Private Power and Infrastructure Board (PPIB) is reportedly facing stiff resistance from the Finance Division on “wished” risk coverage to the Chinese company, which is establishing Kohala Hydropower Project under the CPEC, well-informed sources in the PPIB told Business Recorder. The Power Division tabled the summary, which was returned by the Prime Minister’s Advisor on Finance, Dr Abdul Hafeez Shaikh saying that comments of other stakeholders be obtained prior to submission to the ECC. The PPIB Managing Director, Shahjahan Mirza, who is supervising the entire process, held a meeting in the Power Division to get the issue resolved, but so far he was unable to convince the SBP on this issue. He also held a meeting with Chairman CPEC Authority Lt General Asim Saleem Bajwa (retired) and discussed issues being faced by the projects under the CPEC. Giving the background, the sources said, 1,124MW Kohala Hydropower Project located on the River Jhelum in Azad Jammu and Kashmir is being developed by Kohala Hydropower Company Limited (KHCL) having China South Asia Investment Limited (CSAIL) (the main sponsor), China Three Gorges Corporation, the IFC and the Silk Road Fund as sponsors of the project under policy for Power Generation Projects 2002 on “Built, Own, Operate and Transfer” (BOOT)-basis.
The project is included in the China-Pakistan Economic Corridor (CPEC). The project was at advanced stage towards achieving financial closing in 2018, when the Government of AJ&K raised various issues regarding the release of additional environmental flows, construction of sewerage treatment places and water bodies, etc.
After resolution of some of the issues, the outstanding issues were placed before the Economic Coordination Committee (ECC) of the Cabinet for consideration.
On October 2, 2019, the ECC considered the summary and approved all the recommendations of the Power Division except company’s proposal regarding true up/down for foreign exchange loss or gain due to delayed payment by power purchaser and delayed payment rate of Kibor +4.5 per cent under the Power Purchase Agreement (PPA).
The company did not accept the ECC decision of not allowing the true up of foreign exchange loss/gain and delayed payment rate, and despite repeated efforts reiterated its earlier position.
The matter was considered by the PPIB Board in its 126th meeting held on November 21, 2019 wherein, while considering the strategic importance of the project, a five-member committee was constituted under secretary Power Division to work out an amicable solution to the pending issues in consultation with the company.
Subsequently, the company submitted improved proposal with the approval of the CSAIK Board for consideration of the GoP; (i) any foreign exchange loan or gain in excess of seven per cent incurred by the company solely due to exchange rate variance from the due date for payment of invoice up to the date of payment received from power purchaser will be trued up/down to be included in the Tripartite Power Purchase Agreement (TPPA); (ii) delayed payment rate to be agreed under the TPPA and IA will be Kibor plus 2 per cent without compounding/provided however that in case of delay in payment under TPPA beyond 90 days the delayed payment rate for such further delay in payment will be Kibor plus 4.5 per cent (without compounding) and; (iii) SBP to allow company to immediately convert received from power purchase to dollars and keep dollars in onshore account until payments are due under various heads of tariff.
Delayed in conversion of rupees to dollars beyond 15 days will be GoP event of default under IA. Any losses due to delayed conversion from rupees to dollars shall be compensated by the GoP.
The committee of the PPIB Board convened a meeting on January 22, 2020 with the company and discussed the proposal in detail. The committee recognized that the Kohala project has a significantly large size and biggest ever foreign direct investment in single project under the CPEC or otherwise in IPP sector of Pakistan/AJ&K.
Further, due to geo-political and security situation of the AJ&K territory, the Kohala project merits for special consideration of the GoP to be declared as a strategic project to be given certain comforts with respect to foreign exchange risks and ease in conversion and repatriation of foreign currency, whereas delay in payment rate under IA and TPPA needs to be rationalized.
The committee noted that the company has significantly improved the earlier proposal (considered by the ECC) by offering to pick up risk up to 7 percent (instead of 5 per cent) of any exchange loss/ gain and true up/ down beyond 7 per cent variation appears very low and will significantly reduce the exposure of power purchaser. Besides, such exposure will be subject to control of power purchaser by making early payments and any gain over 7 per cent will also be passed on to the power purchaser.
Moreover, it will be applicable to FCY components on which Nepra has allowed indexation with foreign currency. As to delayed payment rate proposal, the committee considered that since major risk of the company as to loss on account of foreign exchange fluctuation is being addressed as a quid pro quo.
Delayed Payment Rate under the TPPA and IA should be uniform Kibor plus 2 per cent without compounding. The committee also noted that standard PPA for hydropower projects under 2002 Power Policy provided for a flat Kibor plus 2 per cent Delayed Payment Rate fairly creates a win-win for both.
The PPIB is of the view that as to proposal of the company that the SBP should allow immediate conversion of Pak rupees into US dollar, it was explained to the company that the SBP being an independent regulator has autonomous policies and laws to regulate financial sector and it has not endorsed the proposal of the company, however, the SBP assures that FCY obligations of IPPs are being discharged in a timely manner as when fail in accordance with prevalent laws and regulations.
However, the company insists that its position on this issue be presented before the ECC and requests for a special permission to make representation before the ECC.
After explaining the entire case, the Power Division has submitted the following proposals for consideration of the ECC; (i) Any foreign exchange loss or gain in excess of 7 percent incurred by the company solely due to exchange rate variations from the due date of payment of principal invoice up to actual date of payment will be trued up/down under the TPPA. This adjustment shall be applicable only in relation to the tariff components indeed with the foreign currency in the tariff determination by Nepra, and;
(ii) Delayed payment rate to be agreed under the TPPA and Implementation Agreement (IA) will be Kibor plus 2 per cent (without compounding) per annum.
The Power Division is of the view that with respect to following proposal of the company, ECC may make appropriate decisions in view of SBP’s position and representation of the company. “SBP to allow company to immediately convert rupees received from power purchaser to dollars and keep dollars in onshore account until payments are due under various heads of tariff delays in conversion of rupees to dollars beyond 15 days will be GoP event of default under IA. Any losses due to delayed conversation from rupees to dollar shall be compensated by GoP.”
The Power Division also wants an authorization to execute tripartite agreement with the company in line with the ECC decision and further authorize the PPIB and CPPA-G to develop and execute the GoPOIA and the TPPA respectively in accordance with the ECC decision.
