IMF asks Pakistani government with limited cash to renegotiate CPEC energy agreements before making payments

IMF asks Pakistani government with limited cash to renegotiate CPEC energy agreements before making payments

According to a media report on Thursday, the IMF has ordered Pakistan’s cash-strapped government to renegotiate the China-Pakistan Economic Corridor (CPEC) energy accords before making payments of roughly Rs 300 billion (USD 1,49,71,55,400) to Chinese power facilities, placing Islamabad in a tight place. Pakistan has often sought international assistance to sustain its faltering economy.

Sources said the IMF suspected that the Chinese IPPs might have been overcharging Pakistan and there was a need to reopen these deals. The Mohammad Ali report, which was the outcome of a nine-member committee headed by former chairperson of the Security Exchange Commission of Pakistan Muhammad Ali, on the IPPs had identified an overpayment of about Rs 41 billion to the Chinese IPPs.

The talks with the International Monetary Fund are being held in the Qatari capital Doha. The global lender has asked the government to treat the Chinese CPEC power plants at par with the power plants established under the 1994 and 2002 power policies, The Express Tribune reported in a detailed report. These plants had been set up under the CPEC framework agreement. The IMF’s demand came after China’s refusal in the past to renegotiating the terms of agreements with the independent power producers (IPPs).

Top officials in the Ministry of Finance confirmed to The Express Tribune that the IMF had raised the issue of payments to the Chinese IPPs with their willingness to renegotiate the deals. When contacted, Esther Perez, IMF’s Resident Representative, emphasized the need for equitable treatment of all power sector stakeholders due to the limited fiscal space.

She said that Pakistani authorities should be cognizant of the limited fiscal space available to clear any outstanding arrears of the sector stakeholders, and thus there should be a trade-off between this and other government priorities, and the potential to unlock lower capacity payments for electricity as part of the aforementioned burden-sharing across stakeholders.

“An important principle underpinning these (power sector) reforms is that all stakeholders contribute equitably to reduce the circular debt, between the government, IPPs, and consumers, while protecting the most vulnerable consumers,” said Perez.

Perez added that to contain circular debt in the power sector, the government of Pakistan had engaged efforts to reduce the cost of power generation as part of a broad power sector reform strategy, including in concluding renegotiations of the capacity payment terms with over 30 IPPs last year. She added that several partners of Pakistan were supporting those reforms, including the World Bank and the IMF.

Finance ministry sources said that the global lender had also objected to giving Rs 50 billion to the Chinese IPPs in February this year without first renegotiating the agreements. Due to the IMF’s objections, the government did not directly make a payment of Rs 50 billion to the Chinese IPPs last week. Prime Minister Shehbaz Sharif had announced that the Chinese IPPs would be given Rs 50 billion to ensure fuel supplies.

Instead, the government released Rs50 billion for the Power Division under the general subsidy claims for July. In return, the Power Division made the payment to the Chinese IPPs and some others to address their “liquidity crunch”, said sources. Sources added that after knowing about the indirect payment to the Chinese IPPs, the IMF asked Pakistan to provide the list of power plants that received the Rs 50 billion injections. The IMF’s objections to clearing the outstanding dues of the Chinese IPPs may jolt Pakistan’s efforts to address the Chinese concerns over the slowdown of CPEC during the past four years and its desire to put the multibillion-dollar initiative back on track. So far, 11 Chinese IPPs, set up with an investment of USD 10.2 billion, are operational, having a total generation capacity of 5,320 megawatts.

Out of these, nearly 2,000MW of power plants had been shut last month due to the depletion of imported coal inventories. Information Minister Marriyum Aurangzeb said that the 600 MW units each of Sahiwal and Port Qasim power plants would be back on the national grid from June 16 to 30. As of May 13, Pakistan owed Rs 340 billion to these power plants, out of which the government has now indirectly cleared some of the dues, leaving behind around Rs300 billion. The Chinese IPPs had threatened to stop their plants if the payments were not immediately cleared, prompting the prime minister to convene a meeting to address their concerns. Six more Chinese IPPs, being set up with an investment of USD 6.8 billion, are at various stages of implementation and will add 3,584MW to the generation capacity of Pakistan.

The previous government had renegotiated the power purchase and implementation agreements with the 46 IPPs established under the 1994 and 2002 power policies. The renegotiation is expected to save Rs770 billion over 20 years. The government had won concessions on account of a reduction in the return on equity and other cost-saving benefits from the power plants of 1994 and 2002 policies. In return, the government agreed to pay Rs403 billion to them in two installments. The payments were made in the shape of one-third in cash, one-third in five-year Sukuk, and one-third in 10-year PIBs at the floating treasury bill rate plus 70 basis points. Sources said that the IMF wanted the same treatment with the Chinese IPPs and after renegotiating the deals, payments should be made in cash and treasury papers, according to The Express Tribune.

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