The Independent Power Producers (IPPs) are reportedly on the verge of default due to exhausting of their credit lines as the government is not honouring obligations on payment due to which receivables are now hovering at around Rs 450 billion.
Background interviews with officials and power sector stakeholders indicate that there is lack of interest on the part of government with respect to resolution of financial issues of the power sector. Commercial banks are also reluctant to further increase their exposure to the power sector due to prevalent circumstances.
The incumbent government has constituted another committee, now headed by Prime Minister Advisor on Institutional Reforms, Dr Ishrat Hussain and comprising Secretary Finance and Secretary Power Division to look into issues of servicing loan and stock handling, in a holistic manner and submit viable recommendations to the ECC for consideration.
This new committee is in addition to the committees headed by former Chairman SECP, Muhammad Ali, and by a power sector expert tasked with the same job with a different angle; these two committees are also working to sort out this issue and one of these committees has hired an international consultant firm to prepare the circular debt retirement mechanism.
The new committee was constituted by the ECC headed by the Prime Minister Adviser on Finance and Revenue during discussion on Pakistan Energy Sukuk-II amounting to Rs 200 billion for power sector liquidity through Power Holding Private Limited (PHPL).
The government has decided to obtain fresh loan from a consortium of Islamic banks by way of issuance of Pakistan Energy Sukuk-II, against the assets of the Discos/Gencos as collateral through open competitive bidding as advised by the office of Director General Audit (power) while conducting the audit of Rs 200 billion Pakistan Energy Sukuk-1 executed on March 1, 2019 so that the procurement of financing is conducted in a fair and transparent manner.
The sources said, to improve the liquidity of the power sector and create space for structural improvements and in the light of directions of the committee under the chairmanship of Adviser to Prime Minister on Institutional Reforms & Austerity, following were proposed for consideration of the ECC: (i) another Rs 200 billion may be raised from the Islamic banks as a fresh facility through PHPL by way of issuance of Pakistan Energy Sukuk-II, against assets of the Discos/ Gencos as collateral through open bidding to procure financing in a fair and transparent manner.
The amount will be utilized for the purpose of funding the payment liabilities of the Discos through CPPA-G to settle overdue payments in the total payables of CPPA towards various sectoral entities to handle the flow and stock, and any shortfall in the flow targets.
Finance Division will provide government guarantee for repayment of loan as well as profit/interest etc. for the facility amounting to Rs 200 billion, arranged from a consortium of local Islamic banks; (ii) servicing of the new proposed facility will be done through imposition of surcharge. For the interim (6 months) or tariff determination whichever is earlier, the markup/ profit servicing will be made by GoP which will be treated as GoP equity in Discos; and (iii) to finalise the stock handling plan and make current Rs 200 billion Sukuk as part of the overall power sector handling plan. The structure of this plan has already been shared with the Finance Ministry.
However, power sector argues that if the government continues to get electricity from IPPs and does not pay dues as per agreements, then how can the power plants operate?
"When the authorities need power, they ask IPPs to give dispatch power as per PPA but when payment time comes, they say wait, wait and wait. How can new investment in power sector come, when neither project sponsors will get payments nor the government follow the pacts in letter and spirit," said one of the experts.
When power plants are not provided payments from the power purchaser as per agreements, plants get working capital from banks against which interest is to be paid quarterly. And if Late Payment Interest (LPI) is not paid by the power purchaser, then how can the power companies run their operations? He further questioned.
"There are many misconceptions about the profits of IPPs within those circles which are dealing with it," he maintained.
IPPs also have to meet their own expenditures like payment of principal amount of equity loan, interest payments, salaries etc but payments are not being made regularly as per agreements. Private sector also complains that if something concrete is approved at the proper forum, it is not implemented which raises serious questions.