Govt approves Letter of Comfort for Rs1.23tr loan

Bank borrowing being made to settle power-sector circular debt

ISLAMABAD:

The government on Friday approved the issuance of a Letter of Comfort in favour of banks to meet the condition for disbursement of a loan of Rs1.23 trillion obtained for the settlement of circular debt, taking responsibility in case the cash-starved power sector fails to repay the debt.

In another decision, the Economic Coordination Committee (ECC) of the cabinet, which met under the chairmanship of Finance Minister Muhammad Aurangzeb, approved an arrangement for waiving Rs120 billion in late payment interest the Pakistan Atomic Energy Commission (PAEC) owed to its fuel suppliers. It also decided to pass on the financial obligation of Rs22 billion to gas consumers under the same arrangement.

The ECC approved the issuance of Rs659.6 billion worth of sovereign guarantees for circular debt financing of Rs1.225 trillion, according to an official statement. The guarantee is intended for the settlement of Power Holding Limited's (PHL) debt and overdue payments to the independent power producers (IPPs).

Last month, the government and commercial banks signed financing and security agreements for taking Rs1.225 trillion loans for payment to power producers. Electricity consumers will pay the principal and the interest on loans through a surcharge of Rs3.23 per unit.

Due to the poor fiscal health of the power sector, the banks refused to lend the money and demanded the Letter of Comfort from the Ministry of Finance. An official handout stated that the "ECC authorised the Finance Division to issue a Letter of Comfort".

Subsequently, Habib Bank Limited will accept the letter as satisfactory compliance before the first drawdown of circular debt financing.

The ECC approved the Memoranda of Understanding (MoUs) with PAEC and authorised the Central Power Purchasing Agency-Guarantee (CPPA-G) to execute negotiated settlement agreements (NSAs) based on the MoU signed for the restructuring of power purchase agreements.

The ECC authorised CPPA-G and PAEC to amend the relevant agreements and make any relevant changes to standardise such amendments. It also authorised PAEC to file tariff petitions with Nepra for new tariffs for five nuclear power plants based on debt adjustments among the parties.

However, some of the ECC members said those agreements did not help to reduce tariffs in a major way and prices were again set to increase on account of quarterly tariff adjustments and monthly fuel cost adjustments.

The ECC approved the waiver of Rs119.5 billion on account of late payment interest. As part of the agreement, it authorised CPPA-G to pay Rs89.5 billion to OGDCL through Uch Power Limited (UPL-I) and UPL-II from the circular debt financing facility, as a lump sum instead of 18 monthly instalments.

The government will issue a policy guideline to enable Ogra to incorporate the adjustment of Rs21.9 billion into the cost of RLNG supply.

The ECC agreed to shift Fatima Fertiliser, Agritech and Fauji Fertiliser Bin Qasim plants on the gas supply network of Mari Energies. Mari will provide 170 mmcfd of gas to these plants over the next two years from a new field that will be developed with an investment of $200 million.

With the decision, all the 10 fertiliser plants have been shifted to Mari Energies to ensure adequate and affordable supply of fertiliser.

The raw gas from Ghazij-Shawal facility will be delivered within Mari gas field. The respective fertiliser customers shall install facilities for gas processing and compression, injection and transportation in Sui companies' network to their respective plant sites.

The gas price at the delivery point shall be equal to the applicable wellhead price as notified by Ogra from time to time. Fertiliser customers shall enter into bilateral gas sale and purchase agreements with Mari Energies.

Mari will have the flexibility to supply any volume that becomes available from any of the reservoirs to any of its customers including SNGPL/SSGCL, as "swing volume" on "as and when available basis" at the applicable gas price as notified by Ogra.

The committee approved a proposal of the Ministry of National Food Security for the reallocation of funds within the division. The approval allows transfer of resources from the IPC Division through a technical supplementary grant to support ongoing agricultural research initiatives.