Coal power project at Gwadar: Chinese firm shows ‘conditional’ willingness to commence work
24 November 2023
Published in: Business Recorder
ISLAMABAD: Chinese firm, CIHC Pak Power Company (Pvt) Limited (CPPCL) is said to have shown willingness to commence work on 330 MW imported coal power project at Gwadar with stringent conditions, to be met by the Private Power & Infrastructure Board (PPIB) and National Electric Power Regulatory Authority (NEPRA), well-informed sources told Business Recorder.
This project has been firmed up, after interactions at the highest level between China and Pakistan as the former had refused to start a project on Thar coal. The power company submitted revised tariff petition to NEPRA on the advice of PPIB.
The power company’s General Manager Li Yanfeng, stated that the company was unable to formally commence construction as requested by the two governments from time to time over the past six years’ and one of the most important reasons is the absence of an approved rational tariff.
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The project was inaugurated by the leaders of the two countries in 2017 and the groundbreaking ceremony was witnessed by the concerned government officials in 2019 when the Company entered into an EPC agreement with Power China under which the contract amount was $ 20 million above the EPC amount ($ 21.41million) determined by NEPRA. In 2020, the Company constructed a temporary camp and wire fence at the site, in compliance with the request of the GoP.
The same year GoP initiated negotiations of PPA and IA, which were finally signed with the company in April 2021 even though a reasonable tariff was still absent.
In 2021, for the development of the project, the company and CDB (China Development Bank) were required by both the Governments to commence financing work on a fast track basis and as a result, the Company and the lenders, commenced financing work without project cost and final tariff, which was recorded in CDB financing history. For the support of Sinosure, the consent was sought in all directions in this project by the sponsors from 2019 and 2021.
So far, the investor has spent more than $ 22 million directly on the project, and can no longer afford to continue a project that may be shelved by relevant parties’ though the Company is dedicated to promote and develop the project to the extent of its ability.
Despite uncertain conditions and circumstances not allowed to take further commercial activities, the Company overcame numerous difficulties or risks, and carried out the work with assistance of both government entities, which reflects its enthusiasm for investing in Pakistan and its commitment to the development of the China-Pakistan Economic Corridor and Gwadar region. However, the efforts and sacrifices of the company have been considered by some as irrational.
Sinosure and CDB finally decided to suspend the financing work due to the absence of a reasonable tariff following the analysis of recently determined tariffs by all parties.
The Company had submitted the Motion for Leave for Review to NEPRA and sought following relief: (i) approve the EPC cost of $ 420.03million; (ii) onshore EPC cost may allowed to be adjusted according to following mechanism, ie, for the conversion of the onshore EPC cost, the exchange rate prevailing at the time of the decision in the present case should be used and adjustments to the exchange rate on onshore EPC cost will not reduce the EPC contract amount. The same may be applied in others item of the project cost;(ii) project development cost of $ 47.86 million subject to revision as per actual to the extent of amount to be quoted by NESPAK with respect to Project Owner’s Engineer;(iii) permit the upfront Sinosure fee at 5.3% under the Buyer’s Credit policy without any condition and specific amount will be adjusted based on debt service amount and other related assumptions; (iii) coal pricing API-3 index be replaced with API-4 index; (iv) approve O&M cost of $ 17.47 million, which is inclusive of $ 1.64 million Ash Handling cost;(v) cost of providing the bank guarantee be permitted as part of the Project cost (for the portion related to the construction period) and as part of the O&M cost (for the portion related to the operating period); (vi) NEPRA may determine provisionally an amount for withholding tax and sales tax, subject to adjustment at the Commercial Operations Date (COD), and include this sum in the overall project costs. This inclusion is critical for enabling the Company to fulfill the requirements set by its lenders; (vii) the security costs as per Section 5.4 of Implementation Agreement may be included as pass-through items;(viii) NEPRA may incorporate the Sinosure fee and financing fees and charges in the computation of interest during the construction phase; (ix) NEPRA may endorse the proposal for a flexible adjustment in the ratio of debt to equity at the COD, taking into account the finalized loan terms agreed upon with the lenders, with a minimum threshold of 70% for the debt to equity ratio;(x) NEPRA may issue a clarification allowing for the use of SOFR for loans of the project; (xi) NEPRA to approve the 17% Rate of Return for this project according to the macroeconomic situation, the regional situation and the actual situation of this project again; (xii) NEPRA to allow the Company to procure coal from the spot market with some flexibility if coal is not available or does not meet the operational demand under the long-term agreement. This will ensure that the coal pricing mechanism for the project is competitive with other large operators in Pakistan procuring coal on a long-term basis; (xiii) NEPRA to approve the CSR cost Rs 10 million for the entire project life time determined in the tariff determination on July 27,2023; (xiv) NEPRA to take into account the exchange risk if the annual exchange rate loss exceeds 5% of the established Return on Equity (ROE) and the Company incurs a loss on this account; (xv) NEPRA to restore the project cost denominated in dollars regarding cost of land in PKR paid to Government of Balochistan through dollar selling based on signed lease agreement, which has mistakenly been reduced sharply applying the current exchange rate; (xvi)the cost of standby letter of credit @ 1 % to be paid to the issuing bank for maintaining the Debt Service Reserve Account through project finance be allowed as part of the operation and maintenance expenses on an actual basis; and (xvii) the lenders’ advisors’ fees (including technical legal, insurance, Trustees, inter-creditor agents, administrators, supervisors etc.) paid by the Company be treated as pass-through item during the term of debt at actual not exceeding $ 0.89 million per annum.
