ISLAMABAD: Amid ongoing investigations into dollar-based tariff escalations, “unnatural profits” in the electricity sector and capacity payments of more than Rs 466 billion last year, the government will lift around Rs 200 billion through Islamic bonds next month to reduce circular debt after securing around Rs 11 billion relief from Independent Power Producers (IPPs).
The Ministry of Finance convened a meeting of the presidents of 10 commercial banks in the country on Monday (today) to finalize a term sheet for Pakistan Energy Sukuk-II in the amount of Rs 200 billion for the liquidity of the energy sector. Power through Power Holding (Pvt) Limited – a non-asset shell company in the electricity division. Finance Secretary Naveed Kamran Baloch will lead the government side.
The consortium, led by Meezan Islamic Bank, includes nine other commercial banks – Habib Bank, Bank Alfalah, Bank Islami, Dubai Islamic Bank, Bank Al-Habib, Bank Albaraka, National Bank of Pakistan, United Bank and Faisal Islamic Bank. This will be the second Sukuk financing worth Rs 200 billion for the power sector in less than six months.
The government finalizes an amicable settlement with the RPIs
The government had raised 200 billion rupees through Pakistan’s Musharqa Sukuk in March this year to bail out the power sector after IPPs launched international arbitrations to secure their overdue unpaid bills. The consortium then consisted of six banks – Meezan Islamic Bank, Bank Islami Pakistan, Faysal Bank Limited, MCB Islamic Bank, Dubai Islamic Bank and Al-Baraka Bank.
MCB Islamic Bank stayed away this time.
The government had lost a case at the London Court of International Arbitration (LCIA) against around 10 IPPs, creating a liability of around Rs 35 billion, including interest and other costs, against taxpayers’ money.
Electricity Division Secretary Irfan Ali told the Senate Electricity Standing Committee last month that the government was in talks with IPPs to seek concessions, including on late payment surcharges.
The government has now finalized these negotiations in which the 10 IPPs, who won the international arbitration against the government, have agreed to reduce their mark-up payments on outstanding arrears from Kibor plus 4.5% to Kibor plus 2 pc. They also agreed to apply a surcharge after 90 days of non-payment instead of the existing 35 days, while the surcharge will now be payable only once on the outstanding amount instead of the compound interest rate.
As a result, the government is expected to obtain financial relief of around Rs 11 billion against the initial cost of around Rs 34 billion granted to IPPs by the LCIA. Both parties are expected to sign the settlement agreement within the next few weeks.
On the directives of Prime Minister Imran Khan, the Electricity Division had entered into negotiations with the 10 IPPs set up under the Electricity Policy of 2002 for an out-of-court settlement of the initially awarded of 16 billion rupees authorized by the LCIA. The cost of the arbitration had risen to Rs34bn due to interest and other charges.
An official from one of the IPPs said the government may be overestimating the relief because negotiations were limited to the extent of interest payments. It could be a few billion rupees and nothing like Rs11bn, he said, adding that the out-of-court settlement would be a time-limited discount and in case of non-payment of dues within 45 days, the original mark- up would be revived.
Simultaneously, officials expect the Rs200bn Sukuk funding to also be approved by the cabinet’s Economic Coordination Committee (ECC) later this week to ensure timely clearance of not only arbitration liability to litigants, but also other unpaid due to all IPPs and fuel suppliers suffering from cash flow problems due to circular debt of approximately Rs 1.4 trillion.
An official said the ECC approved in principle up to Rs 400 billion of Islamic financing for the power sector in February this year in two phases, but further ECC approval as well as of the firm was required for the second tranche due to the evolution of financing costs. on an increase of more than 500 basis points in the central bank’s key rate to 13.25 pc under the IMF programme.
Islamic financing of the power sector has already been declared eligible for the statutory liquidity ratio by the government and the State Bank of Pakistan.
Assets belonging to a number of public sector power companies were mortgaged to the financiers along with the previous 10-year government guaranteed bond at a rental yield of Kibor plus 80 basis points based. The bonds involve semi-annual rental repayments from the date of drawing and the repayments are made directly by the central bank on the basis of a budget allocation by the Ministry of Finance on its standing direct debit instructions for return and repayment of maturities to the SBP counter.
The boards of directors of all electricity distribution and generation companies have agreed to pledge the properties/assets of the trust to the banks. Certain additional properties and assets have been selected from the distribution and production network as security against lease payments.
Currently, the National Electric Power Regulatory Authority, the National Accountability Office and the new Debt Inquiry Commission are investigating the finances of IPPs for allegedly higher than normal profits. The government is also considering appointing a specialized commission made up of international engineering, legal and financial experts on the issue.
Posted in Dawn, July 29, 2019
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