Circular debt: Govt carves out plan to reduce capacity charges

ISLAMABAD: The PTI government has carved out a unique master plan under which synthetic financing would be arranged to slice down capacity charges causing huge surge in circular debt. The circular debt has now risen to over Rs2.1 trillion.

Under the master structure based on synthetic financing, debt payment plans of powerhouses and IPPs will be stretched from 10 up to 20 years, which will help lower the basket tariff by Rs0.67 in first ten years. However, in remaining period of 10 years additional tariff will be charged to the consumers.

Finance Division has designed a master structure for synthetic financing to reduce the capacity charges in consultation with Power Division and Nepra as per the decision of Cabinet Committee on Energy that met on February 4, 2020.

Finance Division has prepared the summary to this effect for approval of ECC that met here on Wednesday (May 20, 2020) but because of heavy agenda, this matter will be discussed and approved in next ECC meeting. Once the plan signed by Finance Secretary Naveed Kamran Baloch is okayed by ECC, then the government committee headed by Minister for Power and comprising SAPM on Mineral Resources, Secretary Law & Justice Division will take up the issue with IPPs to include their input and if the plan is okayed by both sides, it will be implemented.

The summary says that power projects having three years or more left on their debt will be eligible for this scheme. The scheme will be applied across the board. However, projects having material reasons preventing to apply the scheme will be excluded. And the debt payment of power projects and IPPs will be spread over ten years after the current repayment period power tariff will be lower than the prevailing tariff during the initial years, however, in remaining period of 10 years additional tariff will be charged to the consumers. Under the plan, IPPs will be paid same amount (having 10 years repayment commitment with lenders) the differential to be financed through bond issuance each year by Special Purpose Vehicle (SPV) such Power Holding Private Limited (PHPL) with GoP guarantee.

Under the plan, bond repayments will be spread over year 11 to year 20 with quarterly interest payment and maturity in bullet, by SPV and interestingly the servicing of these bonds will be done through the new uniform debt servicing tariff component in the tariff from year 1 to year 20.

Currently, the ‘front loaded’ tariffs of all the power generating units, in private sector, have resulted in consistently higher tariff at the consumer end. This includes significant portion of capacity payments interalia containing debt repayments in first 10 years of a project, otherwise having operational life of 25-30 years. However, the objective of lowering this front loading of the tariffs, through stretching out the debt terms say from 10 to 20 years, is possible through a synthetic refinancing structure without disturbing the existing debt structure of the pool of projects that can go into the programme. The group may include those projects having three years or more left on their debt. This category of projects that several years their capacity payments drop can benefit from refinancing includes approximately (10,000MW) of projects in operation or construction.

In simple, debt profile of each project to be put in this programme will be reworked as if the debt terms have been stretched by 10 years. The Power Purchaser says the capacity based on this stretched debt term, but the existing lenders still get the full payment as they were originally scheduled. The shortfall occurring every year for the period ending original debt term will be funded by series of bonds, to be issued by a Special Purpose Vehicle (SPV). When the original underlying lenders are paid off, the total stock of the new bonds will be outstanding; the same will be paid over the 10-year period by the Power Purchaser through a stretched capacity payments. In addition to the principal ,the power purchaser will be paying interest on the bonds, as it would have paid, if the original loans had a longer tenor rather from the 10 years assumed there. It can be estimated that the impact of debt rescheduling could be about Rs0.99-0.25 per unit in individual tariff leading to estimated reduction of basket tariff at Rs0.67 in initial years, however, from year 11 to 20 basket prices will be higher as per generation level at that stage in time.

However, the said model of debt refinancing is likely to face several issues. Depending on the size, each electricity generation project could have a consortium on average of 5-6 long-term lenders including banks, local and international DFIs, Export Credit Agencies (ECAs), bilateral and multilateral, as well as private lenders. Refinancing each project, may not be feasible. First, most lenders, including even ECAs, may not agree to extend their maturities given the credit profiles. Second, building a consensus in each consortium will take an inordinate amount of time, and even one hold-out can break the transaction. Third, existing guarantees on debt portion of the project being part of the security package under the respective power policies will be replaced with individual government sovereign guarantee instruments.