Impediments to CPEC projects

IT appears the bouquet of power-sector projects under the China-Pakistan Economic Corridor has hit a number of road blocks of late. The latest in a series of snags that these projects have run into is the Matiari to Lahore transmission line, the first private-sector initiative in power transmission that Pakistan has seen. The line is vital to the overall CPEC vision because it will carry additional power to be generated under numerous other CPEC power-generation projects in Sindh, including Tharparkar and Hub in Karachi. If the line is not built, that additional generation capacity will have no means to get to load centres in Punjab, rendering it redundant. Given the $2.1bn cost of the line, the Chinese were asked to build the project, but the tariff that they wanted was higher than what the regulator, Nepra, could allow. The net result has been a stalemate of sorts for almost a year now. In August, Nepra approved a tariff of 71 paisa per unit, but the Chinese want a tariff of 95 paisa instead, 30pc higher, and the government is spinning all its wheels to persuade the regulator to grant the revised tariff.

This is not the first time that we have seen a large CPEC project run into financial difficulties. Earlier, the complex of power plants envisioned at Gadani was scrapped because of the costs of building the jetty. Many investments in the Quaid-i-Azam Solar Park in Punjab have landed up in litigation because the government cannot honour the upfront solar tariff it offered to woo the Chinese. A large coal-fired power plant to be built in Kallar Kahar has also been scrapped due to an escalation in cost, while the Thar coal plants have landed up in litigation because of the costs of compliance with environmental regulations.

The fact that all of these were scrapped at advanced stages of execution shows the lack of foresight while highlighting the abundance of triumphant rhetoric under which these projects were being carried out. In almost every case, it is being discovered that the hidden costs are large enough to erode whatever cost advantages the projects are supposed to bring. Accommodating these costs in every case runs the risk of creating a separate class of investor in the power sector that enjoys privileged access to the sector’s resources, from revolving funds to dollar-denominated settlement and a special security force. This situation must be avoided to safeguard the future integrity of power-sector investments. And the temptation to simply pass all these costs on to the consumers must also be resisted. If the investment coming under CPEC cannot justify itself on financial grounds, then it is worth considering why we should go down this path rather than walk the hard road of power reforms to promote competitiveness instead.

Published in Dawn October 4th, 2016

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