Are Pakistani and Chinese utilities set to quarrel over electricity payments?

Power crisis is deepening in Pakistan. Scores of people in the country are living in the dark as power generation has been hit due to the devastating floods.

While the Dadu power station, located in the Sindh province supplying electricity to millions of people, has been saved, threats remain with forecasts suggesting that there could be more rains.

Pakistan Prime Minister Shehbaz Sharif has underlined the need to protect the 500 KV plant at all costs. “For uninterrupted power supply, the protection of grid station is necessary,” he had said.

The heavy rains which have killed more than 1400 people and left thousands homeless have “endangered grid stations and exacerbated power shortages at a time when the country is already grappling with an acute energy crisis and limited LNG supplies,” S&P Global said.

To add to the problem, Pakistan now has limited capacity to repay the Chinese independent power producers (IPPs) operating in the country under the larger China Pakistan Economic Corridor (CPEC) project.

The country’s Central Power Purchasing Agency (CPPA) owes around Rs260 billion to the Chinese IPPs and non-payment of dues to these power companies has also become a thorny issue between China and Pakistan.  These IPPs have been raising the issue of repayment and even warned that they would have to close down in case dues are not cleared.

Recently, Islamabad said that a payment of Rs 50 billion to four power plants will be made.

Though the Sharif government has promised to start the repayment process, it will have to balance its commitment made to the International Monetary Fund (IMF), which has outlined that the Chinese loans threaten Pakistan’s debt sustainability.

Restructuring purchase agreements with the Chinese IPPs was one of the prerequisites of the IMF for reviving its $6 billion bailout package.

Several reports have suggested that the Chinese IPPs, operating in Pakistan, have been over-charging without any transparency in the financial dealings.

Anticipating that the financial assistance could be directed towards repaying the Chinese IPPs, the IMF set out the condition that Islamabad would not be able to use the funds to repay the Chinese IPPs. Pakistan has also received the first tranche of loan of $1,166 million from the IMF under its Extended Fund Facility (EFF).

The government has assured the multilateral agency that it would renegotiate purchase agreements with the Chinese IPPs or reschedule bank loans.

A report by Nikkei Asia said that even as Pakistan and China trumpeted their all weather friendship on the sidelines of the just concluded Shanghai Cooperation Organization, tensions between the two nations are brewing due to “Islamabad’s scramble to extricate itself from an economic crisis could stoke tensions.”

Haroon Sharif, former minister of state, told the media organisation that the Chinese companies have “been absolutely upset for a very long time.”

“The Chinese stance is that it’s a commercial agreement. No IPP is obliged to listen to the [Pakistani] government because the agreements were drawn under the law,” the former minister said.

With the damages from the floods that would be a huge dent on the exchequer, analysts are almost certain that the payment process may not be a smooth one.

“Patience for the Chinese are also thinning and now they are worried as the IMF riders are not favourable for them,” one of them said.

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