Power production contracts with Chinese companies need review, Pakistani minister says
“I think the terms and conditions that we already have with the Chinese as far as their IPPs [independent power producers] are concerned, they need another look,” Leghari told VOA in an interview this week.
The power projects, set up mostly in the last decade, helped end hourslong blackouts. But contracts require that Pakistan pay for the entire generation capacity of each power plant, regardless of how much electricity is used. A failure to spur industrial growth that could help utilize additional power, and the inability to reduce transmission losses, has left Pakistan with huge bills to pay for unused and wasted power generation capacity in addition to repaying project loans.
Independent power plants set up by Pakistani companies in the country also have contract terms similar to those of Chinese-run plants. Experts say Pakistan's efforts to conduct an across-the-board audit of domestic and foreign-owned independent power plants show Beijing does not want its companies to be singled out as problematic, nor does it want to be alone in offering concessions to Islamabad.
Leghari is leading a power sector reform task force created after his recent trip to China. Reform plans aimed at cutting power sector losses include auditing all independent power plants.
Experts say Pakistan's efforts to conduct an across-the-board audit of domestic and foreign-owned independent power plants in the coming days show Beijing does not want its companies to be singled out as problematic, nor does it want to be alone in offering concessions to Islamabad.
Leghari said the Chinese government and companies are already engaging with Pakistan on the reprofiling of power sector debt and to convert coal-fired power plants to local fuel.
"Those are changes in the terms and conditions of how the Chinese IPPs are working with us. Those would give us very substantial benefits to harvest in terms of [electricity] tariff reductions," the power minister said, referring to Pakistan's efforts to also bring down skyrocketing electricity prices for consumers.
Islamabad owes more than $15 billion to Chinese power plant operators. It is seeking rescheduling of payments to gain financial breathing room in a bid to obtain much-needed financing from the International Monetary Fund.
Leghari and Finance Minister Muhammad Aurangzeb went to Beijing late last month to discuss power sector debt relief.
The trip came days after Islamabad reached a staff-level agreement with the IMF for a three-year, $7 billion loan program. The bank’s board must still approve the deal.
Leghari said China, like the IMF, wants to see broader reforms from Pakistan.
China and the IMF “are wanting to look at the entire economic or power sector reform that we have already authored and embarked upon,” Leghari said. “I think the more the confidence they have in our economic reform agenda, the better would be the response.”
Beijing has not publicly addressed Islamabad’s request for rescheduling energy sector debt. However, Pakistan’s daily Express Tribune reported it has agreed to convert three Chinese-owned power plants in Pakistan from using imported to local coal.
Pakistan hopes to save hundreds of millions of dollars annually by switching to local coal for power generation.
The change may come at a high cost. Experts say Chinese investors struggling to recover payments may demand higher insurance premiums and profit margins if they are to expand mining operations, reducing savings for Pakistan.
“It’s going to be a win-win situation for everyone,” Leghari said, rejecting the concerns.
“Unless that isn’t there, people will not invest, lenders will not give money.”
Pakistan will also need infrastructure to transport local coal long distances, and power plants may need to make technical design changes to use Pakistani coal, which is known to be dirtier and less efficient than imported coal.
“There has been an overwhelming response to have a look and run technical and financial feasibilities on all the aspects of coal conversion and reprofiling,” Leghari insisted, while rejecting environmental concerns about shifting to local coal.
Leghari played down the possibility of scaring Chinese investors as Pakistan seeks a review of past contracts, saying Islamabad holds relationships with investors “dear to our heart.”
“Whatever will happen, with whomever, will be with mutual consent,” he said.