The power sector in Pakistan will see a significant financial influx in the country as the government is about to sign a financing package worth 1.225 trillion with 18 banks. The transaction, which will be observed by the Prime Minister Shehbaz Sharif, will solve the long-standing circular debt crisis in the country.
Background of the Circular Debt
The circular debt, which was estimated to be 2.5 trillion, has been reduced to about 1.7 trillion. Although reforms have occurred in recent years, the energy sector still bears a heavy burden, which disrupts payments to power producers and impacts the stability of the entire electricity supply chain.
Details of the Financing Package
No reports indicate that no codal requirements, approvals, and guarantees have been received. The Rs. 1.225 tr package is marginally smaller than the original package of 1.275 tr because the government has decided to limit quarterly payments to Rs. 310 million as opposed to 325 million. This was done to prevent increasing the Debt Servicing Surcharge (DSS) to Rs. 3.23 per kilowatt-hour, which would have political implications.
Allocation of Funds
Among the total funding, the amount of repayment of loans owed by Power Holding Limited (PHL) is Rs. 659 billion. The government is still uncertain about the distribution of the remaining money to independent power producers (IPPs), petroleum industry or subsidy changes. The willingness of IPPs to forego interest on late payments will determine how much they are paid.
Role of CPPA-G and Cabinet Approvals
Central Power Purchasing Agency-Guarantee (CPPA-G) as an agent of distribution companies (Discos) will be the key participant in the financing. CPPA-G has been authorised by the federal cabinet to perform public service functions, implement contracts and design securities on behalf of Discos. Other measures related to this are amendments of the Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997, and Sales Tax Act, 1990.
Banking Partners in the Deal
The funding package is comprised of 18 banks, among them Meezan Bank, Habib Bank, National Bank of Pakistan, Allied Bank, United Bank, Faysal Bank, Bank Al Habib, MCB Bank, Bank Alfalah, Dubai Islamic Bank, The Bank of Punjab, Bank Islami Pakistan, Askari Bank, Habib Metropolitan Bank, Al Baraka Bank, Bank of Khyber, MCB Islamic, and Soneri Bank. These institutions have signed deals with CPPA-G in order to make it easier.
Fiscal Measures and Supplementary Funds
In order to back the financing package, the cabinet indicated the prompt allocation of Rs. 267 billion that had been appropriated in the Power Division. Further, amounts of Rs. 393 billion will be disbursed as technical supplementary grant to pay the bills to the government-owned power stations such as Uch-I and Uch-II and also to the Oil and Gas Development Company Limited (OGDCL).
Conclusion
Rs. 1.225 trillion financing package is a step in the right direction of dealing with the Pakistani chronic power sector debt. Although it may help in the short run, the long run success of reforms to stabilize the sector will depend on the capacity of the government to sustain the reforms, to negotiate with IPPs, and to manipulate the energy subsidies. The deal itself is a good indication of progress, though Prime Minister Shehbaz Sharif will provide political heft by signing the deal.
