Tax Due Diligence of a Foreign
Controlled Resident Company (FCRC) working for Sahiwal Coal Project
Crowe Pakistan-TAX has recently conducted Tax Due Diligence of a Foreign Controlled Resident Company (Target) on behalf of a China-based company having an objective to acquire 50% stake in the Target. The Target Company have leased-hold possession of two docks of Port Qasim. Port Qasim, is a deep-water seaport in Karachi, handling about 35% of the country’s cargo and the Target Company has signed an implementation agreement with the Port Qasim Authority (PQA) by virtue of which the Target Company has been granted the concession, right and license to establish, operate and maintain a dedicated Coal Terminal for a period of 30 Years.
The Target company renders services in respect of receiving, unloading, handling, weighing and storage of coal at port and deliver the same to The Sahiwal Coal Power Project which is Pakistan's first supercritical coal power plant, and consists of two plants that generate a total of 1,320 megawatts of electricity.
Our Tax Due Diligence would enhance the acquirer’s understanding of the tax risks and would help the acquirer to validate the key points at the time of pre-deal negotiations therefore by increasing the likelihood of the deal to be sealed at a reasonable price. It would help the acquirer to identify and understand critical success factors so that informed acquisition decisions can be made.
Ø About Sahiwal Coal Power Project
The power plant is located about (12 mi) from Sahiwal and (9.3 mi) from Okara cantonment, just north of the road which connects the two towns, in Pakistan's Punjab Province. The power plant is Pakistan's first supercritical coal power plant, and consists of two 660-megawatt (890,000 hp) plants for a combined capacity of 1,320 MW. This is the first phase, and may be followed by a possible second phase which will include two 1,000-megawatt (1,300,000 hp) plants.
Though the plant is now considered to be part of the China Pakistan Economic Corridor (CPEC) which was announced in April 2015, the symbolic ground breaking for the project actually preceded the announcement of CPEC and took place in May 2014, as the government of Punjab in March 2014 invited bids for the construction of two 660MW power plants in order to help alleviate Pakistan's energy shortfalls.
The plant was built by a joint consortium of China's state-owned China Huaneng Group which will own 51% of shares, and the Shandong Ruyi, which will hold 49% of shares. The Government of Pakistan will purchase electricity from the consortium at a tariff of 8.3601 US Cents/kWh. The project was built on a build, operate, transfer basis in which the plant's ownership will be transferred to the Government of Punjab after 30 years of operation.
Ø Coal Source for the Project
As with the Pakistan Port Qasim Power Project, most of the coal used for the power plant is imported from Indonesia and South Africa, and is transported by rail from the Port of Karachi and Port Qasim in Pakistan's Sindh Province to the nearby village of Yusuf Wala on Pakistan's existing railway infrastructure.
An estimated 4.48 million tons of coal will be required annually for the plant, based on a calculation of 22 hours of power generation per day. Indonesia is identified as a primary source for its high quality coal, reliable production, and short transit times to Pakistan. Coal from Pakistan's own Thar coalfield was found to contain excessive amounts of sulfur and lime, and was not deemed to be of high enough quality for the project. The supply of reliable coal from the fields was also considered to be inadequate. A mixture of Pakistani indigenous coal with imported coal was also deemed to be unsuitable as it would decrease heat production from coal, and would compromise safety of the boilers which are to be used in the project.
