August Issue 2014
China to the Rescue
A great deal has been said and heard about US$ 30 billion that China has proposed to invest in the Pakistan-China Economic Corridor, as well as the Pakistani power sector, in the next three to four years. If these projects were to come to fruition, they would go a long way in bringing an end to the scourge of load-shedding that plagues Pakistan. But what its proponents fail to point out is that this investment would come in the form of Independent Power Projects (IPPs) and would depend entirely on the feasibility and bankability of these projects.
The only difference being that this time, these IPPs would be financed by Chinese banks and not Pakistani banks as happened in case of the IPPs set up in 1994 and 2002. The government would bring on the negotiating table Chinese suppliers of equipment, Chinese Banks and Pakistani investors who are required to line up equity and prepare bankable proposals.
Consider, for example, the 6,000 Megawatt (MW) coal-based Gadani Park between Karachi and Balochistan and the 1,000 MW Jinnah Solar Park in Bahawalpur. Gadani Park would comprise 10 IPPs producing 600 MW each. The federal government will only construct an eight-kilometre jetty for unloading coal. Ironically, this is the same project that former prime minister, Benazir Bhutto, had awarded to the Chinese tycoon Gordon Wu in 1994 with great fanfare, but it was cancelled by the succeeding Nawaz Sharif government because it did not employ the use of indigenous coal.
Similarly, the Jinnah Solar Park would comprise 20 IPPs of 50 MW each, for which land and infrastructure would be provided by the Punjab government.
Besides Gadani Park, several additional coal-based power plants are on the horizon. Work has started on two 600 MW units in Jamshoro, using imported coal, with help from the Asian Development Bank. Work has also begun on two units of 600 MW each at Port Bin Qasim by China Power, described by the Prime Minister’s Advisor for Energy, Dr Musadik Malik, as a “sure shot.” Several smaller and medium-sized, coal-based power plants are also being set up by provincial governments of Sindh and Punjab with Chinese assistance.
The Sindh Government has established the Sindh Coal Mining Company as a joint venture with Engro Powergen for the mining of Block-II and development of a 600 MW Power Plant.
The Water and Power Development Authority (WAPDA) had set up the Lakhra Power plant in the mid-’80s based on Lakhra Coal but it didn’t produce more than 150 MW of electricity. Consequently, the Sindh Government has set up a joint venture company known as Lakhra Coal Development Corporation in partnership with WAPDA, the Pakistan Mineral Development Corporation and the Sindh Government to meet coal requirement of the 150 MW Khanote Power Plant in Dadu district.
It appears that Pakistan is heading towards a replay of 1994, when US Energy Secretary Hazel O’Leary had flown to Islamabad to sign nearly a dozen Memorandums of Understanding (MOU) for IPPs which were later castigated by the Nawaz Sharif Government. These IPPs are presently believed to be the root cause of the chronic circular debt that Pakistan’s economy has been saddled with and refuses to go away.
The impact of the coal-fired IPPs that the incumbent Sharif government is promoting could be gauged from the simple fact that the much-condemned IPPs approved by Pakistan People’s Party (PPP) Government were guaranteed a 17 per cent rate of return, while the coal-based power plants to be set up at Gadani and elsewhere are slated to give a 30 per cent rate of return. It is no wonder then that the federal government had to engage in a lot of arm-twisting to persuade the National Electric Power Regulatory Authority (NEPRA) to announce an upfront tariff for the second time in less than a year.
But the 1,250-mile long Pakistan-China Economic Corridor is an entirely different story. It would stretch from Gwadar Port in Pakistan’s sparsely populated Balochistan province all the way to China’s south-western Xinjiang province. It was first mentioned in a MOU signed by the two countries on April 27, 2006 when at the conclusion of an energy forum in Islamabad, the two countries also decided to undertake studies to “build an energy corridor for Chinese access to oil and gas reserves of Central Asia and Western Asia, including the development of oil refinement and storage in the coastal areas of Pakistan.”
Earlier, Chinese President Hu Jintao had visited Saudi Arabia and discussed a proposal to set up strategic oil reserves in China to be fed by Chinese supplies in addition to regular Chinese crude imports from Saudi Arabia.
Newspaper reports quoted the then minister for petroleum and natural resources, Naseer Khan Mengal, as saying that a pipeline would be laid from Gwadar to the border with China to transport Saudi oil. Another component of the project was the setting up of a refinery at Gwadar and the construction of storage depots.
The construction of a railway line between the two countries, starting from Havelian in Khyber Pakhtunkhwa to the 4,73 meter high Khunjerab Pass, was another component of the project. A contract has also been awarded to a consortium of consultants from Austria, Germany and Pakistan to carry out a feasibility study for the 750 km railway project.
The Nandipur Thermal Power plant set up by a Chinese Company after years of tussles between WAPDA and private sponsors was only recently inaugurated by Prime Minister Nawaz Sharif. But within days of its completion, it has been switched to using coal. It is said that it was running on diesel — supposedly the most expensive thermal fuel — although this may not be entirely true. The truth is that the plant was constructed to operate on both, natural gas and diesel. However, WAPDA has developed a taste for fuel oil and chooses not to operate its plants on gas even when it is available. It is being insinuated that the reason behind this is that fuel oil is a lot easier to pilfer as compared to gas.
It’s a similar case with the Uch II power plant in Dera Murad Jamali, Balochistan which was also inaugurated by Prime Minister Nawaz Sharif. It is said that it cannot transmit electricity because our transmission and distribution system cannot bear the burden of over 16,000 MW of electricity.
It is ironic that 67 years after independence, Balochistan which accounted for nearly half of Pakistan cannot receive more than 500 to 600 MW of electricity because of an antiquated transmission system that cannot handle the load.
This article was originally published in Newsline’s August 2014 issue.
Shahid-ur-Rehman has been covering economics and finance as a journalist for three decades.