[CPEC] Silk Road Fund contributes to $1.292 billion syndicated loan for 720MW Karot Hydropower Project (Linked to Record ID#54012, #92310, #37233)

Project narrative

In May 2007, Karot Power Company Limited (KPCL) obtained a letter of interest from Pakistan’s Private Power Infrastructure Board (PPIB) to develop the 720MW Karot Hydropower Project. Karot Power Company (Private) Limited (KPCL) is a special purpose vehicle (SPV) that was created for the purpose of financing, building, operating and maintaining the 720MW run-of-the-river Karot hydropower plant on the Jhelum River in Pakistan. China Three Gorges South Asia Investment Limited (C-SAIL)—an investment holding company formed by China Three Gorges Corporation on September 30, 2011 in the Cayman Islands, to acquire, develop, build, own and operate renewable power generation projects in Pakistan—holds a 93% ownership stake in KPCL, while Pakistan's Associated Technologies holds a 7% ownership stake in KPCL. In October 2009, PPIB approved a feasibility study report for the 720MW Karot hydropower project and Pakistan’s National Electric Power Regulatory Authority (NEPRA) granted KPCL a generation license to develop the project on November 2013. In January 2015, an Environmental and Social Impact Assessment (ESIA) was completed by KPCL. Then, on September 9, 2016, KPCL and the Central Power Purchasing Agency–Guarantee (CPPA-G) signed a Power Purchase Agreement (PPA) for the Karot Hydropower Project. On May 6, 2016, the Board of Directors of the International Finance Corporation (IFC) authorized an investment (IFC/R2016-0117) in the form of an “A” loan worth $100 million in KPCL for the 720MW Karot Hydropower Project. On February 22, 2017, China Development Bank (CDB), the Export-Import Bank of China (China Eximbank), and the Silk Road Fund (SRF) signed a $1,292,000,000 syndicated buyer's credit (facility) agreement with KPCL for the 720MW Karot Hydropower Project. The original borrowing terms of the syndicated “B” loan are as follows: a maturity of 17 years, a grace period of 5.76 years, an interest rate of 6-month LIBOR plus a 4.75% margin, a 1% arrangement (management), and a 0.5% commitment fee. However, as of July 1, 2023, the loan's interest rate was reset to 6-month SOFR plus a 0.42826% credit adjustment spread (CAS) and a 4.75% margin. The borrower is expected to make equal, semi-annual principal payments (worth 3.25% of the outstanding loan amount) during the loan's repayment period. According to clause 1 of a Common Terms Agreement signed by KPCL, CDB, China Eximbank, and SRF on November 25, 2016, KPCL is responsible for making the first principal payment and interest payment on November 25, 2022. As of November 2022, the A loan and B loan had jointly achieved an 89.7% disbursement rate ($1,249,896,399 out of $1,392,000,000). The (principal) amounts outstanding under the syndicated loan included $553,874,570 to China Eximbank, $454,177, 145 to CDB, $184,624,858 to SRF, and $57,219,827 to the IFC as of November 2022. As of July 2024, the (principal) amount outstanding under the A loan and the B loan was $1.3 billion. The total cost of the 720 MW Karot Hydropower Project, excluding contingencies, was $1.74 billion and it was financed according to a debt-to-equity ratio of 80:20. The World Bank Group’s International Finance Corporation (IFC) issued a $100 million loan in support of the project on November 25, 2016. The remaining $1.292 billion of debt financing was provided by this syndicate of Chinese state-owned lenders. CDB's contribution is captured via Record ID#37233. China Eximbank's contribution is captured in Record ID#92310. The Silk Road Fund's contribution is captured via Record ID#92311. The proceeds of the loan were to be used by the borrower to partially finance a $1.6 billion commercial (EPC) contract with Yangtze Three Gorges Technology & Economy Development Co., Ltd. (TGDC). Sinosure also issued a buyer’s credit insurance policy at a cost of $54.3 million, and the borrower pledged the following sources of collateral to the lending syndicate: fixed (project) assets, future rights to electricity charges, and the Sinosure credit insurance policy. Additionally, China Three Gorges Corporation reportedly made a $316.20 million equity investment in project, while Associated Technologies reportedly made a $23.90 million equity investment (captured via Record ID#54012). The purpose of the independent power project (IPP) is to construct a 720MW hydropower generation complex — with four, 180MW power generation units — near Karot village, some 1.7 kilometers upstream of Karot Bridge and 74 km upstream of Mangla Dam. The project involves the construction of a roc-filled dam, spillway, powerhouse, diversion tunnels, head-race power tunnels and a tail-race tunnel end. The project site is accessible through the Islamabad – Kahuta – Kotli road, approximately 29 kilometers from Kahuta, and 65 kilometers from Islamabad. Upon completion, the power plant is expected to generate 2,970 GWh (net) of clean energy annually and reduce 2.3 million tons of carbon emissions each year. The IPP is being implemented on a Build-Own-Operate-Transfer (BOOT) basis. KPCL will sell all its energy to the National Transmission and Dispatch Company Limited (NTDC) under a 30-year power purchase agreement [at a levelized tariff of Rs 7.68 (7.57 cents) per unit]. The Government of Pakistan GoP guaranteed the (power purchase) payment obligations of the NTDC to the KPCL. The Government of Pakistan also issued a 17% return on equity (ROE) guarantee. The general EPC contractor responsible for implementation is Yangtze Three Gorges Technology & Economy Development Co., Ltd (TGDC). China Machinery Engineering Corporation (CMEC) is also involved in implementation. A formal groundbreaking ceremony took place on April 20, 2015. A construction mobilization ceremony was held on January 10, 2016. A project implementation agreement was signed on September 28, 2016. Then, a “notice to proceed" was issued to (TGDC) on December 1, 2016. Construction works were 25% complete as of September 2017. On September 22, 2018, the project successfully achieved river closure. Construction works were 70% complete as of January 2020. Then, on May 2, 2021, the first rotor of the power plant was successfully hoisted into place. Construction works were 88% complete as of May 2021. On November 20, 2021, the hydropower station closed the gates of its diversion tunnels and started water storage in its reservoir for future use. The project was successfully commissioned on June 29, 2022. It reportedly employed 3000-5000 people. The project's originally expected commercial operation date (COD) of the hydropower plant was December 28, 2021. KPCL is responsible for handing over this project to the Pakistani government after the term of its 30-year concession agreement has expired. The project has been the subject of local controversy. In August 2019, a complaint was submitted to the IFC’s Compliance Advisor Ombudsman (CAO) by a former employee of the project. The complaint raised concerns about lack of payment of exit wages, as well as discrimination against local workers in relation to access to drinking water, conditions of accommodations and transportation at the project site. Then, in July 2020, a complaint was lodged with CAO by representatives of Building and Wood Workers International (BWI) and the Pakistan Federation of Building and Wood Workers (PFBWW), on behalf of the Awami Labor Union. The complaint raises a range of social issues related to the working conditions and terms of employment, workers' organizations, and grievance redress mechanism at the Karot hydropower plant. The complainants claimed adverse impacts on approximately 3,000 project workers, including violations of IFC Performance Standard 2 on workers’ organizations, health and safety, working conditions and terms of employment, grievance mechanisms, retrenchment, and concerns related to the use of security forces under IFC Performance Standard 4. There are also some indications that the syndicated loan for the 720MW Karot Hydropower Project has financially underperformed vis-a-vis the original expectations of the lenders. In March 2023, KPCL sought Rs 22.703 billion from Central Power Purchasing Agency–Guarantee (CPPA-G) by April 10, 2023 to settle its outstanding debts (including principal and interest) to SRF, CDB, China Eximbank, and IFC and avoid default. In a letter to Rehan Akhtar, the CEO of CPPA-G, KPCL’s CEO Wang Minsheng noted that his company had to make mandatory principal, interest, and commitment fee payments and any delays in payment would result in a breach of covenants resulting in an event of default for the company. He noted that, per section 2.05 of the facility agreements signed by KPCL and its lenders, his company needed to make its second loan repayment (equivalent to 3.31 percent of the outstanding loan amount, or Rs. 22.703 billion) by April 21, 2023. KPCL therefore requested that CPPA-G pay its overdue invoices (receivables) -- worth Rs 4.937 billion -- by April 10, 2023. At the time, invoices were being submitted based on a reference tariff without indexation determined by NEPRA on the actual costs incurred by KPCL at the time of Commercial Operation Date (COD) stage tariff. Then, in November 2022 letter to Chief Executive Officer of CPPA-G Rehan Akhtar, KPCL’s CEO Wang Minshing referred to a September 27, 2022 letter in which KPCL noted that it had to make mandatory payments of interest, principal, and commitment fees by November 25, 2022 an delays in the payment would result in a covenant breach, resulting in an event of default. In July 2024, the Government of Pakistan reportedly requested that CDB, China Eximbank, and SRF grant a 5-year maturity extension to KPCL. However, as of October 2024, a debt reprofiling agreement had not yet been finalized.