ECC okays $3b loan guarantee for N-plant

Also endorses operator-favoured State Support Agreement for outsourcing of Islamabad airport

ISLAMABAD:

 

Pakistan on Tuesday approved issuing $3 billion worth sovereign guarantees against a Chinese loan for a nuclear power plant and also stamped an operator-favoured State Support Agreement for the outsourcing of the Islamabad International Airport.

The Economic Coordination Committee (ECC) of the outgoing cabinet took these decisions but left a decision for the import of at least one million metric tons of wheat for the caretaker government.

Finance Minister Ishaq Dar, who may have some role in the interim setup, chaired the ECC meeting. After the meeting, the Ministry of Finance stated that the Pakistan Atomic Energy Commission submitted a summary regarding the issuance of government’s guarantees for Chashma Nuclear Power Project Unit -5 (C-5).

“The ECC decided to allow the issuance of gradual sovereign Guarantee for the Chasma C-5 project within the IMF programme”.

According to the terms of the agreement, China will provide the 21.3 billion RMB loan or $3 billion for a period of 20 years. China will charge 3 per cent interest rate and the repayments will start after eight years.

However, Pakistan is required to issue the sovereign guarantees for the repayment of the Chinese debt along with the interest rate.

As per the Financing Agreement, sovereign guarantee issued by the government of Pakistan to guarantee the payment obligations of PAEC is a prerequisite for validation of C-5 contract by China.

China National Nuclear Corporation Overseas Limited (CNOS) has offered a Supplier Credit of 21.3 billion RMB for the construction of the 1200 megawatts nuclear-energy fired power plant.

Airport outsourcing

“The ECC also approved a summary about the State Support Agreement for the outsourcing of Islamabad International Airport through international competitive bidding,” the finance ministry said.

However, the State Support Agreement has put an extraordinary financial burden on the federal government despite handing over the control of the airport to private parties.

The Ministry of Finance had objected to picking the additional cost, which was ignored by the ECC, the sources said.

The aviation ministry informed the ECC that the issues that could hamper the airport transaction include PIA outstanding dues, uncertain macroeconomic conditions, Civil Aviation Authority concession fee and tariffs, fate of employees and existing contractual arrangements at the airport. All these obligations have been passed on to the federal government.

The International Finance Corporation (IFC) of the World Bank has also recommended allowing the new operator to operate a foreign currency account to avoid any problems arising out of the country’s poor external sector conditions.
The IFC had urged the government to sign the service-level agreement between all the government entities performing reserve functions and the Civil Aviation Authority (CAA) so that the authority may not be held responsible for any breach of the agreed performance indicators.

The IFC also recommended that the government should backstop the CAA payment obligations in the case of termination payments under all scenarios through the State Support Agreement.

As per the approved agreement, the concessionaire will be allowed to set-off any non-payment by PIA against the CAA revenue share under the Concession Agreement.

Under the State Support Agreement, the government will compensate the CAA for revenue loss on account of PIA under a separate agreement to be entered into later.

The aviation ministry is of the view that the objectives to outsource the Islamabad International Airport can only be achieved if the government agencies play their due role.

The finance ministry has stated that the CAA should bear any losses, as it has not shared its profits with the federal government during the past 10 years.

The finance ministry had also shown reluctance to pick the PIA’s payables to the airport operators and proposed that the PIA should be treated as par with other airlines. But these comments were ignored by the government.

The Ministry of Finance has opined that no sovereign guarantees can be provided to the new airport operators due to limitations on maximum amount of the guarantees imposed by the IMF.

Wheat import

The ECC did not take a decision on the wheat import to meet domestic shortfall despite the bumper crop.

Against the total available wheat of 29.8 million metric tons, the Ministry of National Food Security has estimated the requirements at 31.33 million metric tons. It has identified a gap of 1.53 million metric tons that has to be bridged through imports.

The ECC decided that the matter should be left upon the interim government, as currently there were sufficient stocks available in the market.

The wheat prices have been skyrocketing and the Pakistan Bureau of Statistics reported average 40kg wheat price at a record Rs4,946 during the week ended on July 20. The wheat flour price was Rs5,669 per 40kg or Rs142 per kg.

The federal and the provincial food departments have also failed to meet their procurement targets and could buy only 5.9 million metric tons of wheat, which is equal to 76 per cent of their assigned targets.

The international wheat prices as of end July were $290 per tons or Rs3,851 per 40kg, including freight charges. They are lower than the prevailing market prices in Pakistan. The government needs a minimum $444 million foreign exchange to import 1.53 million tons of wheat for meeting the domestic requirements.

The food ministry had proposed importing one million metric tons of wheat either through government-to-government arrangements or through a competitive bidding process.

Urea gas supply

The ECC considered a summary of the Ministry of Industries and Production regarding Urea fertilizer requirement for Rabi season 2023-24.

The ECC decided that the SNGPL based plants ie Fatima Fertilizer (Sheikhupura) and Agritech may be allowed to operate beyond August 31, 2023 till October 15, 2023.

The Fertilizer Review Committee had recommended the ECC to run the two Punjab-based fertilizer plants on local gas till March next year. It had also recommended taking a decision about import of 200,000 metric tons of urea to fill the shortfall anticipated for the months of December 2023. The provinces have refused to bear the import cost and instead asked the federal government to arrange the subsidies.

PM Kissan Package

The Ministry of National Food Security submitted a summary for one year extension of Kissan Package 2022. The ECC allowed extension in time period as per fiscal space available till December 31, 2023 to financing schemes of Kissan Package.

These schemes include provision of subsidy for interest-free loans for subsistence farmers in flood affected areas, PM’s Youth Business and Agriculture Loan Scheme, markup subsidy and risk sharing scheme for Farm Mechanization and interest-free loan to landless farmers in the flood affected areas.

The PM’s Kissan Package was aimed at providing concessional access to loans till June 2023. But the disbursements remained low due to lack of awareness and the banking procedures, the Ministry of National Food Security and Research admitted.

The ministry sought extension in the package on the ground that there was no financial implication in four out of five schemes. But the PM's Youth Business and Agriculture loan scheme needed the financial allocations.

SME Package slashed

The summary of the Finance Division regarding SME Asaan Finance (SAAF) Scheme was submitted for consideration of the ECC.

The committee approved the proposed revised features of the scheme and its budgetary impact as proposed by SBP, according to the finance ministry.

The ECC reduced the risk coverage of the banks and also lowered the banks’ margins to 6 per cent under the revised SME scheme. As against current 60 per cent risk coverage of the government on Rs4 million loans, the government will now pick 50 per cent losses.

Similarly, on loans of up to Rs7 million, the government has reduced the risk to 40 per cent from 50 per cent. On SME loans of up to Rs10 million the government has reduced the risk coverage to just 30 per cent of the loan amount.

By lowering the coverage, the government’s financial obligation has been reduced from Rs18.4 billion to Rs12 billion for two financial years ending June 2025. So far, the authorities have issued guarantees equal to only Rs7.3 billion.