Alternative to ADB plan: US proposes $ two billion 'equity fund'

The US has proposed an alternative strategy to that prescribed by Asian Development Bank in response to IMF stipulation to eliminate the circular debt as part of its standby facility: establish an equity fund worth $2 billion with the assistance of local banks, public sector and multilaterals to provide funds to independent power producers (IPPs) to settle the circular debt, sources told Business Recorder.
The ADB prescription of creating a 'Power Holding Company', expected to assume the Rs 216 billion debt from public sector power companies, failed due to non-implementation by Pakistan. The reason for the failure to implement was inability of the Finance Ministry to settle the issue with banks.
The US has announced its decision to partner with Pakistan to assist the energy-starved nation to overcome its severe power shortages as well as to transform its energy economy over the long term. America's co-ordinator for international energy affairs, David Goldwyn, announced this last week in a press briefing. According to him, Pakistan has a functioning economy, and there is a climate for investment in Pakistan.
Sources in Economic Affairs Division (EAD) said that the proposed equity fund would be generated with a contribution of $400 million from the government of Pakistan, $800 million loans from multilaterals and local banks, and $800 million public debt raised by issuing Term Financing Certificates (TFCs).
Following the guidelines, sources said, a special committee, led by State Bank of Pakistan (SBP), has been constituted with the inclusion of representatives from major commercial banks, including National Bank, Habib Bank, United Bank, MCB Bank, and Allied Bank, and three representatives from the IPPs namely Rousch, Hubco and Engro.
The committee has suggested establishing a 'Special Purpose Vehicle' (SPV) to provide credit facilities to IPPs to ease financial crunch attributed to the circular debt. The SPV will be responsible to raise financing for IPPs, directly as well as indirectly, from local financial sector, public and multilaterals with a mandate to generate funding facility amounting to $2 billion, sources added.
At present, private sector in Pakistan has no access to foreign commercial financing option for power projects due to the current credit rating of the country and world economic recession. The local banks have exposure of over $5 billion loan facility for the power sector with the share of $1.8 billion for IPPs. Sources said that local banks are not willing to provide financing for the new IPPs due to circular debt.
Circular debt in Pakistan is causing problems to fuel suppliers as well as power producers. Government recently issued TFCs worth Rs 89 billion to clear the burden of circular debt on oil and power sectors. State run oil marketing company Pakistan State Oil (PSO) is the major fuel supplier to power sector with receivables against its clients amounting to Rs 70 billion on Friday.