China, Pakistan power plant dispute at a breaking point


PESHAWAR – With China virtually halting the multi-billion dollar China-Pakistan Economic Corridor (CPEC) over differences in cost estimations and contractual disputes, the issue of overdue payments owed to Chinese independent power producers (IPPs) is near a breaking point.

Media reports claim Beijing is reluctant to pump in new funds under the CPEC arrangement until problems faced by Chinese investors are resolved and previous CPEC-related agreements are fully honored by Pakistan.

Last September, Pakistan pledged to pay US$1.4 billion due to Chinese power plants against accumulated owed dues of $2.3 billion during a meeting of the 10th Joint Cooperation Committee of the CPEC.


Islamabad also committed to opening a revolving fund equal to 21% of the cost of power generation.

Only days before Prime Minister Imran Khan left for Beijing last month, Pakistan paid $28 million to Chinese IPPs and had the revolving fund approved by the cabinet.

As many as 10 energy projects worth $10 billion have been completed under the CPEC while four power projects costing $4.7 billion are near completion.

Official circles claim the previous Nawaz Sharif government “badly managed” agreements with the Chinese and their IPPs. They say the Power Purchase Agreements (PPA) were based on erroneously calculated fuel mix components, which has made the country dependent on imported fuels for power generation.

The lopsided agreements, they claim, created the capacity for compulsory payments by the insertion of “take-or-pay” mechanisms in the PPA clauses.


Former energy minister Omar Ayub Khan, speaking at a question and answer session in the National Assembly early last year, informed parliamentarians that the annual capacity payments to IPPs would reach $8.1 billion by the year 2023. He blamed the hike on the faulty agreement brokered by the Pakistan Muslim League-Nawaz (PML-N) government.

Pakistani Prime Minister Imran Khan attends a welcome ceremony in Beijing. Photo: AFP / Jason Lee

Beijing has expressed its concerns over the non-payment of power dues for some time, including at the highest level during Prime Minister Khan’s visit to Beijing last month.

The difficulties China’s state-owned firms face getting paid on time for electricity supplied to the national grid have compelled the firms to send warnings to Pakistani authorities.

The China Electric Power Equipment and Technology Co Ltd (CET) and the State Grid Corporation of China (SGCC), registered in Pakistan as the Pak Matiari-Lahore Transmission Company Private Limited (PMLTC), sent a strongly-worded letter to the Ministry of Water and Power requesting it to release $700 million by March 24 to avert a default under the facility agreement.

Pakistan is bound to make timely payments to the Chinese power plants established under the 2015 energy framework agreement. However, the government has been violating this agreement since 2018 due to a faltering economy, a fast-shrinking budget and depleted national reserves.


The payable dues to Chinese investors have now ballooned to $2.3 billion, with power producers threatening to halt transmission services.

Pakistan faces a looming financial crisis, with the budget deficit widening to an all-time high of $24 billion, the trade deficit to $31 billion and the current account deficit expected to touch $31 billion by the end of June this year.

The record $24 billion budget deficit – equal to 8% of gross domestic product (GDP) – persisted despite a cut in the development budget of $1.1 billion. Pakistan will need to procure more domestic and foreign loans to bridge this huge budgetary gap of 4.3 trillion rupees ($24 billion).

With limited budgetary options available for the government to pay Chinese power producers, Islamabad has proposed to renegotiate the PPAs with Chinese IPPs operating under the CPEC, as has been done with domestic power producers.

This photo taken on May 23, 2018, shows a Chinese-backed power plant under construction in Islamkot in the desert in the Tharparkar district of Pakistan’s southern Sindh province. Photo: AFP / Rizwan Tabassum

The Pakistani government believes that if the agreements are successfully renegotiated, the country would save $14.29 billion on electricity costs over the life period of the newly-built plants.


However, analysts, observers and officials claim Beijing turned down Islamabad’s proposal and insisted that the original agreement is honored.

Pakistan’s Finance Ministry, they said, directed the Pakistan ambassador to China, Moin ul Haq, to follow up on “these proposals with concerned Chinese authorities and inform them that renegotiation of the terms of purchase agreements is linked with the country’s external account stability and budgetary requirements.”

Pakistan Tehreek-e-Insaf (PTI) senator and renowned industrialist Nauman Wazir Khattak told Asia Times that the total capital investment of most of the IPP agreements had been repaid during the first two to three years of operations.

“I repeatedly pinpointed that the IPPs intentionally misled the National Electric Power Regulatory Authority (NARPA) and presented exaggerated input and overhead costs to get a higher percentage of tariffs. They should be forced to cough up billions they illegally made by misreporting to the regulatory authorities,” he claimed.

He said that once the Chinese IPP’s outstanding dues were cleared, the government would be left with no legal way to prosecute them.

An analysis of official data compiled by the CPEC authority in 2019 revealed that 10 Chinese units had received not only their capital investments but made more than an 80% dividend on energy sales in a short span of three to four years.

The inflow and outflow charts of plants at Kohala, Karot, Suki Kinari, Port Qasim, Hubco, Engro, Gwadar, Thar, Sahiwal and the Clean Energy Power Project revealed these units had originally invested $15.975 billion and earned $25.591 billion in a short time.

The Chinese-built Port Qasim coal-fired power plant. Photo: WikiCommons

In 2020, a nine-member inquiry committee headed by a former chairperson of the Security and Exchange Commission of Pakistan (SECP) unearthed alleged widespread malpractice in the power sector.

In its 296-page report presented to the prime minister, the committee highlighted instances of corruption, including at Chinese units installed under a government-to-government arrangement for CPEC-related operations.

The report revealed that most of the agreements, including those set up under the CPEC arrangement, had made 50% to 70% in profits against a maximum threshold of 15% as determined by the national regulatory authority.

Several IPPs had an investment payback period of two to four years and made profits as high as 10 to 20 times over their initial investment, the report claimed.

In particular, the report revealed that Huaneng Shandong Ruyi Energy (HSR), which set up the 1,320 MW Sahiwal Coal Power Project in Punjab and the Port Qasim Electric Power Company Limited (PQEPCL), had overstated its set-up costs and received over­payments of 483.64 billion rupees ($3 billion) over a period of three years.

(Courtesy Asia Times)