Protection of Economic Reforms Act: MoF asks Power Div to satisfy Chinese lenders

ISLAMABAD: Ministry of Finance (MoF) has asked Power Division to expedite measures to satisfy Chinese lenders on the Protection of Economic Reforms Act (PERA) to avoid any dispute in future, well informed sources told Business Recorder.

Finance Ministry has written to Power Division in the backdrop of “potential system risk from $ 150 million Standby Letter of Credit (SBLC) against National Bank of Pakistan (NBP),” saying that for the time being Hubco SBLC has been extended till February 23, 2023 and the other matter has been resolved amicably between Hubco and NBP.

Prime Minister Shehbaz Sharif had directed the concerned authorities including Minister for Planning, Development and Special Initiatives, Ahsan Iqbal to resolve a dispute between Hubco and M/s China Power Hub Generation Company (CPHGC) on “encashment of Hubco’s Standby Letter of Credit of $150 million”, well informed sources told Business Recorder.

Encashment of SBLC: Resolve Hubco-CPHGC dispute, PM asks authorities concerned

He issued these directions on an SOS call from Hubco as according to CEO Hubco Kamran Kamal, the CPHGC called on Hubco’s SBLC of $ 150 million despite Islamabad’s untiring efforts.

In a letter to Secretary to Prime Minister, Kamran Kamal had stated that under the SBLC Facility Agreement with the banks, Hubco is required to pay $ 150 million in equivalent Rupees (amounting to Rs 34 billion) within the next ten days to National Bank of Pakistan (NBP) in order for the NBP to honour its obligations under the SLBC.

Hubco argued that the overdue receivables from CPPA-G to Hubco and Hubco Narowal as of now are Rs 37 billion and Rs 11 billion, respectively, totalling Rs 48 billion. “We believe that CPHGC’s call on SBLC is invalid and legally defective and Hubco is taking appropriate steps in this regard but it has created a huge financial exposure for Hubco.”

At the same time, the call on Hubco’s SBLC will have far reaching consequences on the entire CPEC initiative and its future and all relevant stakeholders including Hubco, CPHGC, CPIH and lenders. It will create serious adverse implications for Pakistan, as well as, energy security in the country,” said Kamal in his letter.

On November 19, 2022, Hubco in a letter to Ahsan Iqbal contended that as a joint venture partner and Pakistani sponsor of a CPEC power project named CPHGC, Hubco provided sponsor support to CPHGC’s lenders in the form of a $ 150 million SBLC. The SBLC was issued on November 24, 2017 at the time of the project’s financial close for a period four years till November 23, 2021. It was primarily meant to cover the project’s construction risk which was mitigated upon the Commercial Operation Date (COD) of the project in August 2019.

Post-COD, the project has completed three years of operations during which it has demonstrated strong earnings with profits in excess of $ 400 million and has been servicing its debt in a timely manner which includes foreign principal repayments amounting to $293 million to-date.

The project has also completed the major requirements of Project Completion Date (PCD) including compliance with the stipulated financial ratios. Government of Pakistan has not defaulted on a single debt payment commitment of any Pakistani Independent Power Producer in the past.

However, despite this, Chinese lenders did not give up the requirement of SBLC citing the reason of default in establishment of Revolving Account by CPPA-G. Consequently, Hubco was constrained to renew the SBLC for another year till November, 2022.

The government of Pakistan (GoP) established the Pakistan Energy Revolving Fund (PERF) on November 1, 2022 with concurrence of Chinese ambassador to satisfy the requirement of Revolving Account for CPEC projects. This milestone was achieved ahead of the recent visit of Prime Minister to China to demonstrate GoP’s commitment towards the CPEC.

The dispute between Hubco and Chinese company also landed in a court in Karachi. However, the issue has been resolved for the time being due to involvement of high level officials.

Copyright Business Recorder, 2023