Performance obligation of power purchaser is guaranteed through sovereign guarantee (SG) by government of Pakistan (GoP) and when power purchaser defaults the payment of independent power producers (IPPs), they reach GoP invoking the SG. The default on sovereign guarantees may not only unnerve the financial markets, but also downgrade the government’s creditworthiness, making it more expensive to borrow money. Therefore the government takes it very serious, typically, to avoid the invocation of SG.
However, government is stuck in a state of circular reference between commitments to IMF & IPPs. The IMF required to get rid of inter-corporate debt, commonly known as circular debt, by avoiding subsidies and increase in power tariff. The government cleared the circular debt in July 2013 and expressed strong commitment to control it in future. The detail of circular debt paid and methodology used is as follows;
However, despite increase in power tariff for domestic, industrial and commercial consumers, the government is unable to control the reemergence of the monster of circular debt and it has touched the PKR 300 billion now. IPPs are the most concerned entities keeping in view the heavy debt obligations to international lenders and returns to investors.
Mister of Water and Power, Khawaja Asif held a meeting with IPPs on May 29, 2014 and vowed to clear all the outstanding bills in a two weeks period. However the Finance ministry is reluctant to pay off the amounts to curtail the fiscal deficit to 5.7% of GDP to meet the targets set by IMF and to be eligible for next disbursement of 6.7 billion dollars by IMF. Previously in 2013, by paying off the circular debt of PKR 480 billion, fiscal deficit had been pushed from 6.5% to 8.2% of GDP.
As a result, 15 IPPs have served final notices to NTDC/GoP for invoking the SG provided to them as part of Implementation Agreements. An amount of PKR 67 billion approximately is due to these IPPs, which if paid will have a negative impact on fiscal deficit & if not paid, will damage the credit rating of the country.
If the government fails to pay off the dues in one month, the IPPs will have the right to get sovereign guarantees encashed under their PPAs. Both government and IPPs are not facing this situation first time and have enough experience to tackle the situation which may result after the expiry of notice period under the PPA. A couple years ago, 8 IPPs had invoked the SG after non serious attitude of the concerned authorities. The government, however paid the due amounts partly after the court orders.
The government will most probably pay the dues after 30th June, 2014 but the question remains unsolved about the strategy to handle this in future. The circular debt should better be retitled as “Spherical Debt” because of its complexity and inability of government to handle it. By issuing PIBs (another debt) to get rid of former debt is a poor strategy of the government and must be raised at appropriate levels for the clarification. Consumers are already paying for generation cost, transmission and distribution losses, theft and recovery losses and now another cost is added in the portfolio to be recovered from consumers.
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