The federal government has decided to revise the re-lending policy, after public sector utilities refused to borrow on higher interest than the prevailing market rates.
Official sources told Business Recorder that the prevailing rate was 11 percent (Kibor 9.07 percent plus exchange risk coverage 2 percent) while GoP's current re-lending rate was 17 percent, which the public sector entities were not ready to accept.
"The Economic Affairs Division has been directed to prepare revised re-lending policy and submit it to the Economic Co-ordination Committee (ECC) of the Cabinet for approval," sources said.
The decision was taken in the backdrop of two project loans namely upgradation of load dispatch system phase II and transmission arrangements for power dispersal of Ghazi Brotha Hydropower Project (GBHP) which the government intends to re-lend to the Water and Power Development Authority (Wapda).
Sources said that loan and project agreements were signed between KWF, a German financial institution, GoP and National Transmission and Dispatch Company (NTDC), the project executing agency, on July 15, 2004 for Euro 51,129,188.12 for supply and erection of the 500 kV, 220 kV and 132 kV substation at Ghakkar (Gujranwala).
According to the agreement, the borrower would channel the loan to the project executing agency under a separate agreement (on lending agreement) which should reflect prevailing market conditions in Pakistan, subject to approval of the ECC.
The Ministry of Water and Power, in its summary submitted to the ECC meeting held on April 14, said that NTDC had signed agreement with United Bank Limited on December 12, 2005 for an amount of Rs 1.6 billion to finance the construction of 500 kV Sahiwal sub-station at an interest rate of six months Kibor plus two percent, which is currently 9.07 percent.
Thus, the prevailing market conditions justify re-lending rate of 11.07 percent (9.07%+ 2%), whereas Wapda is being offered re-lending loan at 17 percent.
In the case of upgradation of load dispatch system phase II, the re-lending loan to Wapda is being offered at 17 percent whereas the government took the loan at 1.2 percent from Japan Bank for International Co-operation (JBIC).
Sources said that Ministry of Water and Power had asked the government that re-lending should be extended at 11.07 percent rather than 17 percent, as Wapda was not ready to avail the loan at higher than the prevailing market rate.
They said that Economic Affairs Division agreed with the proposal, but Planing Commission was of the opinion that re-lending terms could not be changed for one organisation.
According to sources, Planing Commission even said that if Wapda did not fulfil the terms and conditions, it was free to approach the private banks. The Ministry, however, argued that the much delayed project should not be held back for want of a general decision, particularly when agreement has already been signed with the JBIC.
After detailed discussion on the cases and Planing Commission's viewpoint on the issue, the ECC decided to revise the re-lending policy, thus directing EAD to submit revised policy in the next ECC meeting, sources added.