Posted on

CPEC debt servicing

The cautioning of the multilateral donator agencies about the Chinese debt to finance energy and infrastructure projects under the umbrella of CPEC has been vindicated. Pakistan will pay S40 billion on account of  loan repayment and profits to the Chinese investors of energy projects within 20 years against the loans obtained worth 21.40 billion. It established the fact that Chinese loans were acquired at a very high rate of interest as compared with loans granted by the multilateral donor agencies for project financing, balance of payment requirements and budgetary support.

The capital expenditure on energy projects was on a very high side and agreed power tariff was also sky high, resulting in the payment of hefty profits to the private investors. Out of 39.83—to be precise—the debt repayment of energy and infrastructure projects amounts to $28.43 billion. The rest of 11.40 billion will be paid in the shape of dividends to the investors, according to the estimates of Ministry of Planning and Development.

This suggests that unlike the claim of $ 50 to $ 62 billion CPEC high interest bearing loans ridden financing, the actual investment is likely to remain half of initially announced investment figures. The only project that will materialise with in the next few years is $ 8.2 billion Mainline-1 project of Pakistan railway. At present the project is not included in these estimates because its PC-1 is yet to be approved. Experts have described the cost of the project inflated and the Railway Minster Sheikh Rashid Ahmad had hinted in an interview with female anchor Gharida Farouqi for a possible reduction of $ 2 billion in its cost.The ADB Country Director Naohong Yang has advised Pakistan to be watchful in handling the mega railway mainline ML-1 project to be financed under CPEC. 

The ADB Country Director is of the view that ML-1 is very expensive mega project and the government needs to explore all possible ways to make sure that the project is financially sustainable. ADB is providing assistance in reviving Pakistan Railway. The ADB and the World Bank has suspended Pakistan’s budgetary support due to deterioration in macroeconomic conditions of the country. Yang shared that all the donors came together on the economic stabilization policies that are to be implemented by Pakistan and it was not only about the International Momentary Fund (IMF).

On the pressure of the International Monetary Fund (IMF), the Ministry of Finance has also shared these estimates with this multilateral to secure a bail out package to overcome the economic woes confronting the country which were left as legacy by the tow previous government to the incumbent government. Pakistan has to return $ 2 billion CPEC debt per year.

These are the first comprehensive estimates that are based on under implementation projects and outflows have been estimated on account of debt servicing of energy and infrastructure projects. CPEC portfolio currently comprises energy projects being set up by private investors and infrastructure schemes undertaken by the government.

The previous PML-N government had signed loans of $ 5.9 billion at an interest rate ranging from 2 percent to as high 5 percent. There were three government loans totaling $ 774 million that have been obtained at an interest rate of 5.2 percent. The commercial loans for setting up power plants had been arranged at an interest rate of London Interbank rate offered at 4.5 plus percent. However, it is the return on equity, which is in some cases as high as 34.2 percent and that will cause an outflow of $11.3 billion. Are such unaffordable energy projects make CPEC a game-changer which was often claimed by the former Planning Minister and senior PML-N leader Ahsan Iqbal?

Capital expenditure (Capex) for coal based energy projects was 40 percent higher than the international cost and power tariff was 8.4 cents per unit as compared to a tariff of 5 cents and below in many jurisdictions. The Capex of hydropower projects under CPEC framework is also very high as compared with that of stage-1 of Dasu hydroelectric power project of 2160 megawatt which being financed by multilateral donor agency. The agreed tariff rate of hydropower plants financed under CPEC is irrationally high. Karot has 2.03 times more the reference cost of Dasu, Kohala 3.31 times, Azad Pattan 3.97 times, Suki Kinari 2.38 times and Mahal 2.50 times. The agreements of energy projects need to be reviewed if possible to bring down the outflow of foreign exchange from cash strapped Pakistan.