During President Xi Jinping's visit to Pakistan on April 20, the Silk Road Fund (SRF), China Three Gorges Corp (CTG) and Pakistan's Private Power and Infrastructure Committee jointly signed the "memorandum of understanding on the joint development of Pakistani hydropower projects" in Islamabad, witnessed by leaders of both countries.
This is the first investment project since the SRF was established, marking a milestone for the new fund. The fund was interviewed to discuss the development.
Can you give a brief introduction to the project?
The SRF cooperates with CTG to invest in the Karot Hydropower project. The Karot Hydropower Station, on Pakistan's Jhelum River, is part of the fourth stage of the river's five-stage development plan. With an installed capacity of 720,000 kilowatts and an annual power generation capacity of 3.2 billion kilowatt hours, an investment of about $1.65 billion is required.
The Karot Hydropower Station is one of the priority projects of the broader "China-Pakistan Economic Corridor" initiative. It will be developed under the "build-operate-transfer" (BOT) mode. It is scheduled to start construction by the end of this year and go into operation in 2020.
The station will be operated by the Chinese side for 30 years and then transferred to the government of Pakistan. The project plans to develop a total capacity of 3,350 megawatts along the Jhelum River in ways of new development and mergers and acquisitions.
It is expected to help ease Pakistan's electricity shortage, which in turn will support the country's economic development.
How will the SRF's investment be structured?
The project will be financed by both equity and debt. Initially, the SRF will take a stake in Three Gorges South Asia Investment Ltd (CTGSAIL), which is the CTG's investment operation platform and it used to facilitate investment in clean energy, in Pakistan and throughout the South Asian region.
The CTGSAIL has already built and operated a wind power project in Pakistan. The Karot Hydropower Station will be the first time for the company to invest in hydropower.
The fund will also participate in a consortium led by the Export-Import Bank of China to provide loans to the project.
Why was Pakistan's hydropower project chosen by the SRF to be its first project?
The SRF is operating as a commercial institution, aiming to achieve mutual benefits among cooperators. "Professional, prudent, consistent" are the main standards for selecting projects. We select projects that can benefit local development, and they should be feasible. We will also assess the economic and social benefits, as well as our project partners they should all meet international standards.
We focus on market-oriented, internationalized and specialized operation.
The hydropower project in Pakistan went through a short period from the initial contact to substantive progress, and it becomes the "first project" of the SRF, mainly because our investment philosophy and principles dovetail with the project perfectly.
Can you explain how they dovetail?
They dovetail in the following aspects:
First, the project resonates with the two countries' development targets and reflects the SRF's investment philosophy to achieve mutual benefit and win-win outcomes. As a long-term development and investment fund, the SRF targets investment opportunities associated with the implementation of China's "Belt and Road" initiative and aims to provide financing services, in order to promote economic ties and connectivity between China and relevant countries.
In May 2013, during his visit to Pakistan, Premier Li Keqiang reached an important consensus with Pakistani leaders on the construction of the "China-Pakistan Economic Corridor". It is a crucial part of the "Belt and Road" initiative, and the corridor is a key region where the SRF is looking for opportunities.
The Pakistani hydropower project is the one to reflect the spirit of the initiative.
Second, cooperation with international and domestic institutions is a showcase of the SRF's attitude of being open and inclusive. In this project, the SRF and the International Finance Corp (IFC), a member of the World Bank Group, are shareholders of the CTGSAIL, which provides capital support for the project. At the same time, we joined the consortium made up of the Export- Import Bank of China, China Development Bank and the IFC to provide loans. We had very fruitful communication and cooperation with the relevant parties.
We will follow the international financial order, be market-oriented, share risks and benefits with cooperators.
Third, the project has sound risk management and is expected to achieve reasonable long-term investment returns. The Pakistan government promised a sound return on investment after recovering construction and operation costs. Pakistan's power sector has huge market potential and the risk is relatively low. CTG has many years of experience in the country, and has thoroughly evaluated the project. We have also taken full account of the various risk factors and prepared solutions.
Why did the SRF choose to align with CTG in its first deal? Will the two sides cooperate in the future?
The success of an investment depends largely on the choice of partners. When the SRF makes outbound investments, it will leverage the talent, industrial and technology advantages of Chinese enterprises, and their years of experience in overseas markets, in order to achieve better risk control.
At the same time, the SRF can use its equity financing advantage and help enterprises improve their financing capacity and strengthen their project management ability. It can support enterprises to "go global" with a higher quality.
When we selected project at an early stage, we noted that the CTG is a leading company in the development, construction and operation of clean energy, and enjoys a good reputation both at home and abroad.
The corporation has been involved with the engineering contracting business in Pakistan since the1970s and has established a good local reputation. In addition, seeing the huge market potential there, CTG has provided constructive suggestions for the long-term planning for Pakistan's national power and clean energy development.
The SRF's investment in the CTGSAIL has laid a solid foundation for the two sides to expand cooperation in Pakistan and in other South Asian countries' clean energy sectors.
What steps has the SRF taken to accelerate its outbound investment?
On the one hand, the SRF has established and improved its investment decision-making process and business norms. On the other hand, it has actively expanded the business, by visiting and contacting relevant government departments and enterprises. It also strengthened its project evaluation and selection processes. It has targeted a number of key projects and some projects with potential value for investment.
What is the next step for the SRF?
The SRF will continue to look for opportunities involved in the Belt and Road initiatives. It will steadily carry out investment projects while keeping market-oriented, internationalized and specialized.
We will avoid impulsive investment, enhance mutual understanding and trust with partners through the projects and bolster communication with the public.
We will respect the local law and international standards, and take into account both the economic and social benefits.
We will also strengthen research in related fields and explore a cooperation model that is mutually beneficial and replicable.