Wapda raises Rs100bln through sukuk for Neelum-Jhelum hydropower project

Biggest Shariah-compliant corporate financing

KARACHI: The state-owned Water and Power Development Authority (Wapda) on Wednesday raised Rs100 billion from an Islamic bond for the development of 969-megawatt Neelum Jhelum hydropower project, marking the biggest Shariah-compliant corporate financing in the country’s history. 

A consortium of 16 banks, led by the National Bank of Pakistan (NBP), agreed to fund the infrastructure corporate sukuk, based on diminishing Musharaka. The privately-placed sukuk with 10-year tenor was mandated in February.

Neelum Jhelum Hydropower Company Pvt Limited (NJHPC) has entered into a financing agreement with the banks.

Chairman Zafar Mehmood at the Wapda, President and Chief Executive Officer (CEO) Syed Iqbal Ashraf at NBP, Member Finance Anwarul Haq at Wapda and CEO Lt. Gen. (Retd) Muhammad Zubair at NJHPC witnessed the signing ceremony.

A document from the lead arranger showed that the project set a profit rate for its sukuk of 113 basis points over the 6-month Karachi Interbank Offered Rate.

The local currency sukuk, which carries a Pakistan’s government guarantee covering the issuance amount and profit payments, was given a preliminary AAA rating by credit rating agency JCR-VIS.

Infrastructure sukuk have been slow to appear, partly because they often require the transfer of assets into special purpose vehicles, which can be problematic for political or legislative reasons when it comes to large state projects. 

The Neelum Jhelum hydropower project is the world’s first project and its infrastructure works are near 80 percent of completion. However, the project has yet to achieve a financial close. Located near Muzaffarabad in Azad Kashmir, the project is estimated to cost Rs404 billion, with 77 percent of that being financed through debts.

The project is an underground power generation facility being constructed on River Neelum in Azad Jammu and Kashmir. The project will annually generate 5.15 billion units of low cost electricity.

The project envisages 90 percent construction work under high mountainous overburden and only 10 percent above the surface. It involves three river diversions at different times and maximum overburden of the project was around 1.7 kilometres. The 68-km tunnel system involved 19.6km stretch of headrace twin tunnels and 10 access tunnels.

The project, after completion, is estimated to generate Rs50 billion/year in revenue for the Wapda as per the existing tariff structure.

Mehmood said it was the biggest-ever funds arranged from the local banks for any public sector project in the country’s history.

“This historic achievement reflects not only investor confidence in the federal government and Wapda but also indicates the potential of investment that hydropower sector offers in the country,” he said.

Wapda chief said Chinese Exim Bank will also provide $576 million for the project. “An agreement is expected to be signed during the upcoming visit of the finance minister to China,” he added.

Mehmood said the project’s first unit with electricity generation capacity of 242 megawatts will be commissioned by July 2017 and remaining three units will be ready by December 2017.

Chairman Wapda said the issuance of sukuk would go a long way in arranging funds for other hydropower projects.

NBP chief said the bonds provide avenues for Islamic banks and mutual funds to invest their liquid funds in a tradable government guaranteed Islamic instruments.

Pakistan's Islamic banks have expanded rapidly along with growth of Shariah-compliant banking across the Middle East and Southeast Asia, but the sector still lacks some of the money market instruments available to conventional lenders.

The country’s Islamic finance institutions asserts and deposits were recorded at Rs1.63 trillion and Rs1.34 trillion, respectively by end march 2016. Market share of Islamic banking assets and deposit in overall banking industry stood at 11.4 percent and 12.9 percent, respectively.

Profitability remains below, Rs2.9 billion during the period, the banking industry average; partly due to higher expenses as Islamic banks expand their branch networks and a lack of compliant investment options.

Islamic banks increased their investment by Rs155 billion to Rs587 billion by end March. The increase in investment was mainly contributed by investment in government securities as it recorded growth of 35.8 percent.