Pipeline network revamp: gas companies express reservations over World Bank re-lending rate

Sui Northern Gas Pipelines (SNGPL) and Sui Southern Gas Company (SSGC), have reportedly expressed reservations at the fixed effective re-lending rate, of 11.8 percent, of a $200 million World Bank (WB) loan, as it might exceed the market rate, according to official documents available with Business Recorder. The two public sector gas utility companies are engaged in transmission, distribution and sale of natural gas in the country.
They have transmission and distribution pipelines network of about 129,044 km, serving almost 6.2 million customers. Their networks have become aged, and overloaded, with the passage of time, resulting in increased number of leaks, which is increasing gas losses.
The companies are operating in a regulated environment with unaccounted for gas (UFG) benchmarks prescribed by the Oil & Gas Regulatory Authority (Ogra). The companies had to pay UFG related penalties, amounting to Rs 31 billion, during last eight years. According to the documents, both companies intend to develop a comprehensive 5-year (FY 2011-12 to FY 2015-16) UFG reduction plan to bring the UFG down to acceptable limits. The plan, titled 'Natural Gas Efficiency Project' (NGEP), is targeted to save about 108 BCF gas during plan period by rehabilitating ageing network, repairing underground and overhead leakages, installing automatic pressure management systems, improving measurement devices, strengthening cathodic protection, improving surveillance systems to save up to 108 BCF, which would become available for use by other sectors of the economy.
The project also includes introduction of energy-efficient domestic gas appliances (stoves, heaters, geysers, etc) which will be a major step towards conserving this vital non-renewable energy source.
The NGEP is estimated to cost Rs 60 billion over its 5-year period, including a foreign exchange component of Rs 14 billion. One component of the project of SSGC has been evaluated by the World Bank, which has found it technically and financially feasible, and has agreed to lend $200 million (Rs 19 billion) on long-term (20 years) basis, including a grace period of 5 years. The World Bank would be approached to provide another $200 million for the other component of the project (SNGPL) on similar terms. The companies will raise the balance amount from their own resources including bank borrowing.
As per existing arrangements, the borrower of the World Bank loan will be the Government of Pakistan (GoP), through EAD. The loan carries an interest rate of LIBOR plus 0.38 percent (variable spread), which at current LIBOR rates comes to around 1 percent. The EAD supports the proposal of re-lending the loan to SSGC and SNGPL in rupees at a mark-up rate of 5 percent and the foreign exchange risk. Finance Division has also supported the proposal of EAD for re-lending the World Bank loan of $200 million at a re-lending interest rate of 5 percent, with exchange risk cover fee of 6.8 percent.
However, SNGPL has pointed out that keeping in view the tenure of the loan and the fact that the effective interest rate the company will be paying is fixed at 11.8 percent pa, there is a risk that the company might end up paying higher interest rate than the market rate on this loan. In order to counter the risk, the company has suggested that the effective rate of interest should be linked with a ceiling fixed at 11.80 percent pa.
SSGC has also expressed its reservations and maintained that it had examined the proposal and wished to advise that borrowing at an interest rate of 5 percent in dollar terms is not a feasible option since it is unable to arrange foreign exchange risk coverage from the local market at an affordable cost. The net borrowing cost to the company will exceed the commercial borrowing cost.
SSGC has proposed that the federal government, as a special case of re-lending of World Bank loan of $200 million to SSGC and SNGPL at an effective rate of interest which should be linked with KIBOR of 1 percent with a ceiling fixed at 9 percent pa. These arrangements, the companies argue, would enable both companies to overhaul their ageing infrastructure and help save valuable source of energy, which is the dire need of the country at this time of energy crisis.