Advisers set conditions for LNG plants’ sale


Financial advisers of the National Power Parks Management Company Limited (NPPMCL) — which owns and operates two LNG-fired plants with a combined capacity of around 2,500 megawatts — have asked the government to immediately finalise gas-sale and power-purchase agreements, debt recapitalisation and payment mechanism if it wanted an early sale of the two units to Qatar.

The government is trying to sell off the two power plants — the 1,223MW plant in Kasur’s Balloki area and the 1,230MW Haveli Bahadur Shah plant in Jhang — to Qatar on a government-to-government basis as part of the International Monetary Fund’s conditions and has already held a series of meetings with authorities in Doha.

NPPMCL’s adviser Credit Suisse Singapore, which has been associated with the transaction since April 2019, has told Islamabad that finalising and executing the security package — involving gas-sale, power-purchase and implementation agreements (GSA, PPA and IA) — and resolving other central issues affecting privatisation, particularly payment of receivables, had been the “main reasons that have halted the NPPMCL transaction process”.

The two Punjab-based plants were taken up by the previous PML-N government under Nawaz Sharif in tandem with building the first LNG terminal and signing a long-term LNG supply agreement with Qatar on a war footing to overcome crippling power cuts.

Under that arrangement, the plants were to be operated on a must-run basis (meaning any power generated by them should always be accepted by the grid) with a guaranteed 66pc LNG supply by gas companies on a take-or-pay basis with the annual gas delivery plan.

However, the power sector, led by then-power secretary Ali Reza Bhutta, did not follow through with back-to-back power purchase agreements and payments against LNG supplies to reduce power companies’ financial exposure that remained parked with gas companies.

As a result, the PTI government, in April 2021, approved the waiver of a minimum 66pc take-or-pay commitment in the power purchase and gas supply agreements of three RLNG-based public sector power plants, including Quaid-i-Azam Thermal Power Plant, Balloki Power Plant and Haveli Bahadur Shah Power Plant.

The Sui Northern Gas Pipelines Ltd (SNGPL) and the petroleum division had been opposing the move because it exposed petroleum sector companies — Pakistan State Oil (PSO), Pakistan LNG Limited and the SNGPL itself — to losses and “practically shifted circular debt from power companies to petroleum companies”.

The PTI’s decision entailed a major shift and envisaged submission of a monthly production plan binding on the power purchaser and the power seller (the National Transmission and Despatch Company and the power plants) under which the power purchaser is entitled to submit demand requirements as needed, at least 75 days before the start of each such month.

The concept of a monthly delivery plan for gas under the GSA had been paired with the monthly schedule as provided under the PPA as a “cost-effective solution, enabling the power and gas purchasers to make requisite purchases in line with actual requirements instead of following a fixed arrangement”.

The petroleum division, however, kept protesting that the entire LNG supply chain — including 800 million cubic feet per day (mmfcd) of imports from Qatar and the open market, regasification terminals, PSO and the gas network, had been put in place on the basic premise of LNG power plants and would become unsustainable in the long term just for short-term gains of privatisation proceeds.

In 2019, the cabinet decided that the 66pc obligation on power plants would remain intact until the first LNG price review in 2026.

As fate would have it, Mr Bhutta was transferred as petroleum secretary later and had to deal with the challenge of his own making. More interestingly, soon after the PML-N-led coalition came to power in April this year, Rashid Mahmood Langrial — a key force behind LNG plants — was appointed as the power secretary. Naturally, the LNG-based power plants are now paid against their power supplies on preference.

The revised PPAs, GSAs and IA could not be executed despite the approval of the coalition’s cabinet. While gas and power supplies remained generally uninterrupted despite grey areas because of public sector ownership of all entities and the build-up of circular debt in both power and gas sectors, such an arrangement is a major challenge for any outsider — whether a private company or a friendly government entity.

The government hired Credit Suisse as financial advisors for the NPPMCL on April 30, 2019 for a term that expired on Oct 30, 2020 but then extended for another 18 months until April 29 this year.

Credit Suisse has now linked the new 15-month agreement to complete the transaction with payment of all outstanding amounts, “including milestone-based fee and out-of-pocket expenses” for itself and financial close of the debt-recapitalisation process by the NPPMCL.

The Privatisation Commission expects inter-ministerial issues to be resolved soon to successfully close the transaction and a committee led by Power Minister Khurram Dastgir was “meticulously” working to remove the bottlenecks as the NPPMCL — a special purpose vehicle for LNG power plants — is a major and complex transaction.

The financial advisers’ assistance pertains to financial restructuring, divestment options, valuation, reference price, process, transaction documents, post-bid evaluation and closure of the transaction.

A top official said the government was committed to inviting the much-needed private sector investment and expertise in the power sector, and its efforts had already attracted international investors for investment opportunities in Pakistan — thanks to IMF programme compulsions.

Moving swiftly, the Privatisation Commission board on Sept 5 recommended reengaging Credit Suisse as the financial adviser and the cabinet’s privatisation committee, or CCoP, approved it three days later on Sept 8 to avoid further delay.

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