[CPEC, IPP] CDB provides $1.326 billion overseas investment loan for 878 km Matiari-Lahore Transmission Line Project (Linked to Project ID#53695)

On May 14, 2018, the National Transmission and Dispatch Company (NTDC) — a Pakistani government-owned power transmission company — and Pak Matiari-Lahore Transmission Company (Private) Limited (PMLTC or Pak MLTC) signed an Implementation Agreement (IA) and a Transmission Services Agreement (TSA) for the 878 km Matiari-Lahore Transmission Line Project. PMLTC is a special purpose vehicle (SPV) and joint venture between China Chengxin International Ltd. (69.98% equity stake), China Excellence International Ltd. (30% equity stake), and the SPV’s directors (0.02% equity stake). It is responsible for constructing and operating an 878 km power transmission line from Matiari, Sindh (South of Pakistan) to Nankana Sahib, Lahore (North Punjab). The total cost of the 878 km Matiari-Lahore Transmission Line Project, which is part of the China-Pakistan Economic Corridor (CPEC) and the Belt and Road Initiative, was $1,658,340,000. It was implemented as an Independent Power Project (IPP) — on a Build, Own, Operate and Transfer (‘BOOT’) basis — and financed according to a debt-to-equity ratio of 80:20. The debt component is captured in Project ID#54013 and the equity component is captured in Project ID#53695. On November 9, 2018, China Development Bank (CDB) Sichuan Branch signed a $1.326 billion overseas investment loan agreement with PMLTC for the 878 km Matiari-Lahore Transmission Line Project. The loan carried the following borrowing terms: a 10-year maturity length, a 2.25-year grace period (27 months), a 5.64% all-in interest rate (LIBOR plus 4.5% margin), a 1% upfront (management) fee, and a 0.2% commitment fee. Sinosure provided overseas investment insurance for this loan at a maximum rate of 0.60% per annum. The Government of Pakistan also issued a sovereign guarantee in support of the loan and a 17% guaranteed return on equity (ROE) to the investors in the BOOT project. State Grid International Engineering Ltd. — the overseas investment company of State Grid Corporation of China (SGCC) — agreed to provide approximately $332 million in equity financing through two unspecified special purpose vehicles (SPVs). Financial close was achieved on February 27, 2019. The purpose of the project was to construct an 878 km, 660 kV, High Voltage Direct Current Line (HVDC) that transmits 4,000MW of electricity (mainly from coal) from the Chinese bank-financed Thar Block-1 Integrated Coal Mine and Power Project (captured via Project ID#53674), the Thar Block-2 Coal Mine and Power Project (captured via Project ID#54314, #35127, and #54315) and the Chinese bank-financed Port Qasim Power Project (captured via Project ID#52904) to the northern parts of Pakistan (near Lahore). The starting point of the transmission line is at the Matiari Converter Station about 15 kilometers northeast of Matiari in Sindh Province, and the end point is at the Lahore Converter Station at a distance of about 40 kilometers southwest of Lahore in Punjab Province. China Electric Power Equipment and Technology Co. Ltd. (CET) — a wholly owned subsidiary of State Grid Corporation of China (SGCC) — is the EPC contractor responsible for project implementation. Under the terms of the BOOT contract, CET will operate the Matiari-Lahore transmission line for 25 years and transfer it afterwards to the National Transmission and Dispatch Company (NTDC), the Pakistani government-owned power transmission company. A project commencement ceremony took place on December 1, 2018. PMLTC also issued a notice to proceed (NTP) to CET for the commencement of EPC works on December 1, 2018. The project achieved mechanical completion in October 2020. It successfully completed equipment debugging, sub-system commissioning, and station commissioning with a certificate of readiness for interconnection and a certificate of readiness issued on December 1, 2020. The project’s originally expected commercial operations date (COD) was March 1, 2021, but due to delays related to the COVID-19 pandemic, the project ultimately reached its COD on September 1, 2021. The transmission line is currently operational. However, various problems arose during project implementation. On November 30, 2020, NTDC and PMLTC acknowledged that there was a defect in the transmission line, which emerged during low power testing. Additionally, the certificate of readiness issued on December 01, 2020, was later declared null and void upon the failure of the low power test due to frequency oscillation on December 2, 2020, and a notice of dispute in the matter was served to the PMLTC by NTDC. The matter was resolved between the parties through Memorandum of Understanding (MOU) dated February 18, 2021 without a declaration of the force majeure events and both parties agreed to extend the COD until September 1, 2021. The project has also encountered debt repayment and financial management challenges. In May 2022, reports emerged that the Government of Pakistan’s Central Power Purchasing Agency (CPPA) had fallen behind on payments (for the purchase of electricity) to PMLTC. Total payment arrears, at that time, amounted to PKR 14.5 billion (approximately $72.5 million). Then, in June 2022, the Private Power & Infrastructure Board (PPIB) requested that the State Bank of Pakistan (SBP) make available foreign exchange so that PMLTC could make a $6.31 million Sinosure fee payment. In a letter to SBP’s Executive Director ofFinancial Market and Reserve Management (dated June 24, 2022), PMLTC noted a significant delay in approval by SBP of the $6.31 million payment request filed by the company on May 9, 2022. It also noted that late payment could result in a material breach of Sinosure policy leading to a contractual breach under financing documents. PPIB also noted that non-availability of requisite foreign currency could result in the lapse of consent under the Implementation Agreement (IA), which could in turn expose the Government of Pakistan to litigation. According to PPIB, pursuant to provisions of the IA, it is the responsibility of Government of Pakistan to make available through SBP the foreign currency not available through normal banking channels within the specified time for payment in foreign currency related to the projects, including the payment of premiums and fees to offshore insurers and reinsurers. Then, in July 2022, Zhang Li (CEO of PMLTC) wrote a letter to the Managing Director of the PPIB, warning that the Government of Pakistan’s imposition of 17 percent general sales tax (GST) on transmission service charges (through amendments to the Finance Act, 2022 and Sales Tax Act, 1990) would have ‘severe financial implications’ for PMLTC. 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).

Additional details

1. This project is also known as the Matiari-Lahore HVDC Transmission Project. The Chinese project title is 巴基斯坦默蒂亚里—拉合尔±660千伏直流输电工程 and 中国电力技术装备有限公司投资巴基斯坦默蒂亚里-拉合尔±660千伏直流输电项目. 2. AidData has coded this transaction as a collateralized loan for two reasons. The first reason is that ICBC was selected as the security agent (i.e. collateral agent) for the loan, and when lenders take collateral as security for their loans, a collateral/security agent is often appointed to enforce rights against the collateral in the event of the borrower’s default under the loan. The second reason is the lender requirement that the borrower maintain a minimum cash deposit in an escrow (revolving) account. 3. 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). 4. In December 2017, at the 6th Meeting of the CPEC Joint Cooperation Committee, State Grid Corporation of China (SGCC) and the Pakistan Ministry of Water and Power of Pakistan signed ‘relevant agreements, for the project guaranteeing a 17% Internal Rate of Return (IRR). 5. According to the “Decision of the Authority in the matter of Petition filed under Rule 3 of the NEPRA (Tariff Standards & Procedure) Rules, 1998 for Modification of the Tariff Decision dated May 04, 2017 (Pak Matiari Lahore Transmission Company (Private) Limited (PMTC) in the matter of Matiari Lahore 4,000 MW E 660 KV HVDC Transmission Project Case # NEPRA/TRF-433/PMTC-20181” from March 2018 the levelized tariff was decided to be at 0.7435 Rs./kW/h. 6. China Chengxin International Ltd. and China Excellence International Ltd., the majority owners of Pak Matiari-Lahore Transmission Company (Private) Limited, are wholly-owned subsidiaries of State Grid International Engineering Ltd. 7. 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 dated 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

37

Number of total sources

61