[CPEC, IPP] CDB contributes to $260 million syndicated loan for Phase 1 of 330 MW Thar Block 2 (TEL 1) Coal-Fired Power Plant Construction Project (Linked to Project ID#89499)

On May 17, 2016, a special purpose vehicle called Thar Energy Limited (TEL) — a wholly owned subsidiary of Hub Power Company (Hubco) — was incorporated in Pakistan in order to develop, own, operate and maintain a 330MW mine–mouth coal fired power plant at Thar Block II (Thar Coal Mine) in Sindh Province. Then, on September 30, 2016, Pakistan’s Private Power & Infrastructure Board (PPIB) awarded TEL a generation license for the development of this 330 MW coal-based conventional steam turbine generation facility/thermal power plant. Several months later, on December 9, 2016, PPIB issued a Letter of Support (LOS) to TEL, requiring it to (i) achieve Financial Close (FC) for the project no later than nine months from the date of LOS and (ii) enter into the Implementation Agreement (IA), Power Purchase Agreement (PPA) and Water Use Agreement (WUA) no later than three months prior to the FC date. TEL executed an Implementation Agreement with PPIB on November 10, 2017. TEL also executed a Power Purchase Agreement, Water Use Agreement and Coal Supply Agreement on July 27, 2017, October 17, 2017 and May 13, 2017, respectively. Then, on March 15, 2018, Hub Power Company (Hubco) signed a shareholders’ agreement with Fauji Fertilizer Company Limited (FFC) and China Machinery Engineering Corporation (CMEC). Under the terms of this agreement, Fauji Fertilizer Company Limited (FFC) and China Machinery Engineering Corporation (CMEC) Tel Power Investments Limited purchased 30% and 10% equity stakes, respectively, in TEL from HUBCO. The total cost of Phase 1 of the 330 MW Thar Block 2 (TEL 1) Coal-Fired Power Plant Construction Project, which is part of the China-Pakistan Economic Corridor (CPEC) initiative and the Belt and Road Initiative, was $520 million. It was implemented as an Independent Power Project (IPP) and financed according to a debt-to-equity ratio of 75:25. On December 20, 2018, TEL — a special purpose vehicle and joint venture between HUBCO (60% ownership stake), FFC (30% ownership stake), and CMEC Tel Power Investments Limited (10% ownership stake) — signed two loan agreements worth $390 million for Phase 1 of the 330 MW Thar Block 2 (TEL 1) Coal-Fired Power Plant Construction Project: a $260 million syndicated loan facility agreement with CDB and China Minsheng Bank Corporation Limited (CMBC) and a PKR-denominated syndicated loan facility (worth $130 million) with HBL, Bank Alfalah Limited, Bank Al-Habib Limited, National Bank of Pakistan, Soneri Bank Limited, Faysal Bank Limited, and Sindh Bank Limited. The remaining project cost ($130 million) was provided by the project sponsors via equity infusions. The estimated borrowing terms of the syndicated loan from CDB and CMBC are as follows: a 10 year maturity, a 3 year grace period, a 5.8% interest rate, and a 5% Sinosure insurance premium. The Government of Pakistan issued a sovereign guarantee in support of the loan. Sinosure also provided credit insurance (95% political risk coverage and 65% commercial risk coverage). The estimated cost of the Sinosure credit insurance policy is 7% of the borrower’s total debt service to CDB and CMBC. Additionally, as a source of security (collateral) for the syndicated loan from CDB and CMBC, the owners of TEL pledged their shares (equity stakes) in the project company. The proceeds of the loan were used to finance at least two commercial contracts: a $262.5 million commercial contract with CMEC (with a 32 month work period) that was signed on May 26, 2018 and a commercial contract (with an unspecified monetary value) with Hebei Engineering Company that was signed on on December 14, 2018. The purpose of Phase 1 was to construct a 330MW mine-mouth coal-fired power plant in Thar Block II, near the villages of Singharo-Bitra in Taluka Islamkot within the district of Tharparkar in Sindh Province. The power plant was to be fueled by a coal mine also in Thar Block II operated by Sindh Engro Coal Mining Company (SECMC). The coal mine has 3.8 million tons per annum capacity. China Machinery and Engineering Corporation (CMEC) — a subsidiary of Sinomach and 10% stakeholder in TEL — was the general EPC contractor responsible for project implementation. Project implementation commenced in 2018, but the precise start date is unknown. The power station entered partial commercial operations in July 2019, and the coal mine is currently in the operational test phase. As of October 2021, Phase 1 was nearing completion. CDB also financed Phase 2 of this project (as captured via Project ID#89499).

Additional details

1. The Chinese project title is 巴基斯坦的330MW矿井褐煤发电厂 and 巴基斯坦信德省塔尔330兆瓦电力项目 and 巴基斯坦塔尔电站一期 and 巴基斯坦TEL1×330MW坑口燃煤电站项目 and 巴基斯坦塔尔煤田II区块项目. 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. The loan that was issued by CDB was very likely a buyer's credit since it is (1) denominated in USD, (2) the lender stated it would not cover more than 85% of the commercial contract; which is standard for export buyer's credits, and (3) Sinosure provided credit insurance. 4. This appears to be a separate project from the 2 x 330 MW Engro Thar Block II Coal Power Project implemented by Engro Powergen Thar Limited (EPTL), captured via Project ID#35127. The project will utilize Thar coal supplied by Sindh Engro Coal Mining Company from its mine, captured via Project ID#54315. There is a second phase of the mine construction that will supply coal to this project, it is unclear how the second phase of the mine is financed. 5. On November 10, 2017, Pakistan's PPIB and HUBCO signed an implementation agreement and supplemental implementation agreement. This might be when the plans were revised and the price rose from $497 million to $520 million. 6. AidData codes this transaction as a collateralized loan because Habib Bank was selected as the security agent (i.e. collateral agent) for the loan. 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. 7. The size of the contributions from CDB and CMBC to the $260 million syndicated loan are unknown. For the time being, AidData assumes that CDB and CMBC each contributed $130 million. 8. According to a Pakistan National Electric Power Regulatory Authority (NEPRA) document dated June 7, 2017 (see source #61616), Phase 1 was originally projected to have a total project cost of $497.70 million with a debt-to-equity ratio of 75:25. At the time, China Development Bank (CDB), the Export-Import Bank of China, and the Industrial and Commercial Bank of China (ICBC) expressed their willingness to finance the $373.3 million debt component (p. 6). Thar Energy Limited told NEPRA that they could not secure the entire debt financing from Chinese banks as Sinosure would only guarantee up to 85% of the value of the EPC contract value (p.7). HUBCO engaged CDB as the lead arranger for foreign financing and Habib Bank Limited (HBL) as the lead arranger for local financing. After June 2017, sometime during subsequent financial negotiations and planning, the total project cost increased to $520 million and ICBC and China Eximbank stepped aside. The debt-to-equity ratio stayed at 75:25 meaning the debt component increased to $390 million. 9. The estimated borrowing terms of the CDB and CMBC syndicated loan are based on a NEPRA upfront generation tariff determination issued on July 27, 2017 (https://nepra.org.pk/tariff/Tariff/Upfront/2017/TRF-TCUT%20Upfront%20Thar%20Coal%2027-07-2017%2013031-33.PDF). 10. The Sinosure insurance premium is identified via https://www.dropbox.com/s/bmx3w2b38o7guxm/Debt%20Pricing%20of%20IPPs%20%28002%29.pdf?dl=0

Number of official sources

18

Number of total sources

39