Circular debt: Competitive bidding to be arranged for raising Rs200 bn from banks

ISLAMABAD: The Power Division will arrange open competitive bidding to raise Rs200 billion under Sukuk-II from banks or consortium of banks at lowest interest rate and the amount will be utilised for partial cash settlement of the circular debt that has risen to Rs1.7 trillion in toto, which is 4 percent of GDP of Pakistan.

"Yes, we are going to issue within next two to three days an advertisement in national dailies seeking bids from banks or consortium of banks for raising Rs200 billion on the lowest interest rates," the spokesman of Power Division Zafar Yab Khan confirmed to The News. He said the ECC had accorded Power Division’s proposal seeking financing of Rs200 billion not through negotiated settlement but through open competitive bidding.

However, the official sources explained that after the nod from IMF on the issue of sovereign guarantees, the Power Division has processed some weeks back the summary seeking approval of raising Rs200 billion under competitive bidding mode.

"We are going to hold competitive bidding as last time when the Power Division raised Rs200 billion through a consortium of Islamic banks, the Auditor General of Pakistan had objected negotiated settlement on interest rate against Rs200 billion loan between the government and consortium of banks saying as to why the authorities have not held competitive bidding to ensure transparency."

Now the Power Division wants to raise another Rs200 billion loan through competitive bidding from banks or consortium of banks as per the direction of Auditor General of Pakistan.

The consortium comprising Meezan Bank Limited, Faysal Bank Limited, Bank Islamic Pakistan Limited, Dubai Islamic Bank Pakistan, MCB Islamic Bank Limited and Al Baraka Bank Pakistan Limited that earlier arranged Rs200 billion has shown interest in raising another Rs200 billion for the government, but the Power Division wants the required loan under competitive bidding mode.

Earlier, when the same consortium of Islamic banks raised Rs200 billion under Sukuk-I, the government pledged the properties of DISCOS, GENCOs and WAPDA and now under Sukuk-II, some more properties will be pledged. However, to a question the official said that pledged properties cannot be re-pledged.

At end-September, 2019, the stock of power sector arrears stood at Rs1,690 billion, of which Rs465 billion were accumulated just in financial year 2019. The main contributors to these new arrears were technical and distribution losses, delays in updating tariffs, and provision of unbudgeted subsidies.

The authorities have taken steps to address some of the sources of arrears, including by: (i) investing in infrastructure to reduce technical losses; (ii) launching an anti-theft drive and stepping up enforcement to increase collections; (iii) adjusting tariffs gradually (quarterly) to cost recovery levels, including on September 30 (end-September 2019 SB) by around 5 percent, largely to recover arrears accumulated over FY 2019, and on November 29, 2019 (prior action) by around 2 percent on account of Q1 FY2020 capacity payments; and (iv) budgeting or eliminating all power sector subsidies.

These efforts are already showing some results, with accumulation of new arrears falling from about Rs38 billion per month in FY 2019 to around Rs 10 billion per month in the first three months of the financial year 2020. The authorities remain committed to bring the monthly flow in circular debt to zero by end-2020.