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The IPPs deal is (almost) done. The government will pay the amount in three tranches within a span of 12 months. The amount is based on the decision taken at the time of MOUs signed with IPPs. In return, IPPs will renegotiate prospectively on tariffs, indexation and other factors. Nothing will be applied retrospectively.

There is roughly an amount of Rs53 billion where some disputes are as per IPP’s report on fuel and O&M charges – the fate of these will be decided by NEPRA – the amount is over Rs10 billion for 4 IPPs – Nishat Power, Nishat Chunian Power, Attock Gen, and Liberty Power. For remaining 2002 IPPs, the per IPP amount is around Rs1 billion.

The remaining undisputed amount to be settled is around Rs400 billion in total for around 50 IPPs. This amount will do a cleansing across the cash strapped energy chain ranging from IPPs to oil/gas marketing companies to E&Ps. The amount varies from IPP to IPP and in turn payable to other sectors vary too. For example, Hubco’s net payable is around Rs45 billion, and the company will clear that amount for payables to Sui Gas companies (mainly SNGPL) and they in turn will pay to ODGC and PPL. The amount for Kapco and its impact on the value chain is around double of Hubco.

The IPPs agreement is expected to be signed by January end and then NEPRA will take around 2 weeks to ratify the contracts negotiation factors. Then the payment for first tranche will be made. One third will be paid in cash and two third in 10-Y floating PIBs (at 6M T-Bill plus 70 bps). In each trance one third is cash and two third is PIBs. The first amount is around Rs133 billion –and within it Rs89 billion will be in the form of floating PIBs.

The first question IPPs must have on their mind is how to discount the floating 10 years PIBs. If they sell it, the price may move down – IPPs would incur losses. If they hold the bonds, they will pay 30 percent tax on coupon; while the IPPs income is tax exempt. They will borrow against the PIBs and cannot take any tax credit against interest expense. Not only they will make negative spread but will also pay tax on coupon. It’s a double whammy for IPPs.

In the first tranche the 10Y floating PIBs amount would be around Rs89 billion. This will significantly add to the liquidity in the market. During Jul19 - Dec 20, government has sold Rs2,154 billion worth of floating PIBs in 26 auctions – average issue is Rs83 billion. Within it, Rs934 billion is in 10-year floating bonds at an average of Rs36 billion per auction.

Now the addition of Rs89 billion in February will definitely increase the liquidity. Its 2.5 times the average auction issuance. If the IPPs will come to sell, banks will make a windfall. IPPs fear that they will lose money on selling. For instance, if the floater rate is increased by 10 bps, IPPs will lose Rs45 million.

The government is thinking to adjust the auction calendar by the amount to be issued to IPPs to resolve the issue of over-supply. Government may shelve two auctions in the next 6 months or lower the issuance spread over 6 months. And repeat the exercise for next two tranches.

Another option coined by IPPs is to give these bonds against payables to companies such as PSO, SNGPL, OGDC etc. These companies manage pension and provident funds and these PIBs can be used for that purpose. Then IPPs have their own provident funds where these PIBs can be used in-house.

If IPPs holds PIBs and get loan against these, they won’t be able to get tax credit against interest expense. That issue can be dealt by exempting tax on coupons payments. IPPs are in talks with FBR on this issue. It’s likely that a combination of all options will take place to address both pricing and taxation issues.


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