Salient energy-related points are: (1) Prime Minster's Economic Advisory Council has developed an integrated energy plan to cater short, medium and long-term energy needs of the country; (2) Government has taken a number of measures to improve energy scenario of the country which will also going to give impetus to agriculture and industrial sectors; (3) PSDP allocations for the power sector increased by 100 %, from Rs 11.4 billion in FY 2008/09 to Rs 22.8 billion in FY 2009/10; (4) to the end of a stable and reliable supply to consumers and to minimise power losses and outages, projects have been undertaken for enforcing the transmission and distribution systems; and (5) To resolve the issue of circular debt and to improve the liquidity position of the power sector, the Government / specially created holding company will be taking a number of measures.
Thus, it seems that our leaders and planners have recognised the need for an energy DFI (Development Finance Institution). Budget Speech 2009-10 (paragraph-40), while discussing financial measures, mentions the creation of a new DFI but it is for the industrial financing.
There is nothing in it for revival of an existing DFI or establishment of a new DFI for the financing and risk mitigating of capital intensive power generation or other energy infrastructure projects in the private sector. In the absence of such a DFI, it takes much longer for the sponsors to achieve the financial close for power generation or other important infrastructure projects.
However, the State Bank's (SBP's) Development Finance Quarterly Review (December 2008), mentions the setting up of a new DFI for infrastructure finance with the following words: "An SBP Task Force on Infrastructure Finance was established and delegated with a mandate to identify institutional bottlenecks and recommend an institutional mechanism for risk management of project financing.
A set of recommendations aimed at enhancing flow of credit to project financing have been made by the Task Force. These recommendations primarily focus on development of long-term funding mechanism through establishment of dedicated Infrastructure Lending Organisation, which is under consideration".
In 1988 the Government had set up Private Sector Energy Development Fund (PSEDF), a sort of a specialised Energy DFI, with support and funding by the World Bank, the US AID and some other foreign donors. The Government and the donors had selected the National Development Finance Corporation (NDFC) to administer PSEDF through its specially created Private Energy Division (PED).
For power generation or energy related infrastructure projects appraised and scrutinised by PED. NDFC's Board of Directors was authorised to release finances out of PSEDF resources. The World Bank, the USAID and a number of other donors had provided over $500 million by way of loans and grants for the PSEDF.
Motivating terms of PSEDF loans were specially designed to facilitate raising part of the cost of capital intensive-projects through loans from commercial banks, with maximum 10 years maturity. According to the agreed financial package, PSEDF could finance up to 30% of the capital cost of a new power generation plant in the private sector.
PSEDF loans carried fixed rate of interest (then) at 14% with a maturity period of up to 23 years - including a grace period of up to 8 years. PSEDF loans in repayment were junior to the loans from commercial banks. Competence-wise the officers and staff in PED / NDFC handling PESDF related functions were stated to have attained international level.
This was made possible through intensive on the job as well training otherwise by support, in Pakistan and abroad, especially from the Government, NDFC, the World Bank and the USAID over a number of years. PED had the services of short-term and long-term advisors.
With professional advisory services of NDFC and active support from the Government and all the donors, PSEDF in early and mid-90s financed a number of private sector new power generation projects including Hubco. These are now monitored by LTCF (the successor to the PSEDF). PSEDF also financed the pipeline for carrying furnace oil from Port Qasim to Hubco power plant at Lasbella, Balochistan.
However, after the utilisation of the funds initially provided, new funding for LTCF by the Government was not made. In the absence of financing required for new power generation or energy related infrastructure projects, LTCF activities have been restricted to project monitoring and performing other functions - in compliance with agreed arrangements amongst stakeholders including the Government.
The country has been facing shortages of power with huge losses to the economy coupled with inconvenience to all the electricity consumers. The importance of the relevance of not having an active energy DFI and its loan facilities is partly evident from the fact that in the last few years a few private sector power generation plants have been added to the system.
This loss, at least a substantial part of it, could have been avoided if a revised incentive framework for the private sector investors was designed and allowed LTCF to continue funding, establishment of new power generation projects. One is compelled to say that the huge inflow of foreign exchange into the country, another source after 9/11, was wasted on non-essential imports. With better foresight, these funds could have been utilised for financing new power generation capacity and for removing bottlenecks in the national power system.
One should keep in mind that since the moth-balling of LTCF financing only a small number of new thermal, hydel or coal-based projects had completed financing package or achieved financial close. In addition the people have been made to pay rather higher tariff in the case of fast track rental power projects, relied upon to meet the power shortages in the short run.
High electricity tariff will not let our industry become internationally competitive. Moreover, despite claims from certain quarters for ending load-shedding in the country, the demand-supply gap of electricity on the ground appears to be widening. So is the case with the intensity and duration of load-shedding.
An unkind recent reminder to the real situation in the power sector is that due to a massive electricity breakdown, life in Karachi - the City of Lights - came under serious stress on the evening of 17th June 2009. Until the afternoon of 18th June, 2009, electricity could not be restored in many areas of Karachi. Apart from windstorm that hit the transmission lines, the scale and duration of breakdown had link to the poor maintenance of our grid and transmission networks.
The proposition, as to whether a new DFI be established or an existing structure presently under-utilised be made fully operational, needs to be pondered seriously. The former option ie establishing a new DFI would require completion of a large number of formalities and taking a number of enabling measures.
SOME OF THESE ARE: The Charter/Articles of agreement of every DFI are drafted keeping in view the results envisaged to be achieved through its financing and advisory services. The draft charter is normally discussed thoroughly with all stakeholders including major shareholders and the prospective financiers. Many changes are made at different negotiation meetings.
The completion of this process takes quite sometime. Top executives some members of senior management also take part in these meetings. The selection and engagement of such personnel also takes time and effort. Filing of necessary documents and payment of applicable fees establish corporate existence of the DFI.
Human capital is the real capital of a DFI. Recruitment of necessary qualified and experienced professionals with commitment to economic development of the country is not very convenient, particularly for a country like ours. Training of professionals in different aspects of DFI work demands planning, cost and effort, selection of long term / short term advisors and consultants is also not easy. Large financial resources need to be raised or arranged for smooth process.
Capability of DFI personnel for expert handling of activities such as: appraisal of power / infrastructure projects including the set of inter-locked agreements known as Security Package is essential for financing on limited recourse basis; procurement of plant and equipment in line with the procedures prescribed by the international financiers, the disbursement of funds and finally monitoring the projects to the end of loan recovery.
Money makes the mare go. Energy DFIs need large equity and loan funds. For mega projects financing, funds have to be lined up from various sources - in currencies and maturities needed. The lenders may not allow use of their money till they are satisfied with DFI's organisation structure, staffing as well as the set of applicable policies and guidelines.
Preparation of documents such as the application form, brochure for assisting the investors, policy guidelines and operational manuals of the DFI, particularly the appraisal of power generation projects and other infrastructure projects on non-recourse basis and the drafting of appropriate credit agreements with the project sponsors is of critical importance. Often, the services of experts are required to work closely with the senior management of the DFI.
In view of the emergent electricity situation in the country at present and the time consuming and difficult pre-requisite paraphernalia to establish a new DFI, preferable would be to revive an existing structure instead of establishing a new Energy DFI. Making LTCF fully functional can save most of these efforts and requirements. After all, PSEDF / LTCF have already achieved the above landmarks successfully.
They were able to handle and finance 1292 MW Hubco power plant as well as other power projects through PSEDF funds. All these projects are now operational. There could be so many options to the end of revival of LTCF. The preferred option could be that the country makes LTCF a joint-venture independent DFI specialising in the financing of energy and energy related infrastructure projects.
As in the past, the World Bank and the USAID can possibly play a big role. National Bank of Pakistan (NBP) which had assets amounting to almost Rs 40 billion as on December 31, 2008 and which is now administering LTCF on behalf of the government, may spear head the revival and restructuring of LTCF. The World Bank, USAID and other stakeholders could replenish the foreign currency funds for financing by, credit lines and equity support to the government for the purpose of LTCF.
Thus, the country should be able to revive LTCF as a strong and well-capitalised energy DFI, LTCF could also be mobilising local savings and using these resources to fund part of the local currency cost of new power projects. (The writer is President/CEO of First Credit and Investment Bank Limited (FCIB). The views expressed in this article are of the author and do not represent those of the Bank)