I last visited Thar in January 2014. This was at the inauguration of the Sindh Engro Coal Mining Company’s (SECMC) mining activity by then prime minister Nawaz Sharif and former president Asif Ali Zardari. The event was significant for bringing together erstwhile political rivals on a common platform for the first time after the 2013 elections. However, crucially it also signalled federal government support with a promise of a sovereign guarantee for what was primarily an initiative of the Sindh government. As for the actual coal mining project, many questions remained in assessing the overall risk to the project and therefore the commitment of key players backing it. This included my own employer at the time as one of the sponsors, the conflicting energy agendas of the federal and Sindh governments, the lukewarm response of banks and financing agencies and the vacillating regulatory requirements to spawn a new industry. A reputation for venality and apathy in the province added to the burden of risk. No surprise therefore that deep down, many of us who attended the ceremony harboured doubts despite the hype of the occasion.
Risk is the degree of uncertainty and it increases exponentially when big bets stretching far into the future have to be made. In the case of Thar, the risk perception was further aggravated by the lack of capacity and experience relating to large scale mining projects in the country. The traditional multilateral lending agencies which otherwise provide policy support and advice along with infrastructure loans were completely antipathetic to any coal based investment. At the time, the China Pakistan Economic Corridor (CPEC) had not fully arrived on the scene, although Chinese banks had a manifest interest in financing the project as the EPC bidding contractors were their compatriots. But even they balked at lending to a first-time mining project in the private sector in Pakistan without a sovereign guarantee.
In five years, a desolate, poverty-stricken landscape has transformed and now boasts of modern roads, grid electricity, an airport and 24 schools
The SECMC itself is a novel public private partnership in which the Sindh government, in a pragmatic acknowledgement of its constraints, entrusted management control to Engro despite retaining a majority equity ownership (54 percent) in the venture. Environmental concerns, some not very well informed, clouded the debate initially while local rights activists rushed to judge the project as exploitive. The press, fishing for an angle to the story, inevitably thought it was a scam. In short, the venture that was inherently complex, had so many other moving parts that any number of things could go wrong.
Someone had to make it real and while Engro has excellent management talent, it was particularly fortunate to have Shamsuddin Shaikh in its senior team who was appointed CEO of SECMC at the outset. It has turned out to be an inspired choice. Having seen him operate at close quarters, I have not the slightest doubt that lesser mortals would have wilted under the relentless pressure of the myriad challenges that beset the project up until its financial close. This was largely facilitated when the project, which represents an investment of over $2 billion, achieved its financing within the ambit of the CPEC. A son of the soil, Shaikh is at once passionate, imaginative and empathic in advancing the cause for Sindh, earning the respect and confidence of people within and outside the Sindh government and the majority stakeholders.
This Independence Day, I visited the Thar coal mine area after a hiatus of 55 months and was bowled over by what I witnessed. As you approach the mining site, a sign made from white terracotta tiles embedded on a hillside proudly proclaims in Sindhi that “Thar will make Pakistan.” It frames the underlying question rather neatly as Thar’s vociferous proponents envision it as the future energy capital of the country.
A miracle is indeed being wrought in the sand where SECMC’s Block II is located, some 30 kilometres from Islamkot close to the Indian border. Looking down into the 150 meters deep open cast mine with a front of 1.6 km and a depth of 1.1 kms from the Mine View Point is a truly awe-inspiring sight. Some 3,700 people and a fleet of 200 vehicles including around 130 sixty tonner dump trucks, 70 dozers and excavators have operated round-the-clock over 26 months to remove almost 100m bcm (bank cubic meters) of overburden to reach the coal seam. If all goes well, the first electrons from the Thar Coal will be injected into the grid within five short months as both the mining and power projects are well ahead of schedule. It is a sobering thought that Engro, which took up the challenge to invest in Thar, spent its first dollar on the venture in 2008 and will earn its first dollar from Thar in 2020.
At the project presentation, Shaikh makes all the right arguments that justify the Thar Coal investment by the country. In the PML-N’s tenure, the power production deficit all but disappeared and upcoming capacity in the pipeline will more than compensate for any high cost/low efficiency generation assets due for retirement. The focus, henceforth, will inevitably turn towards affordability of electricity and getting it to markets up north through the overloaded and leaky transmission and distribution system.
The Thar coal price forecast assumes a steep reduction in coal prices as mining operations are scaled up rapidly, allowing for a starting electricity tariff of 11.5 cents per unit (KWHr) at the first-year mine production level of 3.8 metric tonnes, to plummet to a plateau of around 8.6 cents within 4 years after a six-fold production increase to 22.8m tonnes per annum. It is projected to slowly reduce in steps over the course of the next 12 years to under five cents a unit as debt gets paid off and yearly production is optimised at 30.4m tonnes.
Engro’s investment in the initial 660 megawatt power plant has effectively underwritten the beginning of mining operations of up to 3.8m tonnes pa but the question remains whether the momentum of downstream investments will be sustained to bring about the incremental productivity gains in mining as rapidly as is being forecast. Per capita consumption of electricity is abysmally low. But if the economy tanks under an IMF programme critical of Chinese loaning, then the growth forecast in electricity demand will also slow down obviating the need for a large expansion in power generating capacity in the medium term. There are already some signs that this is happening. The next two units of 330 MW sponsored by Hubco and Thal are in very advanced stages of planning but reportedly their financial close has been delayed as their Chinese lenders reassess the investment environment. If this situation persists then indigenous coal will not even be competitive with imported coal for many more years than projected in the graphic. This assumes a fleet capacity of 4,000 MW of generation fuelled by SECMC’s concession of Thar Coal by mid-2022, a 14 percent increase in Pakistan’s overall capacity today.
Will Thar become the energy capital of Pakistan? This goal appears to be receding into the far future as prospects of developing other blocks in Thar now look pretty bleak. The SECMC has the first mover advantage and it doubtful that similarly attractive take or pay terms can be offered to other mine developers to attract the necessary investment.
Adding to the complications are the array of choices now available to the country as advances in cheaper, less polluting and easier-to-install technologies such as solar, wind and the very high efficiency gas turbine combined cycle plants (as in the Punjab) begin to impact the electricity market. Liquefied natural gas (LNG) is now a fact on the ground and even at current prices is a far more competitive base load fuel option than indigenous coal.
For any industry strategy to succeed, it has to be on the right side of the economic argument. But these are not simple binary choices. Countries aim to diversify energy supply for strategic reasons even at a cost penalty. In the case of SECMC’s Block II, this does get mitigated as the number of offtakers increase. Secondly, a lot of the money spent developing the Thar mines will remain in our country and benefit our own people. On that count, Thar coal wins out hands down. This is not just a theoretical assumption. The extremely positive takeaway from my visit is the meticulous planning and execution of a truly inclusive development process for the benefit of local Tharis that is being spearheaded by the Thar Foundation. The Foundation is managed by the SECMC but is jointly funded by the Sindh government and all private sector partners. Its social interventions are supplementing the economic uplift of the community to ensure sustainability in one of the most abjectly poor parts of the country. Other than investments in building previously non-existent infrastructure, it hopes to ensure that Tharis can access basic health services, schooling, clean drinking water and opportunities for livelihood. For their part, SECMC and Engro have ensured that Tharis are given preferential training and employment opportunities and almost 75 percent of CMEC’s (Chinese contractor) workforce is being recruited locally.
Facts speak for themselves. In the five years since my last visit, a desolate poverty-stricken landscape has transformed and now boasts of modern roads, grid electricity, an airport, 24 fully equipped schools with a population of 4,000 children, adult literacy centres, maternity clinics and an 82-bed Indus Hospital facility that is slated for completion by May 2019. Not only the SECMC, but the Sindh government has done right by the people of Thar and can genuinely showcase this venture as one of its major achievements.
The author is a former CEO of Dawood Hercules Corporation Ltd and can be reached at email@example.com