EDITORIAL: It’s a bit rich of Pakistani authorities to try to penalise Chinese power plants set up under CPEC (China Pakistan Economic Corridor) for Islamabad’s own failure — inadequate forex reserves for purchase of fuel for those plants in this case.
Naturally, when there was no coal (for coal-based power plants), those plants were unable to produce any power. Yet the government still slapped liquidating damages on them for not supplying electricity that they were supposed to.
But since this breakdown was the government’s own fault, a fact admitted by the ECC (Economic Coordination Committee) of the cabinet as well when the matter was later brought before it, the Chinese felt compelled to counter the claim with one of their own, demanding return on equity (RoE) and the cost of working capital component of idle capacity payments for the period they could not produce and supply electricity.
Fortunately, this matter has been resolved, with the ECC authorising the energy ministry to sign supplementary power purchase agreements with said power plants.
Now, the Pakistani government will neither deduct the capacity purchase price nor impose liquidating damages for the period during which the projects remained suspended due to fuel shortages. Chinese power plants, for their part, will waive the right to RoE and cost of working capital component of the idle capacity payment. This was a close shave, no doubt, and proves two very important points.
One, the reserves problem has begun to bite into some of the most crucial projects, even creeping into CPEC and causing friction with the Chinese that will cause problems far beyond power plants and electricity generation. And two, the government’s handling of this issue betrays a problematic, very unprofessional understanding of financial as well as diplomatic nuances.
The Chinese are already upset for a whole host of reasons, stretching from failure to honour commitments all the way to lack of adequate security for their working staff in this country. And Islamabad may have dodged the bullet this time, but how it managed it could come back to haunt it if it doesn’t get its act together very quickly.
Reportedly, the finance ministry also discussed “at length” a summary for the approval of the TAPI project as Qualified Investment Incentive Package under the Foreign Investment Promotion and Protection Act (FIPPA), but found that it “required further deliberation and examination of legal aspects, incentives and concessions”.
It turns out that while it is a “much-needed project and should be launched without delay”, ECC could not agree to the proposal “due to restrictions imposed by IMF (International Monetary Fund) on giving new tax exemptions and far-reaching implications for the country’s overall investment regime”. So far, only the Reko Diq copper and gold mine project is covered under the special legal regime.
That obviously means that the government has its work cut out for it. There’s little chance of any concessions from the Fund for the remainder of the SBA (Stand-By Arrangement), but this issue will need to be addressed very seriously when negotiations begin for a subsequent bailout programme.
The finance ministry has already acknowledged that another one will be necessary to stay solvent and push the threat of default further down the road. So it’s pretty much guaranteed that whichever party forms government after the February election will have to offer a pound of flesh – extracted, once again, from the people – to iron out TAPI-related technicalities.
It’s disappointing that the government is causing problems for itself (read the people) and the Chinese for no plausible reason. It is sincerely hoped, though, that it will have learnt the right lessons from these unfortunate experiences.
Copyright Business Recorder, 2024
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