MH Rajesh writes: The recent article in the express tribune, gives some refreshing insights into CPEC. It also triggers some questions about economics of CPEC. The CPEC has more energy than corridor, with over three quarters of investments in power plants. Three quarters of these power plants use coal and shuns furnace oil, its legacy fuel for power generation. Hence when world is walking away from coal, Pakistan walks back into coal, adding to environmental woes.
Unlike the infrastructure segment, where government is deeply involved, the energy field of CPEC mostly involves Sino- Pak private partnership termed Independent Power Producers. Chinese banks will finance these private investments at 5–6 per cent interest rate. The government of Pakistan will be contractually obliged to purchase electricity from those firms at pre-negotiated rates and with a sovereign guarantee against defaults. This is at a high rate of PKR 18 per unit. Pakistan already has a consumer rate of Pk Rs 16.95, which is the highest in the SAARC region. This high rate in CPEC according an analyst ‘is a classical colony-making exercise by China, which Pakistan establishment and the Army is quite excited with’.[i] Chinese firms seek a revolving fund backed by sovereign, amounting to 22 per cent of power tariffs[ii], which could amount to 700mn USD annually for all projects[iii] if local firms default. This could be unfavourable to Pakistan on the long term. The debt equity ratio of energy projects are to the order of 25per cent equity: 75% debt. The loan in addition to interest carries insurance fees of 7 per cent with Sinosure, the Chinese insurance arm. The returns on equity for these projects is at a very high rate of up-to 34%, which will eventually be borne by the consumer[iv].
The CPEC will eventually add a 16 GW capacity in energy generation at a cost of 34bn USD which is at the rate of 2bn USD per GW when all projects are considered. Power Plant installation estimations in CPEC varies from Wind power installation is 2.5BnUSD /GW, Solar 1.35bnUSD/GW, Hydro 1.9-2.68BN USD /GW, Coal 0.8-1.5bnUSD /GW as per calculations by the author. Whereas, India routinely builds its thermal power plants at a cost less than $ 1 billion per GW[v]. Hence CPEC power plants are above normal regional costs. China also gets a near 100 per cent offset benefitting Chinese firms, besides the sovereign guarantee and power purchase commitments.
Hence, against a shortage of 5gw, CPEC creates and additional capacity of 16 GW, which is three times the shortage. The moot question is, who will buy that power?
Such are some interesting facets of economics of CPEC.
End Notes
[i] China-Pak Economic Corridor: Why Gwadar Is An Overrated Port, http://swarajyamag.com/world/china-pak-economic-corridor-why-gwadar-is-an-overrated-port, accessed September 26, 2016
[ii] “ECC Approves Plan to Set up Special Funds for CPEC Projects,” DAWN.COM, February 19, 2016, http://www.dawn.com/news/1240546.
[iii] Satyabrata Pal, “The China-Pakistan Corridor Is All About Power. Not Electricity, but the Real Thing.,” The Wire, June 3, 2016, http://thewire.in/39874/the-china-pakistan-corridor-is-all-about-power-not-electricity-but-the-real-thing/.
[iv] “Windfall for Chinese on Coal Fired Projects,” The Express Tribune, February 15, 2017, https://tribune.com.pk/story/1327172/windfall-chinese-coal-fired-projects/.
[v]“China-Pak Economic Corridor: Why Gwadar Is An Overrated Port,” accessed September 26, 2016, http://swarajyamag.com/world/china-pak-economic-corridor-why-gwadar-is-an-overrated-port.