Govt defaults on sovereign guarantee to IPPs

For the first time in the country’s history, the government on Tuesday committed a sovereign default by failing to clear Rs 238 billion due to independent power producers (IPPs) for which they had invoked sovereign guarantee 40 days ago. An official of the IPPs Advisory Council (IPPAC) said matters had become worse as the government failed to address the concerns of local investors who were running from pillar to post for the last one year to get the matter resolved. “The government made false promises and it did not take even one confidence building step to resolve the crisis.” Nine IPPs, all owned by local business tycoons, gave a 30-day notice to the power purchaser in April to pay their outstanding dues, followed by a 10-day notice to the government, being the guarantor, per the agreements.
The IPPs have sent a final legal notice to the government to clear their dues by May 10, failing which they would have to follow a legal course. “Initially we will be taking the legal course locally, but we do have the option of international legal course,” IPPAC Chairman Abdullah Yousaf said, adding that the government could still resolve the issue by reaching an understanding with the IPPs. The country is already facing a power supply deficit of 7,000MW, as the rising mercury has pushed the demand to 16,000MW.
The available capacity remains unutilized because of the furnace oil constraints, as a majority of IPPs could not buy fuel due to their outstanding dues against the government. Closure of nine more IPPs would mean about 2,500MW going out the window. The government is unable to pay the IPPs due to the circular debt resulting from inefficient power distribution companies that are unable to collect the dues from the consumers and in main cases, the major defaulters remain public sector organizations. Experts have pointed out many times to the government to form a focal point with decision making powers to resolve the issue, as multiple layers of red tape was creating complexity in the resolution of the issue. The sovereign default of the government comes at a time when its economic team is busy finalizing target and strategy for the budget for the next fiscal year. Experts said the sovereign default could lead foreign banks not accepting or confirming letters of credits by local banks, downgrading of credit ratings of Pakistan; suspension in lending by international lending agencies, local banks that have an exposure of Rs 120 billion to the sector taking serious hits and some of the smaller banks possibly going under. Also, local business houses in the sector could be put on credit information bureau (CIB) for a default caused by the government, a further reduction in generation on account of complete shutdown of these plants and calling of sovereign guarantees by other IPPs under the 1994 Power Policy, and a decline in foreign investment due to the negative view. When the electricity shortages started appearing in 2004, the government pushed for new projects under the 2002 Power Policy and itself approached leading business houses of the country for putting up power plants. While investors were wary of the proposals, strong government assurances backed by sovereign guarantee led to 12 IPPs being developed with a gross capacity of around 2,600MWs and at a cost of $2.8 billion. About 75 percent of the investment came from the banking system of the country. The equity portion of 25 percent had both local and at least seven foreign investors and in some cases, foreign governments also invested directly through their corporate bodies.
While the IPPs have been meeting their obligation since their startups in 2009-2010, the power purchaser and the government have consistently committed defaults under the power purchase agreement (PPA) by failing to pay on time. The receivables from the power purchaser for the IPP industry amount to almost Rs 232 billion.