Consultations with banks, IPPs: Government preparing plan to deal with circular debt challenge

The government is preparing a structured finance plan in consultation with three banks and Independent Power Producers (IPPs) to get rid of circular debt of over Rs 1.7 trillion, which is a potential risk for the economy and the State, well-informed sources in Power Division told Business Recorder. Of the total circular debt, an amount of over Rs 550 billion has been added by the incumbent government. However, the Power Division claims that growth in circular debt has declined to Rs 20 billion from Rs 39 per month.

International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB) have given the target to Ministry of Finance and Ministry of Energy (Power Division) to make structured or targeted efforts to resolve the issue of circular debt which is a potential risk for Pakistan's economy.

The Ministry of Finance, sources said approached some of the private sector experts to help government resolve this issue. The team which is working on circular debt approached a renowned foreign consulting firm as the major part of the circular debt is related to IPPs.

The sources said, Minimum Basic Agreement (MBA) was signed with the out of UK firm M/s Fieldfisher which has prepared a structured finance plan to resolve the issue of circular debt. The energy sector expert who is working on the structured finance plan held three or four meetings with top bosses of Ministry of Energy and Ministry of Finance.

The sources said, since local banks are also involved in the structured finance plan to deal with the circular debt they were also given a detailed briefing and understanding of the plan. The three key banks involved in circular debt settlement plan are The Bank of Punjab, National Bank of Pakistan and Habib Bank Limited (HBL).

The circular debt resolution panel gave a detailed presented to the Minister for Power, Omar Ayub Khan, Prime Minister's Special Assistant on Petroleum, Nadeem Babar, representative of Finance Ministry and officials of Central Power Purchasing Agency- Guaranteed (CPPA-G) who attended the meeting as they needed some clarifications.

According to sources, the government team raised some queries on the proposed circular debt structured finance plan which will be answered in the next meeting shortly.

Minister for Power, Omar Ayub Khan, sources said, maintained that the federal government's team is satisfied with the plan, and a joint meeting will be called which also be attended by the representatives of banks, State Bank of Pakistan (SBP) as the Central Bank should also on board as it will have key role in the approval of plan so that the reservations, if any, be resolved in one sitting. The purpose of joint meeting of all the stakeholders is to discuss all issues in one meeting.

The large stock of power sector arrears represents a significant quasi-fiscal risk, including combined annual debt servicing costs exceeding PRs 100 billion. The authorities, together with international partners, are designing a strategy to settle the stock of arrears while limiting the impact on government finances. The plan envisages the following steps: (i) the government will issue new guarantees to transfer costly CPPA payables to IPPs into the PHPL; (ii) the government will absorb PHPL into its budget, fully recognizing the liabilities in PHPL as debt of the government of Pakistan and taking over the servicing of the loans contained in PHPL; and (iii) the government will reduce the stock of outstanding payables through the use of power assets privatization proceeds, recoveries from the outstanding stock of receivables, the existing debt servicing surcharge, and the rightsizing of sector-related subsidies.

According to IMF staff calculations and Ministry of Energy, the amount of circular debt added was Rs 465 billion in 2018-2019 of which Rs 171 billion is sourced to Discos inefficiencies, Rs 82 unbudgeted subsidies, Rs 119 delayed tariff adjustments and Rs 93 billion financial costs. If non-payment of current fiscal year subsidy's amount of Rs 100 billion by the Finance Division is included, total circular debt added by the incumbent government is Rs 656 billion.

HPL uses government guarantees to borrow from commercial banks, typically 5-7 year borrowing at KIBOR+2 percent, with the proceeds used to reduce CPPA liabilities to producers. Servicing of PHPL loans is partly made through a surcharge in the tariff, equivalent to around PRs 40 billion annually that covers around 1/2 of the servicing costs. The remaining amount is covered by diverting power sector revenues, which again generates additional arrears.

The sources said, another committee headed by former Chairman SECP Muhammad Ali, including the representatives of ISI and FIA is also probing the reasons for the accumulation in circular debt. The committee will submit a plan to retire the circular debt. The committee in its initial report has suggested the government to review the Power Purchase Agreements (PPAs) with IPPs.