Chinese investors and power debt

By: Khurram Husain

NOW here’s something interesting. For many years the power sector has been hobbled with large amounts of debt, whether circular or otherwise. It is one of the largest users of bank liquidity (after government), and the size of the so-called circular debt, when it was at its peak, was comparable to the peace-time defence budget.

But a few years ago, a string of Chinese investors began acquiring stakes in the power sector, and in the course of doing so, they examined carefully the myriad risks that the country presented. One of the chief risks that caught their eye was the circular debt.

A racket of sorts had developed around the circular debt when it was in its heyday. Even though many IPPs made a noise about the liquidity constraints that were imposed upon them as a result of delayed payments from government, they were compensated through penal interest charges on all outstanding government receivables to the tune of 2 to 4pc spread over KIBOR — the benchmark lending rate for corporate debt in Pakistan.

A racket was born when sponsors of some IPPs deliberately sought to build up a stock of receivables from the government, then use that as an excuse to shut down their plant and live off the penalties and capacity charges. Of course, managing an enterprise under these constraints remained a challenge, when inflows were erratic but payments to creditors and shareholders had to be made on a rigid schedule. But if you were so inclined, you could enjoy returns on your investment under these circumstances even as your plant lay idle.

The racket got its first hit when the new government came into power in 2013. First, the accumulated stock of outstanding receivables was largely wiped out in a colossal one-time payment of almost Rs500bn. Then, through a concerted effort that was aided by a sharply falling price of furnace oil, the government succeeded in halting the accumulation of outstanding receivables somewhere around late 2014. Today, the IPPs are paid largely on time and fresh accumulation has been avoided.

The new investors are asking for protections against a return to a period of delayed payments and legal disputes.

After this the government began to play hardball with the IPPs. It agreed to pay the penal interest charges on whatever stock of outstanding receivables was in place around September 2014, when the accumulation halted, but in return demanded liquidated damages from those IPPs that refused to restart generation. A dispute arose which was taken to London for international arbitration, during which the IPPs obtained a favourable judgement.

It was in the era of fresh accumulation that many of the Chinese investors first scanned the economic landscape of Pakistan to determine whether or not to acquire stakes in the power sector in Pakistan. Interestingly enough, they wanted nothing to do with any “penal interest charges” or any other element of the racket that the power sector had become host to.

In tariff petitions placed before Nepra, the power sector regulator, successive Chinese investors make reference to a “revolving fund” that they expect the government to maintain to cover delayed payments. These concerns may have abated somewhat once the government established a track record of timely payments from September (or thereabouts) 2014 onward, but what if fuel prices in the future should climb back up past the $60 per barrel mark?

The uncertainties that are the hallmark of dealings with government carry a price tag, and even though things may be better on the circular debt front today than they were five years ago, the fact that there is still a single buyer means the problem can resurface in the future.

It is with this in mind that the new investors are asking for protections against a return to a period of delayed payments and legal disputes. A revolving fund is one way to provide that protection, although it only adds to the government’s fiscal burden. But a few months ago, another potential Chinese investor has found a second innovative way.

It is an open secret that K-Electric is about to be sold to a Chinese sponsor. The utility’s head offices are swarming with Chinese personnel, who are busy going through its books and evaluating its finances. Before the new sponsors take over, though, there is a small hurdle: a new multiyear tariff needs to be determined.

Towards this end, the company has placed a petition before Nepra detailing the requirements of the new MYT, which it asks should run for 10 years. The tariff petition identifies “working capital constraints due to circular debt” as one of seven challenges the company faces going forward and proposes the following remedy.

“KE incurs additional costs in holding working capital to cover late payments by government entities and TDC [Tariff Differential Claims] by the Government, due to circular debt,” says the KE in the petition. “This is an uncontrollable and unavoidable cost. Therefore, KE requests that a working capital allowance should be included as a pass through component in the tariff on the basis of a mechanism to be determined by Nepra.”

Translation: if we don’t receive payments from any government entity, we should be allowed to simply recover that money from consumers through their bills. Notice the language does not differentiate between local, provincial or federal government. It simply says “government entities”, so we can ask: might the outstanding amounts owed to KE by the Karachi Water and Sewerage Board, for example, potentially be considered a pass through item for all other paying consumers of KE?

One cannot blame the Chinese investors for demanding such protections. Unlike domestic investors, they don’t see themselves as acquiring stakes in a highly uncertain racket. They are coming in for a simple purpose: to generate electricity, sell it for a profit. It’s fair that they want nothing to do with the problem of delayed payments, with or without penal interest charges. But is it fair that the cost of this risk ought to be pushed onto consumers?

Policy confusions:



A country’s foreign policy is linked by varying degrees to the political system, social structure, power balances and interests of the ruling elite. So if there is something wrong with the foreign policy, it is often because something is wrong with the domestic policy. And nowhere is this as true as perhaps in Pakistan.

In its early years, Pakistan faced serious challenges of external security and internal unity. To their credit, the army and civil bureaucracy helped Pakistan not only survive but also build a good platform for progress. But the counterpoint was the emergence of a centralised authoritarian state that soon became a useful model to serve the class and institutional interests of the army and dominant social groups who came to decide what was best for Pakistan. They had a stake in the country, but largely as a creation for their own benefit.

From that organising idea emerged a foreign policy that was consistent with the domestic order. No genuine foreign policy debate was encouraged for fear that it might contradict the official paradigm that served the status quo.

No genuine foreign policy debate was encouraged for fear that it might contradict the official paradigm.

In time, the army emerged as predominant amongst the ruling elite; long years of direct military rule helped it define Pakistan’s identity, ideology and interests in a way that entrenched the army’s primacy in national life. This organising principle was made all the more enduring by creating a compatible socio-cultural and intellectual landscape.

The country’s foreign policy was so designed as to focus on issues dependent on the army’s role. And Pakistan’s legitimate security interests were exaggerated to provide a rationale for this. Worried neither by the budget nor accountability, the army embarked on strategic ambitions in the region, leading to an imbalance between foreign policy and the domestic priorities of security, development, and political stability. Civilian rule or military — the system remained the same. The people’s interests suffered, but they were fed illusions and emotions. Even democracy became an illusion.

The army’s definition of Pakistan managed to carry the day due to its political weight and value to the system from which both civilians and the army profited. The army’s achievements were not only in courting external powers, principally the US, China and Saudi Arabia, whose strategic interests it served, but also in enhancing Pakistan’s defence capability, particularly in the nuclear field — a matter of some pride for an underachieving nation. Civilians who could not outperform the army decided to ‘support the troops’ and bask under their accomplishments, especially in the area of security. And both, of course, espoused the cause of Islam and flirted with Islamists.

This model looked ‘good’ as long as we had benefactors who were solidly behind us. To its credit, the Foreign Office did well in making this policy operational. But we did not realise what the years of living dangerously had done to us; we did not realise that we had become a source of concern to ourselves and to most of our friends whose interests had changed. Sadly, our foreign policy remained trapped in old assumptions about the world and about ourselves. And Pakistan’s responses to a vastly changed global and regional environment continued to be fixed and unchanging.

There are both compulsions and incentives for change now. The civilians and the army need to work together for it. The country’s socio-economic problems are crying out for solutions, requiring not only good governance but also cooperation from the army in shifting the focus away from external security and away from a security paradigm from which the ‘jihadist’ organisations have found their raison d’être. We have to find a new way of relating to our neighbours and then create a Pakistan in which radicals are treated as enemies not assets, political or strategic. Alibis for inaction will not work. How can we claim to be victims of forces we have not disowned?

Once Pakistan’s defining idea is changed, it will not be difficult to find a fitting foreign policy. Our capable foreign service can help in the making and putting into operation of a strong foreign policy. And we have great intellectual capacity in the country’s intelligentsia to offer its input. The military should not be afraid to lose its dominance. It is a good professional outfit and its role on behalf of Pakistan’s security in a dangerous neighbourhood will remain indispensable. It is just that the foreign policy needs to be democratised.

The writer is a former ambassador teaching at Georgetown and Johns Hopkins University, US.

Pakistan welcomes US blacklisting of TTP Jamaatul Ahrar

ISLAMABAD: Pakistan has welcomed a United States decision to place Jamaat-ul-Ahrar (JuA), splinter group of the banned Tehreek-i-Taliban Pakistan (TTP), on a list of specially designated global terrorists.

“Pakistan has long pleaded concrete action against the TTP and their like who operate in Afghanistan, and they have planned and launched a number of attacks in Pakistan while operating from there,” Foreign Office spokesman Nafees Zakaria said at a weekly briefing on Thursday.

Jamaat-ul-Ahrar (JuA) is an offshoot of the TTP based in the Pak-Afghan border region. The group, founded by a former TTP leader in August 2014, has staged multiple attacks in the region targeting civilians, religious minorities, military personnel and law enforcement agencies.

The US State Department announced that the designation automatically imposed on the group and its leaders all sanctions that applied to foreign persons and groups determined to have committed, or posing a significant risk of committing acts of terrorism.

As a result of these designations, all property subject to US jurisdiction in which Jamaat-ul-Ahrar has any interest is blocked and US persons are generally prohibited from engaging in any transactions with the group.

Jamaat-ul-Ahrar was responsible for the killing of two Pakistani employees of the US Consulate in Peshawar in March. Later in that month, it carried out a suicide assault at the Gulshan-i-Iqbal amusement park in Lahore that killed more than 70 people — nearly half of them women and children — and injured hundreds more. The Easter Sunday attack was the deadliest terrorist attack in Pakistan since December 2014.

‘Pakistan has suffered more than any country’

The Pentagon’s announcement that it will not pay Pakistan $300 million in military reimbursements did not evoke a strong reaction from the Pakistan Foreign Office.

However, spokesperson Zakaria in response to a question recounted the sacrifices the country has made in the war against terrorism.

Pakistan has suffered more than any other country in the war on terror both in terms of human and economic losses, Radio Pakistan quoted the FO spokesperson as saying.

He said 60,000 people including 6,000 security personnel had lost their lives during the war on terror, adding that the US payment under the Coalition Support Fund (CSF) was helpful to the Pakistani offensive.

Operation Zarb-i-Azb has seen a resounding success due to which bastions of terrorists in the tribal areas have been cleared, the spokesperson stated.

Quetta blast: Terror case registered against unidentified men

QUETTA: Case of the bomb blast on Quetta’s Ispahani road was registered against unidentified men today.

The case was registered in the presence of Station House Officer (SHO) Tanzeem Hussain Shah, in Sadar Police Station.

Various sections including anti-terrorism act, communication damage, and murder attempt have been added in the case.

The blast that occurred a day before injured five people including a woman and also damaged a Frontier Corps (FC) vehicle.

Pentagon won’t pay Pakistan $300m military reimbursements

The Pentagon will not pay Pakistan $300 million in military reimbursements after US Secretary of Defense Ash Carter decided not to tell Congress that Pakistan was taking adequate action against the Haqqani network, a US official said.

Relations between the two countries have been frayed over the past decade, with US officials frustrated by what they term Islamabad’s unwillingness to act against extremist groups such as the Afghan Taliban and the Haqqani network.

“The funds could not be released to the Government of Pakistan at this time because the Secretary has not yet certified that Pakistan has taken sufficient action against the Haqqani network,” Pentagon spokesperson Adam Stump said on Wednesday.

The $300 million comes under the Coalition Support Fund (CSF), a US Defense Department program to reimburse allies that have incurred costs in supporting counter-terrorist and counter-insurgency operations. Pakistan is the largest recipient.

“This decision does not reduce the significance of the sacrifices that the Pakistani military has undertaken over the last two years,” Stump added.

According to Pentagon data, about $14 billion has already been paid to Pakistan under the CSF since 2002.

The decision by the Pentagon is a sign that while it sees some progress by Pakistan in its military operations in North Waziristan, much work remains.

Pakistan rejects harboring militants but says there are limits to how much it can do as it is already fighting multiple extremist groups and is wary of a “blowback” in the form of more terror attacks on its soil.

“(The) Coalition Support Fund is one of the many cooperative arrangements between Pakistan and the United States to pursue common objectives,” said Nadeem Hotiana, a spokesperson for the Pakistani embassy in Washington.

Relations between the United States and Pakistan were tested in May by a US drone strike that killed Afghan Taliban chief Mullah Akhtar Mansour on Pakistani soil.

There has been growing resistance in the US Congress to sending money to Pakistan. Many lawmakers have expressed concern about its nuclear program, commitment to fighting terrorist organisations and cooperation in the Afghanistan peace process.

In March, Republican Senator Bob Corker said he would use his power as the chairman of the Senate Foreign Relations Committee to bar any US funding for Islamabad’s purchase of $700 million of Lockheed Martin Corp F-16 fighter jets.