Government decides to convert additional PHL debt into public debt

ISLAMABAD: The government has reportedly decided to convert additional debt of Rs 80 billion of Power Holding Limited (PHL) into public debt as per agreements with the international financial institutions (IFI), well informed sources told Business Recorder.

For this purpose, Finance Ministry will submit a summary to the Economic Coordination Committee (ECC) of the Cabinet shortly.

The government has already converted PHL’s debts of Rs 136 billion into public debt in accordance with an understanding with IFIs; and has already agreed to convert power sector debts existing on PHL books into public debt as these have matured. Finance Ministry will be responsible for retiring principal amount to the banks whereas CPPA-G will pay interest on the loans. Presently, PHL booked debts are over Rs 1 trillion.

PHL is a wholly-owned government entity, established for the purpose of securing financing for the power sector. It was incorporated under the Companies Ordinance, 1984 on 24th June 2009.

PHL is also a Special Purpose Vehicle (SPV) to park long-term debts of the government owned power sector. PHL regularly borrows from commercial banks, with the debt guaranteed by Ministry of Finance, and the proceeds are used to pay off liabilities of power sector. PHL was used to fund the power sector that could not function due to heavy amounts of payables to IPPs and others; the obligation to pay IPPs is guaranteed under a government policy. The markup payments of borrowing from banks are passed on to paying electricity consumers. However, no cash flow exists to service the principal amount of the debt and none of the facilities obtained by PHL have been retired.

In March , 2018, Syndicated Term Finance Facility (STFF) of Rs 80 billion was executed between Power Holding Limited (PHL) and a consortium of local conventional Banks comprising (i) Allied Bank Limited (ABL), (ii) United Bank Limited (UBL), (iii) National Bank of Pakistan (NBP), (iv) Bank Alfalah Limited (BAFL), (v) Bank Al-Habib Limited (BAHL), (vi) JS Bank Limited (JSBL); and (vii) The Bank of Khyber (BOK), for the purposes of funding the repayment liabilities of the Distribution Companies (Discos) on the terms and conditions duly approved by the Finance Division.

The disbursement proceeds of the facility were utilized by paying the outstanding liabilities of various sectoral entities through Central Power Purchasing Agency (Guarantee) Limited (CPPA-G). The major terms and conditions of PHL finance facility of Rs 80 billion disbursed on March, 30, 2018 were as follows: (i) up to 05 (five) years, inclusive of grace period of twenty four months from the first disbursement date with grace period applicable to principal repayments only; (ii) pricing- 3 month KIBOR (base rate) + 2.00% p.a. (spread). However 1.30% rebate/reduction in spread in case profit/mark-up payments are made within 30 days of the due date; (iii) mark-up to be serviced on quarterly basis; (iv) in 12 equal quarterly installments after completion of grace period; and (iv) security- first demand, irrevocable, unconditional, and continuing Government of Pakistan guarantee for securing the principal, profit payments and/or any other amount(s) becoming due for payment in respect of the facility for the entire tenor of the facility.

On September 30, 2020, Power Division informed the ECC that the grace period of existing PHL finance facility of Rs.80 billion was completed and installment payments on account of principal portion have become payable. However, due to limited available fiscal space and liquidity, power sector did not have capacity to pay principal installments in respect of the existing PHL facility of Rs 80.00 billion; and Power Division and Finance Division are working on a settlement plan for the PHL finance facilities.

It was pointed out that all the profit/ mark-up payments in respect of the subject facility had been made within a grace period of 30 days and rebate of 1.30% had been availed by PHL/ power sector as a result of timely profit/ mark-up payments. Power Holding Limited, a public sector entity without assets, would be responsible for arranging fresh facility of Rs 80 billion on the terms and conditions approved by the Finance Division for the purposes of adjustment/ settlement of the existing PHL finance facility of Rs 80.00 billion. Ministry of Finance would provide a Government guarantee for repayment of principal, profit payments and/or any other amount(s) becoming due for payment in respect of the fresh finance facility for Rs 80.00 billion. The servicing of mark-up, principal repayments and all other amounts becoming due and payable in respect of the fresh facility of Rs 80 billion shall be the responsibility of CPPA-G through the imposition of a surcharge.

Power Division requested the ECC to approve principal installment payments to be deferred for a period of two years from the date of execution of fresh facility and disbursement proceeds of the fresh facility to be utilized towards adjusting the outstanding principal portion of existing PHL finance facility of Rs 80 billion.

After the detailed discussion, the ECC did not approve the proposal and directed Finance Division to bring a summary to convert the loan into government debt, which will later on be made part of the federal budget.

The Finance Division would also arrange an amount of about Rs 400 billion to clear the outstanding amounts of IPPs to convert the MoUs into formal agreements.

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