Banks and development financial institutions are hesitant to fund rental power projects of Pakistan Electric Power Company (PEPCO), says a news report in this paper. National Bank of Pakistan has been entrusted the task to arrange a syndication loan of over $550 million.
NBP reportedly has been pleading with other institutions to contribute in the "national interest" aimed at bridging the electricity supply and demand gap in the country. The situation amply suggests that the banking system is flushed with liquidity, but banks are adopting an extremely cautious approach towards lending particularly in relation to private sector where demand is already dwindling. One may safely assume that banks will be falling over each other to lend against sovereign guarantee. But they are not. Why?
The reasons behind such reluctance of the lenders are: (a) We are yet to get the fundamentals afflicting the power sector right; and (b) the perception that the decision making in selecting the rental power operator is not transparent. This misgiving appears to be based on the present governmental failure to provide good governance in other sectors such as iron and steel; imported fertiliser distribution and governmental tendering of sugar imports.
Banks have a strong appreciation of Pepco's financial situation. The lenders know well that PEPCO is faced with serious cash flow difficulties in making payment for existing dispatch of electricity by private sector power projects. They are also unhappy with the return of 1.5 percent above Karachi Inter Bank Offered Rate (KIBOR) for four years plus one year of grace of Term Finance Certificates (TFCs) of Rs 80-85 billion to clear the circular debt. Private sector fears that this rate is too high and it would also create a new benchmark for borrowing.
If the sovereign is borrowing at this rate then the private sector would be forced to borrow at four to five percent above KIBOR. Banks quote a rate after taking into account liquidity position, credit risk as well as sovereign spread to work KIBOR rate. They are already charging around two to 2.5 percent above KIBOR from corporate clients in the oil and power sector.
Most of these overdraft loans also enjoy indirect backing of the sovereign. They know well that once these new TFCs mature - five years from now - they would be once again rolled over and not paid off. Until recently, banks were charging 0.33 to 0.5 percent above six months KIBOR for government backed TFCs. The revenue position since then has further deteriorated. Under the IMF stand-by arrangement (SBA), the government cannot resort to borrowing from SBP to pay off these TFCs upon maturity.
The rule of thumb for financing power projects is said to be 'a million dollars per mega watt'. PEPCO is reportedly agreed to pay double the amount for second-hand Chinese origin plants. And, PEPCO has also front loaded the payment schedule.
There is a lurking fear that somebody is out to make a killing! President Zardari needs to do something at the earliest before perception matches reality and accusations against alleged dishonest agreements in business and politics that people try to achieve in order to make profit or get advantages gather steam. Even the best economic team cannot succeed in the absence of local investors' confidence. Investor confidence cannot be restored overnight. It may take even several months of transparent decision making. Without this an economic turnaround will remain elusive.