (CPPA-G) to pay overdue receivables of IPPs established under CPEC, warning that the plants may go in default because of rising prices of coal in international market, well informed sources told Business Recorder.

The issues of CPEC projects are amongst the key agendas of Prime Minister’s forthcoming visit to China, commencing from February 3, 2022.

The CPEC Authority, in its presentation, has raised the following major issues of CPEC energy cooperation: (i) overdue/ receivables of Rs 250 billion;(ii) IPPs may go in default because of rising prices of coal in international market; and (iii) IPPs may suspend the operations of power plants as per suspension clauses of Power Purchase Agreements (PPAs).

In December 2021, CPEC Authority proposed that overdue payments need to be made to the IPPs urgently as with pending claims, Sinosure, could not support new projects in Pakistan anymore.

Talking about Revolving Account (RA) for CPEC IPPs, the sources said, CPPA-G has signed opening of RA and Private Power and Infrastructure Board (PPIB) has signed Supplementary Agreement (SA) with the CPEC IPPs. However, RA has not been set up as yet.

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Lenders have put their dividends stopper on IPPs because establishment of the RA is part of financing documents.

In 2014, the government of Pakistan (GoP) and Government of China signed an agreement on CPEC energy project cooperation. Article 5 of the agreement provides that “the Pakistani Party agrees that a revolving account shall be opened with 30 days of commercial operation of the respective project, into which the money, no less than the 22 per cent of the monthly payments for the respective power project under the agreement shall be deposited to provide cover for the shortfall in power bill recoveries from the date of power generation of the said projects agreements subject to the condition that the additional direct and indirect expenses incurred in maintaining the revolving account would be compensated by the producers through a discount arrangement to be mutually agreed.”

Subsequently, Finance Division, in consultation with Power Division finalized a mechanism for RA with the approval of Finance Minister in a letter of June 22, 2015.

Later in September 2017, Power Division forwarded draft Revolving Account Agreement (RAA) to be signed between CPPA-G and power producer(s) to Finance Division. CPPA-G has executed the finalized draft of RAA with multiple CPEC IPPs till date.

The GoP has also guaranteed the funding obligations of the CPPA in respect of PAA, through the Supplemental Implementation Agreements signed between the GoP through PPIB and the respective IPPs.

The sources said that the expected amount required to be funded to meet the obligations will be in the range of Rs 100-150 billion.

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The options to fund the RA are as follows: (I) MoF to provide guarantee to CPPA-G to arrange commercial loans from local financial institutions;(ii) amount to be arranged from multilaterals like Asian Infrastructure Development Bank (AIIB), etc., through an existing unutilized facilities or securing a new facility;(iii) the obligation should be funded in subsequent years by improving recovery by Discos and other efficiency measures; and (iii) CPPA-G and IPPs to deliberate on the reasonable costs relating to account opening, operation and maintenance ( e.g. account agent, etc.) of the RA in the light of RAAs and Supplemental Implementation Agreements.

Another issue is the Withholding Tax (WHT) on shareholders’ dividends which was increased from 7.5 per cent to 25 per cent in Finance Act 2018 and 2020 as fixed and final liability of IPPs’.

This matter was discussed in the 3rd Pak-China Relationship Steering Committee meeting on October 20, 2021 and Power Division was directed to move the summary next week for ECC.

CPEC Authority maintains that Power Division and Federal Board of Revenue need to expedite the submission to ECC for reversal of WHT to the previous position.

This correspondent sought comments of SAPM on CPEC, Khalid Masoor, for an update on opening of revolving account for CPEC IPPs but received no response till the filing of this report.

Copyright Business Recorder, 2022