In Pakistan, China Uses Advantage For “Silk Road” Contracts

China & Pakistan are planning to build 57 billion dollars worth of power plants, port facilities, etc in Pakistan.

A map illustrating China’s “One Belt, One Road” mega-project at the Asian Financial Forum in Hong Kong. (Photo: Reuters)

In 2016, Pakistan held informal talks with General Electric, Siemens and Switzerland's ABB to build the country's first high-voltage transmission line. Chinese power giant State Grid committed to building the 1.7 billion dollar project in half the time of its European counterparts – and clinched the deal.

This is a familiar tale in Pakistan and many other countries.

As China makes its “Belt and Road” initiative – a massive project to connect Asia with Africa and Europe through land and maritime routes – a policy priority for the next decade, Chinese companies are taking the lion's share of infrastructure projects across the region.

Just last year, in 2016, Chinese firms won project contracts in Belt and Road countries worth 126 billion dollars, state media reported.

Pakistan, The Favourite

In Pakistan, whose geographical position makes it central to Beijing's “Silk Road” plans, contracts have been awarded for projects worth more than 28 billion dollars – all by Chinese companies working together with local firms. More than 20 billion dollars in new investment is likely in the next few years, Pakistan's Planning Minister Ahsan Iqbal told Reuters this week.

Last month, Pakistan's government took out full-page newspaper advertisements on the first China-Pakistan project completed under the plan, a 1,300 MW coal plant that it said was constructed in 22 months, a record time for such a facility. The plant is owned by China's state-owned Huaneng Shandong and the Shandong Ruyi Science & Technology Group.

China Inc’s main advantage, officials in both countries said, is the ability of Chinese banks – with the blessing of the government – to fast-track loans for projects related to the Silk Road.

That makes a huge difference to projects like Pakistan’s power transmission line, which aims to end regular energy cuts that leave the country’s 190 million population without electricity for several hours every day.

Image for representative purpose. (Photo: iStock)

Also Read: What is China’s ‘One Belt One Road’? And Why Is India Upset?

“(Chinese companies have) that advantage because of the support of the Chinese government,” said Mohammad Younus Dagha, a senior government official who was in-charge at the Water and Power Ministry until early 2017.

Dagha, who spoke to Reuters shortly before being transferred to the Commerce Ministry, said Beijing was fast-tracking loan approvals and pushing its banks and insurance firms to speed up due diligence work.

Chinese government officials declined to comment on specific loan approvals.

Favouring Lending For Silk Road Projects

But two officials at two Chinese state-owned banks that direct government funding –China Development Bank (CDB) and Export-Import Bank of China (EXIM) – told Reuters that they have been instructed by the government to favour lending to Chinese firms for Silk Road projects.

The officials also said that the two banks prefer that companies working on infrastructure projects across the region import raw materials or purchase equipment from China.

There is some criticism in Pakistan that the awarding of the contracts to Chinese companies – while speeding up projects – is also costing the country more money.

In the transmission line project deal, for example, General Electric estimated it could make one key part of the line – the converter stations – for about 25 percent less than what the State Grid was charging, according to a Pakistani government official and two power sources familiar with GE's projections. By awarding the contract to the State Grid, Islamabad paid a higher price, they said.

An official at Nepra, Pakistan's independent energy regulator, said the State Grid was also given a tax break, not on offer to other investors.

Also Read: Pakistan Eyes 2018 for China-Funded Mega Dam Opposed By India

Pakistani government officials declined to comment on tax issues regarding the deal.

China Electric Power Technologies Company Limited (CET), the State Grid subsidiary that will build the line, said the price it asked for was fair.

“It's a very reasonable cost,” said Fiaz Ahmad Chaudhry, managing director of Pakistan's National Transmission & Despatch Company (NTDC) referring to the overall State Grid contract.

Chinese Foreign Ministry spokeswoman Hua Chunying said the process for Belt and Road projects in Pakistan was “open and transparent”, and would bolster bilateral relations and regional prosperity.

The edge of Chinese companies in Pakistan is likely to continue. Under the Silk Road plan, China and Pakistan are planning to build 57 billion dollars worth of power plants, port facilities, railway lines and roads in Pakistan.

During a meeting in Bejing last month, Chinese President Xi Jinping said that the plan would be accelerated.

Power Lines

The transmission line project was conceived as a government-to-government contract to build a 878-km (545-mile) connection between soon-to-be-built power plants near the coastal town of Matiari, and Pakistan's industrial heartland by the eastern city of Lahore.

According to Pakistani officials, no formal competitive bidding was sought for the project, which was finally awarded in December 2016.

But the officials said GE, Siemens and ABB were contacted when initial talks with State Grid stalled around mid-2016 over costs.

Dagha told Reuters he briefly met officials from the three companies on the sidelines of a Paris power conference in August and informally talked about the transmission line contract with them.

GE made an initial cost estimate of 800 million dollars for the converter stations, against State Grid's initial bid of 1.26 billion dollars, according to documents from Nepra and sources familiar with GE's cost estimate.

Despite the lower cost, the problem for Prime Minister Nawaz Sharif’s government was speed. Sharif has staked his political credibility on ending Pakistan’s frequent power blackouts before the next general election are held by August 2018.

Pakistan’s Prime Minister Nawaz Sharif (L) shakes hands with China’s President Xi Jinping. (Photo: Reuters)

So, Dagha said he asked the Western companies to also match State Grid's ambitious timeline and wrap up work in 27 months.

“They said ‘you must be joking...it's impossible’,” Dagha recalled. Dagha said Western executives predicted it would take at least 48 months to build the line.

They said just to prepare the proposal...and for the banks to agree to, that would require at least 8-9 months at the fastest pace.

Mohammad Younus Dagha, senior government official

One Western energy company executive in Europe confirmed the meeting took place. Another executive in Europe, who is familiar with the matter, said “international companies did not have the opportunity to make a bid for the project”. Both sources declined to be named.

General Electric, Siemens and ABB declined to comment.

A Question of Time

There was domestic pressure in Pakistan to speed up the deal, several government and regulatory officials said.

An official at Nepra, which had to sign off on the contract, said the government put pressure on the regulator to accept State Grid's price demands, warning the deal could come apart as the Chinese were prepared to walk away.

Pakistan's government did not respond to claims that Nepra was put under pressure, although government officials have in the past voiced frustrations that the regulatory agency was slowing down projects.

The Nepra official also said the Pakistani government had sweetened the deal for State Grid by removing a 7.5 percent withholding tax on tariffs the Chinese company would charge consumers the next 25 years.

The tax break, the Nepra official said, was not on offer for other companies.

Federal government officials and the NTDC did not respond to requests for comment on the removal of the withholding tax.

State Grid was awarded the contract in December 2016. It charged 1.7 billion dollars, including a trimmed 1 billion dollars for the converter stations, according to public documents seen by Reuters.

Khawaja Asif, Pakistan's energy minister, defended charges that Pakistan was favouring the Chinese or overpaying for power infrastructure. “That conclusion is a bit misplaced, or exaggerated,” said Asif.

Ashfaq Mahmood, a former top bureaucrat in Pakistan's Water and Power Ministry, said the reality of Pakistan's need to improve its infrastructure made a certain reliance on its bigger neighbour inevitable.

This is an opportunity on which the Chinese have capitalised and we cannot blame them.

Ashfaq Mahmood, former top bureaucrat in Pakistan Water and Power Ministry

(This story was published in an arrangement with Reuters)

Also Read: Pakistan Allots INR 110.85 Billion for CPEC Project With China

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