Debt Relief
Pakistan’s Finance Minister, Muhammad Aurangzeb, has sought an 8-year extension on the repayment period for loans associated with the China-Pakistan Economic Corridor (CPEC) and the energy sector.
Aurangzeb has been in discussions with Chinese officials, requesting not only an extension on loan repayments but also a reduction in the interest rates on these loans. The total loans for CPEC and nuclear power plant projects amount to approximately $17 billion.
If China agrees to Pakistan’s requests, it could result in a significant reduction in electricity prices within Pakistan.
Specifically, electricity tariffs could decrease by 6-7 rupees per unit, while the cost from Chinese power plants might reduce by 3-4 rupees per unit. Additionally, the overall cost of the loans could potentially be reduced by 5%.
Pakistan currently faces over $2 billion in loan repayments for the energy sector, payments it is seeking to defer due to economic challenges.
However, Chinese companies have indicated that they are not considering renegotiating the existing power purchase agreements.
Reports suggest that Pakistan’s energy sector debt is increasing primarily because of capacity payments to power generation companies, where Pakistan pays billions of rupees without consuming the electricity generated.
Representatives from three major Chinese companies have stated that any decision on restructuring the energy debt should be negotiated between Chinese banks and Pakistani authorities.
These companies have not shown willingness to renegotiate the existing power purchase agreements, which include terms about profits and “idle capacity payments” previously agreed upon.
The Pakistani government is also seeking other concessions from the Chinese authorities on the energy debt, including changing the lending currency from US dollars to Chinese yuan and a reduction in interest rates.
If these concessions are granted, it could lead to a decrease in electricity prices by Rs 6-7 per unit overall, with a specific reduction of Rs 3-4 per unit from Chinese power plants under CPEC.
A representative of one of the largest Chinese power plants emphasized that the core issues in Pakistan’s energy sector are uncontrolled high line losses, theft, and low recoveries.
They also pointed out that the higher energy prices should not be attributed to Chinese companies, as their cost of electricity is still lower compared to government-owned power plants running on LNG. Despite being paid in local currency, currency depreciation has eroded their profits.
The representative clarified that the energy companies themselves cannot decide on the debt restructuring; such decisions rest with Chinese financial institutions and Sinosure, a state-owned export credit agency that insures these loans.
Therefore, the ultimate decision-making power lies with these financial bodies, not the power generation companies.
The Pakistani Finance Minister continues to negotiate with Chinese authorities, aiming to convert the interest instruments on the energy debt from the Secured Overnight Financing Rate (SOFR) to the Shanghai Interbank Offered Rate (SHIBOR).
Moreover, Pakistan seeks to reduce the interest rate spread over these benchmarks. Together, these changes could reduce the debt cost by around 5%.
Additionally, Pakistan aims to extend the existing 10-year repayment period for the energy debt by another 5 to 8 years, spreading the cost over a total period of 18 years.
This fiscal year, Pakistan is due to make over $2 billion in energy debt repayments to China, a burden it seeks to alleviate amid current economic strains. This debt includes loans for nuclear power plants, and Pakistan is requesting extensions for these as well.
As of July, the government has notified a new average electricity price of Rs 33 per unit, with over Rs 18 per unit attributed to “idle capacity payments” under the Power Purchase Agreements (PPAs).
There is growing pressure from industrialists and residential consumers to renegotiate these agreements to avoid high idle capacity payments. However, major beneficiaries of these payments are the government and Chinese power plants.
Executives from major Chinese power plants set up under CPEC, such as Sahiwal, Port Qasim, and China-Hubco, maintain that the “take or pay” conditions in the PPAs are based on the 2014 energy policy and cannot be revisited.
They argue that most countries buy electricity on a “take or pay” basis, and foreign investors would be reluctant to invest in Pakistan on a “take and pay” basis instead.
