[CPEC] ABC contributes to $1.44 billion syndicated buyer's credit for Sahiwal 2 x 660 MW Coal-Fired Power Plant Project (Linked to Project ID#54134, #52659, #92302, #92303)

On May 21, 2014, after submitting a performance guarantee and an application for the establishment of a special purpose vehicle (project company), a consortium consisting of Huaneng Shandong Power Generation Co., Ltd. (and its subsidiary in Hong Kong) and Shandong Ruyi Technology Group Co., Ltd. (and its subsidiary in Hong Kong) was granted a Letter of Intention (LOI) by the Government of Pakistan, thereby officially obtaining the right to develop the Sahiwal 2 x 660 MW Coal-Fired Power Plant Project. One day later, on May 22, 2014, Huaneng Shandong Ruyi (Pakistan) Energy Ltd. — a special purpose vehicle (project company) and joint venture of Huaneng Shandong Power Generation Co. Ltd. (51% ownership stake) and Shandong Ruyi Science & Technology Group (49% ownership stake) — was officially incorporated and established to assume responsibility for the development, investment, and management the two 660 MW coal-fired units in Sahiwal. By July 23, 2014, a senior management team was in place at Huaneng Shandong Ruyi (Pakistan) Energy Ltd. In November 2014, a project feasibility study report was approved after an assessment was made by experts from the Electric Power Planning & Engineering Institute (EPPEI) and the Government of Punjab. On November 21, 2014, SEPCO1 Electric Power Construction Corporation was selected as the EPC contractor through bidding. Then, in February 2017, four Chinese state-owned commercial banks — the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB), and Agricultural Bank of China (ABC) — signed a $1.44 billion syndicated buyer’s credit (facility) agreement with Huaneng Shandong Ruyi (Pakistan) Energy Ltd. for the Sahiwal 2 x 660 MW Coal-Fired Power Plant Project. The estimated borrowing terms of the buyer’s credit are as follows: a 14-year maturity, a 4-year grace period, an all-in 4.95% interest rate (6-month LIBOR plus a 4.5% margin), and a 5.26% Sinosure insurance premium. The Government of Pakistan also issued a sovereign guarantee in support of the loan and granted a 27.2% guaranteed return on equity to the project sponsors (investors). ICBC's contribution is captured via Project ID#52659. BOC's contribution is captured via Project ID#92302. CCB's contribution is captured via Project ID#92303. ABC's contribution is captured via Project ID#92304. The total cost of the Sahiwal 2 x 660 MW Coal-Fired Power Plant Project was $1.808 billion. It was implemented as an Independent Power Project (IPP) — as part of the China-Pakistan Economic Corridor (CPEC) Initiative — and financed according to a debt-to-equity ratio of 75:25. Project ID #52659 captures the debt financing component and Project ID#54134 captures the equity financing component. The purpose of the project was to construct 1320 MW coal-fired power plant — with two 660 MW supercritical coal-fired units (Unit 1 and Unit 2) — with synchronous installation of high-efficiency electrostatic precipitator and flue gas desulfurization facilities. The project site is located about 12 miles from Sahiwal and 9.3 miles from Okara cantonment, just north of the road which connects the two towns, in Pakistan's Punjab Province. Its exact locational coordinates are 30°42′55″N 73°14′20″E. The 690 hectare project site was given to the Chinese side by the Pakistani government free of charge. PowerChina Nuclear Engineering Company and SEPCO1 Electric Power Construction Corporation (a subsidiary of PowerChina) were the general EPC contractors responsible for implementation. A groundbreaking ceremony was held on May 30, 2014. Foundation soil replacement and pile foundation tests commenced on February 6, 2015. Construction began on July 31, 2015. Unit 1 passed a 168-hour full-load trial operation and was put into operation on May 24. 2017. Unit 2 passed a 168-hour full-load trial operation and was put into operation on June 8. 2017. All network-related tests were completed on October 12, 2017. The project achieved its Commercial Operations Date (COD) and the power plant was connected to the national grid on October 28, 2017. As part of a build, operate, transfer (BOT) agreement, the power plant's ownership is to be transferred from the project company to the Government of Punjab after 30 years of operation. However, this project has encountered a number of revenue generation, debt repayment, and financial management challenges since the power plant went into operation. In April 2018, reports emerged that the Government of Pakistan’s Central Power Purchasing Agency (CPPA) had fallen behind on payments (for the purchase of electricity) to Huaneng Shandong Ruyi (Pakistan) Energy Ltd. Total payment arrears, at that time, amounted to PKR 20 billion (approximately $172 million), which reportedly brought the Sahiwal 2 x 660 MW Coal-Fired Power Plant Project to ‘to the brink of closure’. It also made it more difficult for Huaneng Shandong Ruyi (Pakistan) Energy Ltd. to source the coal needed to power the plant (since Pakistan Railway demands advance payment for coal transportation). Then, in a letter dated August 7, 2022, Huaneng Shandong Ruyi (Pakistan) Energy Ltd. acknowledged that more than 0.5 million tons of South African coal were being stored in Port Qasim and awaiting clearance because it was unable to pay the coal supplier. 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. The Chinese project title is 萨希瓦尔燃煤电站 or 巴基斯坦萨希瓦尔电站项目. The Urdu project title is ساہیوال کول پاور پروجیکٹ. 2. Some sources identify the total project cost as $1.912 billion. 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). As such, AidData assumes that the loan captured in this record is backed by a sovereign guarantee from the Government of Pakistan. 4. The individual contributions of the Industrial and Commercial Bank of China, Bank of China, China Construction Bank, and Agricultural Bank of China to the $1.44 billion syndicated loan are unknown. For the time being, AidData assumes that all four lenders contributed equal amounts ($360 million). 5. The borrowing terms of the syndicated buyer’s credit are estimated based upon the terms that are reported in the upfront tariff application that Huaneng Shandong Ruyi (Pakistan) Energy Ltd. submitted to NEPRA (https://nepra.org.pk/tariff/Tariff/IPPs/Huaneng%20Shandong%20Ruyi%20(Pakistan)%20Energy%20(Private)%20Limited/TRF-308%20HUANENG%20UPFRONT%20COAL%20DETERMINATION%2031-03-2015%204385-87.pdf). 6. 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

29

Number of total sources

51