Review of Contracts with Chinese Power Producers Recommended by Pakistani Minister
Pakistan’s Minister of Power, Awais Leghari, has indicated that current contracts with Chinese power producers, which have established and operate numerous power plants throughout Pakistan, require careful examination and revision. The nation currently owes over $15 billion to these Chinese operators and is actively pursuing a rescheduling of payments to alleviate its financial constraints, aiming to secure an essential loan from the International Monetary Fund (IMF).
In an interview with Voice of America, Mr. Leghari stated, “The terms and conditions that we already have with the Chinese concerning their Independent Power Producers (IPPs) need another look.” The power projects, which were primarily established in the last decade, have proven instrumental in reducing prolonged blackouts in the country. However, the contracts stipulate that Pakistan must pay for the entire generation capacity of each power plant, irrespective of the actual electricity consumption. This situation, exacerbated by insufficient industrial growth capable of absorbing additional power and significant transmission losses, has resulted in considerable financial liabilities for Pakistan, including payments for unused power generation capacities and project loans.
Recently, Mr. Leghari and Finance Minister Muhammad Aurangzeb traveled to Beijing to seek assistance regarding the nation’s power sector debt. This visit preceded an agreement reached with the IMF for a three-year loan program worth $7 billion, although confirmation from the bank’s board remains pending. Mr. Leghari acknowledged that both China and the IMF are looking for broader reforms within Pakistan’s economic arena, stating, “They are wanting to look at the entire economic or power sector reform that we have already authored and embarked upon. The more confidence they have in our economic reform agenda, the better the response will be.”
Upon returning to Pakistan, Mr. Leghari has taken the helm of a task force dedicated to power sector reforms, which includes auditing all independent power plants. It is important to note that the contract terms held by independent power plants established by Pakistani firms mirror those of the Chinese-operated facilities. Analysts suggest that China prefers not to be singled out in problematic contracts and would rather not be the only entity providing concessions to Pakistan. Although there has been no official confirmation from Beijing regarding the rescheduling of debts, the Express Tribune has reported that China is willing to convert three of its power plants in Pakistan from imported to local coal.
This strategic shift is predicted to save Pakistan hundreds of millions of dollars on an annual basis; however, it may incur substantial costs. Experts warn that, as Chinese investors face payment challenges, they may require increased insurance premiums and profit margins if they are to expand their mining operations, potentially diminishing the anticipated savings for Pakistan. Nonetheless, Mr. Leghari expressed optimism that such changes will cultivate a favorable scenario for all parties involved, asserting, “It is going to be a win-win situation for everyone,” while dismissing concerns regarding potential investor apprehension.
He emphasized that the establishment of a conducive environment for investment is paramount, stating, “Unless that is there, people will not invest; lenders will not provide funding.” Additionally, the transition to local coal necessitates improvements in infrastructure to enable the transportation of coal over long distances, as well as technical modifications in power plants to accommodate Pakistani coal, which is often regarded as lower quality and less efficient compared to imported alternatives.
Despite environmental concerns regarding the shift to local coal, Mr. Leghari reassured stakeholders, stating, “There has been an overwhelming response to evaluate the technical and financial feasibilities concerning coal conversion and reprofiling.” He downplayed any risks of alienating Chinese investors amid ongoing contract reviews, reiterating that Pakistan values its relationships with investors deeply, affirming, “Whatever will happen, with whomever, will be with mutual consent.”
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