Oiling the machinery: Only Standard Chartered willing to finance Neelum Jhelum project

Reportedly willing to provide $500 million at 7% markup after other banks pulled out.

ISLAMABAD:

Commercial banks have opted not to bid for a $500 million load needed by the government to bridge a financing gap in the Neelum Jhelum hydropower project, and the government seems to be left with no option but to borrow from Standard Chartered Bank at a 7% markup on the loan. The financial shortfall is enough to seriously hinder work on the 969 megawatt power project if it is not arranged on time.

Out of the ten banks initially invited to negotiate the loan, only four banks – United Bank Limited, Al Baraka, Habib Bank and CitiBank – had showed some interest in the project. However, they too seem to have decided to stay out of it, sources added.

A meeting scheduled for March 25 for commercial banks, who had sought ten days to come up with a financing offer, turned up nothing for the government. “Most of the chairs remained empty as none of the four banks invited turned up,” finance ministry sources told The Express Tribune. The banks are reluctant to offer a loan due to certain reservations, the sources added.

Authorities are already facing problems in arranging financing through a planned Sukuk issue worth Rs20 billion.

The gap in financing the project, estimated to be between $1 billion to $1.5 billion, has arisen after China and Abu Dhabi backtracked from their commitment to fund the dam. Meanwhile, the project cost has increased significantly, allegedly because of corrupt practices. To bridge the gap, government officials, apart from seeking the $500 million loan from commercial banks, are also trying to convince China’s Exim Bank to extend another $500 million.

However, Standard Chartered Bank has stepped forward, offering to provide a loan at 7% markup for a ten-year tenure. The proposal has been forwarded to the Ministry of Water and Power and Economic Affairs Division, officials said. Including exchange rate risk, the estimated real markup will come to around 14% in rupee terms.

Officials say the government will have to accept the offer at any cost, as a loan from the Exim Bank is as yet unconfirmed, and any delay beyond June will slow down work on the project.

Launched at an estimated cost of Rs84 billion, the revised estimates for the project have shot up to Rs321.4 billion, including foreign loan components, according to project documents. The project design had been modified to make room for more machinery, including tunnel boring machines, which had to be procured from external sources, officials added.

As much as 40% of the project cost will be arranged through a levy imposed by the government on power consumers. Electricity consumers are paying Rs0.10 on each unit of electricity consumed towards the financing for the project.

The average markup on loans arranged so far for the project is 13.7%, and the federal government is purportedly securing foreign loans and relending them at 15% markup to the Water and Power Development Authority, according to documents.

“The biggest threat to the project’s successful execution is the delay in arranging funds, particularly the foreign loan component,” Lieutenant General (retired) Muhammad Zubair, who is the CEO of the Neelum Jhelum Hydropower Company, has said.

Accordign to Zubair, Rs2.5 billion on average are required per day for the day, including the foreign component, to complete the project on time. Zubair said the Standard Chartered Bank is ready to finance the project, and if its bid is accepted, the bank will provide half the promised amount by June this year.

Published in The Express Tribune, April 7^th, 2013.

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