Sources in the Ministry of Finance told Business Recorder on Saturday that the serious issue of power sector circular debt was going to be resolved as the government has decided, in principlee, to replace all mark-ups, Profit Practising Term Finance Certificates (PPTFCS) and loans provided to government-owned power companies on government guarantees with long-term investment bonds.
The federal government is facing circular debt issue since 2007 due to rising oil subsidies and prices of petroleum products on international front, besides less than target revenue collection. According to sources, over the last few months, the banks have been engaged and are in correspondence with Ministry of Finance (MoF) to discuss and manage bank debts in power sector because the issue related to payment delays was creating problems for banking industry, besides repercussions on banks' balance sheets.
In this regard, after various discussions between banks and MoF, it has been decided to adjust this circular debt through subscription of long-term government bonds, and banks have also agreed to adjust circular debt-relate payment with PIBs. Total amount of circular debt stands a Rs 283.32 billion.
Therefore, the MoF has decided to settle circular debt-related banking facilities provided to Power Holding (Pvt) Ltd (PHL), National Transmission and Despatch Company (NTDC), Water and Power Development Authority (Wapda), Iesco, Fesco, Gepco And Lesco, inclusive of all accrued (due and overdue) mark-ups up to the date of settlement.
The ministry has asked all those banks, which have provided loans or issued PPTFCS, to subscribe an equivalent amount of PIBs and complete this transaction till September 24, 2011. The cumulative participation amount of each lending institution will be distributed in different periods of long-term bonds. Under the subscription, 20 percent loan, or interest, will be adjusted in 3-year PIBs; 30 percent in 5-year PIBs; and 50 percent will be adjust through issuance of 10-year PIBs.
"Following the settlement of loans and PPTFCs in the manner set out (crediting of relevant SBP accounts), the banks shall subscribe to an equivalent amount of PIBs, such as the net impact of the contra transaction is expected to be nil", said MoF in a letter to presidents and chairmen of several banks and financial institutions.
Debt policy and co-ordination office of MoF has sent a letter to presidents and chairmen of Allied Bank, Asakri Bank, Bank Alfalah, Bank Al-Habib, Bank of Khyber, Bank of Punjab, Citi Bank, EOBI, Faysal Bank, Habib Bank, Habib Metropolitan Bank, HSBC Bank, JS Bank, KASB Bank, MCB Bank, National Bank of Pakistan, NIB Bank, Pak China, Pak Brunei Investment Company, Silk Bank, Soneri Bank, Standard Chartered Bank, State Life, Summit Bank, United Bank, and Wapda.
According to details, PHL has to pay Rs 61 billion of PPTFCS to HBL, Rs 80.15 billion of PPTFCS billion to UBL and Rs 85.114 billion of PPTFCS to NBP. NTDC has to retire Rs 12 billion of PPTFCS to UBL, Rs 9.33 billion syndicated loan to NBP, and Rs 14.4 billion to Standard Chartered Bank.
Wapda has to pay a syndicated loan of Rs 6.45 billion to Standard Chartered Bank, Iesco Rs 2.626 billion to Askari Bank, Gepco Rs 2.626 to Askari Bank, Fesco Rs 2.626 billion of Askari Bank and Lesco Rs 5 billion Sukuk to Pak Brunai Investment Company. Total amount is calculated to Rs 283.32 billion, and these amounts also include accrued and over-due mark up as on September 23, 2011.
According to Ministry sources, yield at which the PIBs will be issued would be communicated in due course of time. With the execution of above transactions, the already issued Government Guarantees for Power Sector Circular Debt will become null and void, and the banks should ensure to return the same to MoF the date of transaction.
Moreover, all banks will be required to provide 'letter for revocation' of PPTFC in CDS records. The banks will also be required to issue a letter confirming that the outstanding "amounts have been settled, and there is no obligation" on the borrowing entities.
However, MoF has asked banks to provide consent immediately, through a return letter for the above settlement of the above mentioned facilities as explained and this entire exercise is to be completed positively on September 24, 2011.