Q&A about the Silk Road Fund's First Project Investment
Date: 20 April 2015

On April 20, 2015, while Chinese President Xi Jinping was visiting Pakistan, the Silk Road Fund (the Fund), China Three Gorges Corporation (CTG), and Pakistan's Private Power and Infrastructure Board (PPIB) signed a Memorandum of Understanding on the Joint Development of Pakistani Hydropower Project in Islamabad, in the presence of leaders of both countries. This is the Fund's first overseas investment project and marks a solid step forward in the Fund's investment operations. In light of this, an executive of the Fund agreed to a press interview.

1. Q: Pakistan's hydropower development project is the Silk Road Fund's first investment and is attracting widespread attention. Can you brief us on the project?

A: The Fund and CTG are cooperating in the development of clean energy in Pakistan, and the first project is the Karot hydropower project. The Karot Hydropower Station is located on the Jhelum River and is part of the fourth stage of the river's five-stage development plan. It has a planned capacity of 720 MW, annual output of 3213 GWh, and a total investment of US$ 1.65 billion. The Karot Hydropower Station is one of the priority projects of the broader China-Pakistan Economic Corridor initiative and will use a BOT (build-operate-transfer) operation model. Construction will begin at the end of the year and is expected to be completed in 2020. The station will be operated by the Chinese side for 30years and then transferred over to the Pakistani government. The Fund, CTG and other investing parties plan to develop a total capacity of 3,350 megawatts along the Jhelum River through new developments and mergers and acquisitions. Hydropower-related projects will help ease Pakistan's energy bottleneck, promote economic development and social stability, and improve people's well-being.

2. Q: How will the Fund's investment be structured?

A: The project will be financed by equity and debt. First, the Fund will take an equity stake in China Three Gorges South Asia Investment Ltd. (CTGSAIL), which is the CTG's investment and operation platform for clean energy development projects in Pakistan and other South Asian countries. The CTGSAIL has already built and operated a wind power project in Pakistan. The Karot Hydropower Station will be the company's first hydropower project. The Fund will also participate in a consortium led by Export-Import Bank of China to provide loans to the project.

3. Q: Why was Pakistan's hydropower project chosen by the Fund to be its first investment?

A: The Fund is operating as a commercial institution, aiming to achieve mutual benefits among cooperators, and being open and inclusive. "Professional, prudent, consistent" are the main standards for selecting projects. Before a decision is made, we need to ensure the project is in line with the country's development strategies; whether or not the project itself is feasible, which includes both social and economic benefits; an assessment on the project's partners; and whether or not it complies with international standards. In other words, we emphasize the need to follow market practices, international and professional standards, as well as the principles of connectivity, profitability, cooperation, and openness. 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 Fund, mainly because our investment philosophy and principles dovetail with the project perfectly.

4. Q: Can you explain a little more about how they "dovetail"?

A: They dovetail mainly in the following respects:

First, the project resonates with the development strategies of our two countries and reflects the Fund's investment philosophy of mutual benefit. As a medium to long-term investment fund, the Fund is focusing on identifying investment opportunities associated with the implementation of the Belt and Road Initiative and aims to provide financial services, in order to promote economic and trade cooperation as well as connectivity between China and relevant countries. In May 2013, during his visit to Pakistan, Premier Li Keqiang reached an important consensus with Pakistani leaders regarding the establishment of the China-Pakistan Economic Corridor, which aims to strengthen the connectivity between China and Pakistan, develop cooperation between the two countries, and promote mutual development. The China-Pakistan Economic Corridor is a crucial part of the Belt and Road Initiative and a key region where the Fund is looking for investment and financing opportunities. The power sector is one of the fields for priority investment as laid out in Pakistan's 10-year development plan. The Fund and CTG's investment to support Pakistan's power development reflects China's philosophy of promoting mutual development and prosperity with countries and regions along the Belt and Road.

Second, cooperation with international and domestic organizations to utilize complementary strengths illustrates the openness and inclusiveness of the Fund. In this project, the Fund and the International Finance Corporation (IFC), a member of the World Bank Group, have both become shareholders of the CTGSAIL, in order to provide capital support for the project. At the same time, the Fund also joined the consortium composed of Export-Import Bank of China, China Development Bank and IFC to provide loans. We have had very fruitful communication and cooperation with relevant parties, and effectively utilized our advantages of making both equity and debt investment. This also illustrates the Fund follows international financial and market order, as well as its philosophy of openness and inclusiveness, and sharing risk and benefits with partners.

Third, the project has sound risk management and is expected to achieve reasonable medium to long-term investment returns. The Pakistani government has promised that investors of this project will see good returns on investment after recovering construction and operation costs. At the same time, Pakistan's power industry has huge market potential and relatively low market risks. CTG has many years of experience in the country, and has thoroughly evaluated the project. In addition, we have taken full account of all potential risks and prepared solutions.

5. Q: Why did the Fund choose to cooperate with CTG in its first deal? Will the two parties continue to collaborate in the future?

A: The success of an investment depends largely on the choice of partners. When the Fund makes outbound investments, it will leverage the talent, industrial and technological strengths of Chinese enterprises, as well as their years of experience in overseas markets, in order to better control risks. At the same time, the Fund can utilize its advantage of being able to offer equity investment to help enterprises improve their financing capacity and project management abilities, thus putting them in a stronger position to go global. At the early stage of projects selection, the Fund noticed that CTG is a leading enterprise in clean energy development, construction, and operation, particularly large hydropower projects, and enjoys a good reputation in China and abroad. Since entering Pakistan's engineering contracting market in the 1970s, CTG has established a reputable brand image in the country. In addition,  seeing the huge market potential there, the corporation has provided constructive suggestions for the long-term planning for Pakistan's national power and clean energy development. The Fund's investment in the CTGSAIL has laid a solid foundation for the two parties to expand cooperation in Pakistan and other South Asian countries’ clean energy sectors.

6. Q: What steps has the Fund taken to accelerate its outbound investment?

A: On the one hand, the Fund has established and improved its investment decision-making process and business norms. On the other hand, it has actively developed business connections, visiting and contacting relevant departments and enterprises. It has also strengthened its project evaluation and selection process. It has targeted a number of key projects and some projects have potential value for investment.

7. Q: What is the next step for the Fund?

A: The Fund will continue to look for investment opportunities involved in the Belt and Road Initiative. It will steadily develop investment projects based on the principles of following market practices, international and professional standards.

First, it will establish a solid foundation. It will ensure work is project-driven and conducted step by step. This will help avoid concept-driven or impulsive investment.

Second, it will build trust. It will enhance mutual understanding and trust with partners through projects and bolster communication with the public.

Third, it will make overall plans and take all factors into consideration. It will strive to comply with the laws of host country and international standards, and take each party's economic and social benefits into consideration.

Fourth, it will pursue innovation. It will strengthen research in related fields and explore a cooperation model that is mutually beneficial and replicable.

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