Power sector dues: Govt defaults on sovereign guarantees

Move to affect govt’s creditworthiness; IPPs threaten to take legal action.

Shahbaz Rana May 09, 2012


Failure to honour its financial commitments to Independent Power Producers (IPP) has led to the first-ever sovereign default by the government in Pakistan’s history.

The default on sovereign guarantees – assurances the government provides to foreign investors – may not only unnerve the financial markets, but also downgrade the government’s creditworthiness, making it more expensive to borrow money.

“Today, the government of Pakistan has committed a sovereign default for the first time in the history of the country”, announced the IPPs Advisory Committee here on Tuesday.

“The government has defaulted on payments of roughly Rs45 billion to nine IPPs that generate 1,700 megawatts of electricity”, said Abdullah Yusuf, Chairman IPP Advisory Committee while talking to The Express Tribune.  These nine IPPs started operations in 2004 and their total receivables amount to almost Rs232 billion.

Taking legal course

The IPPs gave a 30-day payment notice to the power purchaser, the Central Power Purchasing Agency (CPPA), followed by a 10-day notice to the government. Neither the CPPA nor the government cleared the overdue amounts, said the advisory committee.

The IPPs have exhausted all avenues available and the notice served to the government expired on Tuesday, the committee said.

After the default, the IPPs have issued a legal notice to the government for recovery by Thursday, May 10th, 2012 failing which the IPPs will follow a legal course.

Yusuf said the IPPs will go to the Pakistani courts.

“The default is a very serious matter and carries negative implications for the country”, Yusuf added.

Officials from the Finance Ministry refused to comment and the Federal Minister for Water and Power was not available for comments, despite repeated attempts.

Chronic debt

Despite clearing payment backlog in two attempts, the government has been unable to resolve the circular debt in the energy sector in the last four years. While the government is reluctant to disclose the exact size of the circular debt, some estimates suggest it is above Rs400 billion.

The sovereign default could result into further downgrading of Pakistan’s credit rating. Meanwhile, local banks have an exposure of Rs120 billion to the power sector and the default may also affect their balance sheets.

The IPP advisory committee said that some other power producers, currently operating under the 1994 policy, may also invoke sovereign guarantees.

Previous almost-default

The government had come to the brink of a sovereign default earlier in September 2011, when nine IPPs invoked government guarantees after the amounts due to them had reached phenomenal proportions.

The IPPs had already utilised all of their working capital limits and plant closures looked imminent, the advisory committee said.

The government, however, asked the IPPs to withdraw their call on guarantees and in turn offered an interim arrangement.

Under the “Settlement Agreement,” the government proposed that as long as the CPPA did not clear the overdue amount, it would not impose penalties on IPPS for less-than-agreed upon production.

The government had also agreed to clear all dues by October 15, 2011.

The IPPs accepted this arrangement and withdrew their notices but the government defaulted even on this settlement agreement and did not clear the dues, the advisory committee said.

Published in The Express Tribune, May 9th, 2012.


Paki optimist | 12 years ago | Reply

This has serious consequences for the overall economy. We have witnessed the Dubai crisis and more recently the euro sovereign crisis and its repercussions on the banking system and the economy as a whole, this is no different since it involves the question of whether a sovereign is able to service its debt - and usually sovereign debt carries the notion that it is backed by the government thus the chance of it defaulting on its obligations are next to none - but obviously we have seen sovereign defaulting and more importantly we have also seen the austerity measures these countries have undertaken to correct its imbalances. Cost of borrowing will increase not only for the sovereign but also the corporates in due time. The Government of Pakistan is at a serious financial crossroad, only option for us is to 'cure' this default - otherwise the Government is inviting a financial crisis in the making. An alarming development, indeed.

Meekal Ahmed | 12 years ago | Reply

I think we have a death-wish. This is not only bad but it is astonishingly dumb.

And how interesting that there is no comment from the concerned quarters?

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