Last-ditch option: IPPs ask govt to invoke sovereign guarantees

Govt defaults Rs40 billion interest charges on Rs300b bank loans.

ISLAMABAD:

Nine Independent Power Producers (IPPs), with a combined power generation capacity of 1,800MW, have served notices to the government and central power purchasing agency (CPPA) to invoke sovereign guarantees for the recovery of their dues amounting to Rs31 billion.

The government is in distress as it has paid Rs1 trillion in the past three years on account of subsidy and cost of inefficiency in the power sector while banks refuse to give anymore loans to the power sector.

The cash-starved government failed to pay Rs40 billion interest on Rs300 billion loan against the power sector which were parked in power holding companies.

Sovereign guarantee is being used by the IPPs as a last-ditch option to recover funds from the government which were defaulted by power purchasers.

IPPs will be forced to halt operations due to the financial crunch which will result in hefty electricity loss to the national grid, said Independent Power Producers Advisory Council (IPPAC) Chairman Abdullah Yousuf.

The power producer leader also gave a heads-up that the country might face power outages during Eid as fuel is being transported to IPPs on a day-to-day basis. IPPs are running operations on a day-to-day basis which costs them Rs56 billion monthly of which only 50 per cent is being paid to them by the Pakistan Electric Power Company (Pepco), he said. Pepco paid Rs26 billion interest charges to IPPs last year.

Power purchasers are bound to pay 18 per cent interest charges in case of delay in payment, according to an agreement. Revoke of guarantee can become another setback for Pakistan that is seeking to resume and acquire fresh loans from international financial institutions, said Yousuf. The International Monetary Fund suspended its $11.3 billion loan programme in May last year, citing implementation of patchy reforms by Pakistan.

He said that the remaining power plants will also serve notices calling for sovereign guarantees due to the circular debt issue.

He said that historically the fuel mix for power sector was 70% hydel and 30% thermal which kept the cost of electricity low, however, the ratio has flipped and now almost 70% electricity is from thermal sources while the rest is from hydel. The cost of hydel electricity is almost Re1 per kilowatt hour (kwh), gas costs almost Rs4 per kwh, furnace oil costs around Rs12 per kwh while diesel generate power costs Rs16 per kwh.

Despite the increase in price of electricity, there is still a cost differential of almost Rs2 per kwh which the government is supposed to pay in the form of subsidy. This amount is estimated to be around Rs190 billion annually, Yousuf said.

Currently Pepco has to pay Rs280 billion to the power sector of which 29 IPPs are expected to receive Rs211 billion, Yousuf said.

The giants, Hub Power Company (Hubco) and Kot-Addu Power Company (Kapco) will get around Rs130 billion from the total while the rest of the IPPs will receive Rs81 billion.

Pakistan State Oil (PSO), oil supplier of Hubco and Kapco, is planning to cancel to import oil as its payable for the two power producers has reached Rs130 billion as oil is purchased on credit basis. PSO provided fuel worth Rs26 billion during the current month but only received Rs2 billion for them. PSO has to pay Rs20 billion to mature letter of credits in three days but doesn’t have the money for it, he said.

Published in The Express Tribune, August 27^th,  2011.