ISLAMABAD:
A mammoth Rs150 billion loan swap deal has been finalised by the federal government for the energy sector, which is expected to dramatically ease the pressure on the balances sheets of companies along the energy chain and improve power production as a result.
Testifying before the National Assembly Water and Power Committee, Imtaz Qazi, the water and power secretary, confirmed that the government had struck a deal with commercial banks to exchange about Rs151 billion of the energy sector’s liabilities – which are effectively unfunded at the moment – for bank loans.
A senior ministry official told The Express Tribune that the loans will carry a 13% interest rate. “The annual fiscal impact of this loan is about Rs18.8 billion, which the power companies will pass on to consumers,” he said.
The injection of hard cash into the energy sector companies will allow them to pay off their liabilities to each other and reduce the stock of “circular debt” which the government estimates is currently over Rs300 billion. Power companies will then be able to buy more fuel and run their power plants at closer to full capacity, reducing the durations of the nationwide outages. The power companies are now expected to go back to being within their credit limits, said the water and power secretary.
The loan is part of the Rs160 billion in government-brokered bank loans that had been approved by the economic coordination committee of the cabinet on January 20, 2011. The government had been unable to complete the deal, however, largely owing to pricing issues over the loan.
“This deal had been delayed – causing severe power outages throughout the country due to power plants effectively shutting down – simply because the banks were demanding a 20% interest rate on the loans in case the power companies fail to make payments,” said one official familiar with the matter, but who declined to be named.
It appears that the banks got their way. The final deal does indeed include a clause that calls for the interest rate to go up to 20% in case the power companies default on their loan payments.
During his briefing to the parliamentary committee, Qazi stated that the national electricity shortfall was estimated at about 4,000 megawatts on Sunday when six power plants went offline due to oil companies refusing to supply them with fuel without being paid for their previous fuel consumption. Those plants generate about 1,400 megawatts of electricity
Qazi added that electricity consumption in Pakistan is rising at approximately 8% per year, forcing the government to scramble to increase the power generation capacity installed and connected to the national grid.
“The government is dependednt on thermal and rental power plants as no power generation capacity has been added for the last nine years,” said Qazi.
It is perhaps a testament to how bad that the energy crisis has gotten that the water and power secretary said that the government was right now focused on trying to limit power outages in urban areas to six hours a day.
In the meantime, the government appears to working on encouraging alternative sources of fuel. Officials testified that there were currently investor looking to set up projects that would generate 550 megawatts of win power and that about 450 megawatts of that would be added to the national grid by March 2013. Investors have expressed interest in setting up at least another 1,500 megawatts of wind power generational capacity, they added.
Published in The Express Tribune, February 21st, 2012.
COMMENTS (12)
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As election comes nearer, you would witness more this type of window dressing efforts in coming days....Jhamooriayat khappey!!
@Ahmed Its a revenge man what else it is hahahahahahaahh
@akkaas: "has it been a massive default on bill payments from customers that the government has run out of cash to pay these power generation entities?? I don’t recall any. So where did our bill payments amounting Rs.300 billion go?? even if 25% of electricity was used for free, where is the rest Rs.225bn??"
Apparently electricity is generated using costly oil but the government does not let the electric companies charge consumers for the full amount of cost. On top of that many government organizations have not been paying timely or at all. Finally a lot of individual customers simply steal electricity and do not pay.
No Gas. No Electricity. No Water. No Fertilizers. No jobs. No law-and-order.
Definitely, democracy is the biggest revenge..
Wah Pakistan Wah….
has it been a massive default on bill payments from customers that the government has run out of cash to pay these power generation entities?? I don't recall any. So where did our bill payments amounting Rs.300 billion go?? even if 25% of electricity was used for free, where is the rest Rs.225bn??
Circular debit and power crisis can not be resolved unless Govt shifts IPPs from Oil to Coal. This will only get worst and worst every passing day.
“The annual fiscal impact of this loan is about Rs18.8 billion, which the power companies will pass on to consumers,”
Sickening, consumer bleeds.
@Bilal Khan: I think what's happening is that, under this new arrangement, the unfunded liabilities (LCs and guarantees) are being converted into funded liabilities. The overall credit limit towards these power generation companies will stay the same but its nature will change on the banks' balance sheets. Hence the 13% interest rate (unfunded liabilities seldom carry more than 0.25% or 0.5%, etc) and the "injection of hard cash"... As for the sustainability of such an injection, the government policy clearly is to pass the debt burden on to power consumers. You and I will be paying for the interest and principal payments. At the same time, the banks will mitigate their risk under the "spike to 20%" clause and by using TFCs as collateral.
Circular debt is basically everybody owes each other money, and they refuse to pay because they are waiting for somebody else to pay them. With this move, actual cash is injected into the system, and they can began to pay back each other, and in return pay back the banks. At the moment, PSO is suffering immensily and this should help ease the burden upon that entity.
How does this inject 'hard cash' in to the power sector? If banks swap loans outstanding (on their balance sheets) from power sector entities in exchange for TFCs issued by the power holding company (guaranteed by the government), then that is just a cosmetic change on their balance sheets.
Do you refer to the potential for new bank loans to these power sector entities (since as you point out they will now be within their bank assigned credit limits) as the 'hard cash'? Far from resolving the 'circular debt' issue, I do not see how this even kicks the can down the road - in fact it only adds to the overall debt burden doesnt it? Because after sometime the new loans (which banks may give) will have to be exchanged for more TFCs/other financial gimmickry, as these companies are unlikely to be able to pay back any loans/payables unless structural problems e.g. tariff adjustment (subsidy elimination or payment), consumer bill payment, theft, distribution losses, inefficiencies, high cost of generation (fuel mix), gas allocation etc. are addressed.
@Cautious:
You think?
Please explain how swapping debt is anything other than cosmetic? The problems of circular debt are not resolved by exchanging debt.