[CPEC, IPP] China Eximbank provides $1.6 billion loan for Port Qasim 2x660 MW Coal-Fired Power Project

On July 24, 2014, China Eximbank provided a letter of intent to Sinohydro Resources Ltd. to finance the Port Qasim 2x660MW Coal-Fired Power Plant Project. Then, on October 16, 2015, China Eximbank and Port Qasim Electric Power Company (Pvt.) Limited (PQEPCPL) signed a $1,598,380,000 term facility (loan) agreement for the Port Qasim 2x660MW Coal-Fired Power Project. The borrowing terms are as follows: 14-year maturity, 4-year grace rate, and an interest rate of 6-month LIBOR plus a 3.70% margin. The Government of Pakistan provided a sovereign guarantee for the loan and a 27.2% guaranteed return on equity to the project sponsors (investors). Sinosure also provided credit insurance for the loan. These insurance fees amounted to 4% of total debt service (principal and amortized interest). As of October 2018, China Eximbank has reportedly disbursed $975 million through the loan. PQEPCPL is a project company (special purpose vehicle) that was established in 2014 for the sole purpose of designing, financing, insuring, building, establishing, owning, operating, maintaining, and managing the Port Qasim 2x660MW Coal-Fired Power Project. The sponsors and shareholders of PQEPCPL are Sinohydro Resources Ltd. (51% ownership stake) and Al-Mirqab Capital (AMC) of Qatar (49% ownership stake). The total cost of this project was approximately $2.1 billion and it was financed with a debt-to-equity ratio of approximately 75:25. China Eximbank provided a $1,598,380,000 loan for the project, and the remainder was covered via $521 million of equity contributions from Sinohydro Resources Ltd. and AMC. The Port Qasim 2x660MW Coal-Fired Power Project is located in the Port Qasim Industrial Park (exact locational coordinates: 24.7854°N 67.3695°E), and it consists of two modern supercritical coal-fired units, a self-dedicated coal unloading jetty and a 4 km-length channel dredged and transferred to Port Qasim Authority. The coal will be imported. The project, which is being implemented on build-own-operate (BOO) basis, is one of the largest “Priority Implementation Projects” under China Pakistan Economic Corridor (CPEC). The EPC contractors are Sinohydro Harbour Co., Ltd and CCCC Second Harbor Consultants Co., Ltd. A groundbreaking ceremony for the project took place on April 20, 2015. Construction then began in May 2015. On November 29, 2017, Yao Jing, the Chinese Ambassador to Pakistan, accompanied the Prime Minister of Pakistan to the power generation ceremony of the first unit of the coal power plant at Port Qasim. Then, on April 24, 2018, the project reached its commercial operations date (COD). This project has been plagued by controversy. Transparency International Pakistan alleged that PQEPCPL and NEPRA colluded to set a tariff for the coal-fired power plant and artificially inflated the cost of the project. In August 2019, Prime Minister Imran Khan directed the formation of a committee to examine the causes of the ‘high cost of electricity’ and circular debt, and to propose a way forward to ensure ‘the future energy security of the country.’ The committee was given 12 weeks to complete the onerous set of tasks, which it concluded in April 2020 in the form of a 296-page report, titled ‘Report on the Power Sector: Committee for Power Sector Audit, Circular Debt Resolution & Future Roadmap’. The report claims that the cost of the Port Qasim 2x660MW Coal-Fired Power Project was artificially inflated. Then, in May 2022, it was revealed that PQEPCPL was having difficulty servicing its China Eximbank loan (including a $70 million principal payment due on May 31, 2022) due to the fact that the Government of Pakistan’s Central Power Purchasing Agency (CPPA) had fallen behind on payments (for the purchase of electricity) to PQEPCPL. Total payment arrears, at that time, amounted to PKR 91.2 billion (approximately $483,360,000). PQEPCPL, in turn, had payment arrears to its coal supplier amounting to $140,000,000. As of May 2022, the coal supplier had stopped providing coal for the Port Qasim 2x660MW Coal-Fired Power Plant due to large outstanding payments. PQEPCPL warned that ‘without urgent payments to restore coal supply, the whole complex will shut down shortly’. Documents showed that the Port Qasim power plant also sustained losses of $153 million due to rupee devaluation. PQEPCPL official reportedly told the Pakistani authorities that ‘[s]ince 2014, billions of US dollars have been invested, thousands of people have worked hard for seven years but today the company has no cash, low coal inventory, huge outstanding payments, a huge exchange loss, making coal supplier and operation and maintenance contract bankrupt and facing loan default soon.’ Several months later, on October 26, 2022, Sinosure informed the Government of Pakistan that it would not be able to provide credit insurance for any additional projects in Pakistan without ‘early resolution of [the] Revolving Account Agreement (RAA) pending between Central Power Purchasing Agency (CPPA) and Chinese IPPs since 2017’. Under a November 8, 2014 CPEC Energy Project Cooperation Agreement, the CPPA and Chinese IPPs had agreed on the establishment of an RAA to facilitate the automatic payment of at least 22% payables to IPPs directly through the recovery of electricity bills of distribution companies (so-called ‘discos’). However, ‘due to various technical and financial constraints’, the Government of Pakistan’s Power Division acknowledged that the RAA had not been implemented over the previous 5-year period. In May 2022, an effort to establish an RAA was undertaken by the Government of Pakistan, but it was ultimately unsuccessful. Then, on October 31, 2022, Pakistan’s Ministry of Finance came up with an interim arrangement for the Power Division to open ‘an assignment under the title of Pakistan Energy Revolving Fund (PERF) till such time matters pertaining to RAA are resolved’. The escrow account was to be opened at the National Bank of Pakistan and operated by the CPPA and PKR 50 billion was to be allocated from the Ministry of Finance’s subsidy account to the PERF with a monthly withdrawal limit of PKR 4 billion (against invoices from IPPs). The Government of Pakistan acknowledged, at the time, that this '[would] not fully fulfill the revolving account requirements under the RAA, but it [would] provide additional comfort to Chinese IPPs’. Then, in November 2022, the Economic Coordination Committee (ECC) of the Cabinet turned down a proposal by the Ministry of Energy (Power Division) for the PERF (escrow) account to be operated by the National Bank of Pakistan. It decided that the account would instead be operated by the country’s central bank: the State Bank of Pakistan (SBP). Then, on May 15, 2023, PQEPC served a formal notice of payment default on the Central Power Purchasing Agency (CPPA). The total overdue amount that CPPA owed to PQEPC at that time was $263.5 million. PQEPC's power purchase agreement states that a failure to pay an undisputed amount by the CPPA within 35 days of the notice constitutes a power purchaser event of default. PQEPC demanded that CPPA make a principal payment of $73.6 million before May 31, 2023 to avoid a 'facility agreement default' as well as a Government of Pakistan or 'GoP default'.

Additional details

1. The Chinese project title is 巴基斯坦卡西姆港燃煤应急电站项目 or 卡西姆港燃煤发电项目1320MW. 2. According to multiple, official sources, the Government of Pakistan has issued sovereign guarantees in support of all loans issued by Chinese state-owned banks for independent power projects (IPPs) in Pakistan (see https://www.fmprc.gov.cn/ce/cepk/chn/zbgx/t1735166.htm and http://pk.chineseembassy.org/eng/zbgx/202110/t20211010_9558510.htm and https://www.dropbox.com/s/bmx3w2b38o7guxm/Debt%20Pricing%20of%20IPPs%20%28002%29.pdf?dl=0). As such, AidData assumes that the loan captured in this record is backed by a sovereign guarantee from the Government of Pakistan. 3. On November 8, 2014, the Chinese Government and the Government of Pakistan signed a CPEC Energy Project Cooperation Agreement. According to Article 5 of the Agreement, ‘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, the Finance Division, in consultation with the Power Division, finalized a mechanism for the Revolving Account (RA) with the approval of The Minister of Finance in a letter date June 22, 2015. Then, in September 2017, the Power Division forwarded a draft Revolving Account Agreement (RAA) to be signed between Central Power Purchasing Agency-Guaranteed (CPPA-G) and power producer(s) to the Finance Division. CPPA-G subsequently executed the finalized draft of RAA with multiple CPEC IPPs. The Government of Pakistan also guaranteed the funding obligations of the CPPA with respect to the RAA, through Supplemental Implementation Agreements signed between the Government of Pakistan — through the Private Power and Infrastructure Board (PPIB) — and the respective IPPs.

Number of official sources

26

Number of total sources

47