ECC to approve issuance of PPTFCs today

MUSHTAQ GHUMMAN

ISLAMABAD: Economic Coordination Committee (ECC) of the Cabinet which is scheduled to meet on Tuesday (today) with Finance Minister in the chair is scheduled to approve the issuance of Privately Placed Term Finance Certificates (PPTFCs) worth Rs 82 billion aimed at partial resolution of power sector circular debt, amounting to Rs 398 billion.

Ministry of Water and Power, the mover of the summary, has held responsible both the federal government (Finance Ministry) and Discos for the current circular debt which has created severe liquidity problems disabling the sector to even import fuel.

“Since last few years, delayed payment of Tariff Differential Subsidy (TDS) by the federal government, Discos’ inability to collect 100 per cent of their receivables against present and past billing and Technical and Distribution (T&D) losses beyond Nepra determinations have resulted in the build up of the power sector circular debt,” the Ministry said in its summary exclusively made available to Business Recorder.

According to the summary, as of April 30, 2012, total payables in the power sector amounted to Rs 398 billion compared to receivables of Rs 376 billion as of March 31, 2012.

Pepco/Central Power Purchasing Agency (CPPA) have to pay Rs 36 billion to Kapco, Rs 95 billion to Hub Power Company (Hubco) Rs 41 billion to SNGPL and Rs 1.2 billion to SSGC for supply of power sector and gas.

Likewise, Hubco and Kapco owe Rs 117 billion to the PSO for supply of furnace oil. Against this, the PSO owes Rs 83 billion to various refineries and, in turn, oil refineries have to pay Rs 73 billion to Oil and Gas Development Company Limited (OGDCL), which gives a total of Rs 82 billion.

According to the Ministry of Water and Power, the circular debt in power sector can notably be reduced provided power sector issues seven-year Privately Placed Term Finance Certificates (PPTFCs), yielding 6 month Kibor + 1 per cent secured against the government guarantee, to the OGDCL amounting to Rs 82 billion.

 Pepco/CPPA will use the entire proceeds of PPTFCs to retire claims of Hubco and Kapco will pay off their liabilities towards OGDCL.

After receiving money by the PSO from Habco and Kapco, the PSO will settle its liabilities towards oil refineries and refineries will settle claim of the OGDCL, who will use these funds to subscribe to the PPTFCs issued by power sector. This will be cash neutral exercise; however it will reduce the power sector circular debt by Rs 82 billion. Eventually, the OGDCL will swap its receivables with PPTFCs secured through sovereign guarantee after receiving funds from oil refineries and gas companies to the tune of Rs 82 billion.

Ministry of Water and Power maintains that the PPTFCs will benefit both power sector and OGDCL.

Power sector is under contractual obligation through Power Purchase Agreements (PPA) signed with Kapco and Hubco to SBP discount rate plus four per cent per annum in Kapco and SBP discount rate plus two per cent to Hubco as penal charges on delayed payments.

Assuming equal retirement of obligations towards Hubco and Kapco, power sector will save at least two per cent per annum in terms of interest and will also ease pressure on its cash flows. Replacement of receivables from oil refineries with financial instrument secured through sovereign guarantee eventually improves the quality of OGDCL’s financial outlook.

The proposed PPTFCs can be offered as security to procure borrowing from local financial institutions to meet its future capital expenditure and other requirements.

Last week, President Asif Ali Zardari presided over a hurriedly called meeting wherein it was decided to issue PPTFCs of Rs 82 billion instead of Rs 70 billion as was earlier proposed by the Minister for Petroleum and Natural Resources, Dr Asim Hussain.