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Sector Outlook
Press Release for Leading Newspaper
Date : 25/06/2020
Author Information
Uploaded by : Awais
Uploaded on : 25/06/2020
Subject : Banking Finance
PAKISTAN S POWER SECTOR, STRUGGLING FOR POWER lt;/p>
Pakistan is passing through difficult economic times. Our products
face stiff competition in the global space, which is further accentuated
due to inefficiencies being created by infrastructure bottlenecks -
particularly the power shortage. At the same time, war on terror has
led to weak law and order situation. Under the circumstances, the
government finds it difficult to enhance its fiscal space. Meanwhile,
no letup is available in strict monetary policy due to stubborn inflation
- mainly due to rising commodities prices.
Our woes are aggravated by constrained power supply. While our
power infrastructure has capacity issues, the available capacity cannot
be fully utilized as well. This is mainly due to sizeable gap between
the volume of electricity generated and eventually billed. The
situation is worsened by a misdirected subsidy structure. These factors
have created sizeable financial mismatch, being filled by the
government. GoP, with all its good intentions and efforts but
constrained by its limited fiscal space, finds it difficult to fully meet
the needs. This has led to creation of circular debt , where the
difference between cost of electricity produced and recovered from
the consumer is floating throughout the power sector. The impact
subsides with sporadic injection of money by GoP, but it recreeps
soon as the gap between electricity cost and consumer proceeds,
though narrowing, is still there.
Pakistan`s power generation has two key sources, hydel and thermal.
In this regard, Independent Power Producers (IPPs), with
commencement of a large number of plants in the recent past, now
contribute significantly towards total electricity production. However,
these are hit hard by accumulation of circular debt.
This has resulted in pile up of huge receivables from power purchaser.
Resultantly, many of the IPPs are facing severe pressure on cashflows.
This severity is more pronounced in case of new IPPs, which have
limited contingency reserves. Notably, these payments are critical to
ensure timely repayment of borrowings.
PACRA rates ten IPPs and considers the guarantee of the GoP against
capacity and energy payments as one of the key rating factor. The
funding structure of IPPs is such that major portion of the project is
financed through debt. The guaranteed payments by the GoP includes
the debt portion, thereby transferring the financial risk to the
sovereign, given all performance parameters under the PPA are met.
The non-payment by the power purchaser is not only putting
operational pressure on IPPs but may result in increased financial risk.
Few IPPs are expected to handle the immediate pressure, but in &most cases the repayment of debt obligations is entirely contingent
upon release of overdue to the affected IPPs.
Gradual removal of subsidies in the power chain, ongoing
restructuring of distribution companies to minimize losses, and
improved financial discipline are expected to help in overcoming
circular debt and related issues. However, the roadmap and milestones
are still blur. We believe that despite all its financial problems, GoP
would not let any such situation to arise resulting in closure of an IPP
due to non-payments, in turn, sovereign default. However, the
payment pattern is likely to remain erratic. We have observed such
instances lately, wherein a few IPPs have to invoke government
guarantee for settlement of overdues. The invocation was then
withdrawn due to partial payment by the GoP.
In this regard, PACRA would continue to monitor all the
developments related to the circular debt issue and would take the
appropriate rating action on individual entities as and when required.
This resource was uploaded by: Awais