Chinese IPPs’ circular debt surpasses Rs400bn, threatens progress on power projects

The circular debt owed by Chinese Independent Power Producers (IPPs) has surpassed the Rs400 billion mark, posing challenges to the continuation of robust power sector initiatives by Chinese companies.

The overall circular debt in the power sector reached Rs2.6 trillion by the end of October 2023, with no signs of abating as it accumulates at a monthly rate of Rs75 billion.

Top official sources confirmed the escalating circular debt crisis, expressing concerns about its impact on other power projects undertaken by Chinese companies.

Despite efforts by the previous government to alleviate the circular debt burden, recent months have witnessed a resurgence, with the Chinese IPPs’ debt escalating from Rs250-300 billion to the current Rs400 billion.

Officials warn that failure to address the circular debt issue amicably may lead the Chinese to slow down progress on other power projects. The Power Ministry has engaged with the Chinese side, requesting an extension of the debt-to-equity ratio maturity for Chinese IPP projects.

The complexity of the situation arises from the fact that Chinese power plants, relying on imported coal and RLNG, contribute to the mounting circular debt. Repayment challenges persist, as the Chinese are reluctant to settle capacity repayments in the local currency, creating difficulties for the dollar-scarce nation amid a depreciated rupee. Repayments remain linked to the dollar rate parity against the rupee.

With imported coal costs surging by over 450 percent, offering no easy solution to reduce capacity repayment charges, the government may explore the option of requesting the Chinese to consider domestic coal to lower power generation costs.

As of October 30, 2023, the circular debt reached Rs2.6 trillion, escalating from Rs2.3 trillion at the end of June 2023. Revised estimates presented to the IMF indicate a projected increase of Rs385 billion in circular debt by the end of December.

The outstanding amount payable to power producers stands at Rs1.75 trillion, and power distribution companies incurred losses of Rs76 billion in the first four months of the current fiscal year. Despite tariff and fuel price adjustments, and surcharges, the power sector remains in disarray, with no apparent relief on the horizon.