ISLAMABAD: The government on Friday decided to cut fertiliser prices, issue a $350-million international bond for 10 years and waive taxes on a Japanese loan.

The Economic Coordination Committee (ECC) of the cabinet, presided over by Finance Minister Ishaq Dar, took these decisions besides approving a draft standard power purchase agreement.

The cut in the urea price by Rs200 per 50-kilogram bag, involving a Rs950-million subsidy, is aimed at disposing of about 235,000 tonnes of public-sector stocks losing shelf life and effectiveness.

Cabinet body also waives taxes on Japanese loan amounting to $26m

The urea quantities lying with the National Fertiliser Marketing Company Ltd (NFML) were imported by the government with a subsidy and then its sales were made on repeated subsidies – reducing the price from Rs1,700 per bag to Rs1,350 per bag in August last year, then to Rs1,200 per bag in September and now again to Rs1,000 per bag.

Meanwhile, natural gas supplies were increased to domestic fertiliser companies at a subsidised rate. They were asked to sell urea at subsidised rates last year, which was followed by the permission for its exports involving subsidies.

The ECC was informed that only 42,000 tonnes of urea from the NFML stocks could be sold since December last year despite a series of incentives due to a tough competition from private companies. There are still stocks of 235,000 tonnes that are nearing their expiry.

Therefore, the ECC allowed a Rs200 per bag price cut with immediate effect to offload remaining quantities during the ongoing Kharif season to help NFML reduce the carrying cost by Rs60 per bag and attract “financially depressed farming community by supplying urea at a lower rate”.

The meeting was informed that Dasu Hydropower Project – located on the Indus River, 240 kilometres upstream of Tarbela Dam – had an approved cost of Rs486 billion ($4.38bn) and faced a financing gap.

With an installed capacity of 2,160 megawatts for Stage 1, the project will provide 12,225 gigawatt hours of clean electricity to the national grid annually.

The project is being partly funded by the World Bank through the International Development Association (IDA) Credit-1 of $588 million along with the partial credit guarantee (PCG) of $460m. Additional IDA/International Bank for Reconstruction and Development (IBRD) credit of $533m was expected in 2017 with additional PCG of $460m. At present, PCG of $460m is available for commercial financing.

The government and the World Bank had envisioned that commercial loans of $2.446bn for main works would be arranged on the strength of $460m PCG. In addition, the tenor of the loan would be 15-20 years at competitive pricing in the international capital market.

For meeting the local currency component of the project cost out of intended $2.446bn, a commercial loan of Rs144bn ($1.44bn) has been already arranged from local banks without using PCG.

In order to arrange commercial credit of $800m ($300m loan plus $500m bond) under PCG for the foreign currency cost component of the project, four commercial banks were engaged for credit structuring. The World Bank, however, restricted the use of PCG of $180m (60 per cent) for $300m loan and $200m (40pc) for $500m bond, leaving $80m spare for further commercial borrowing.

After a lengthy deliberation with international banks, along with the World Bank, it was agreed that Wapda would raise $350m upfront through the international capital market for a tenor of 10 years by using PCG of up to 60pc ie $210m, which is equivalent to four times of the surrendered IDA credit of $52.5m and the remaining amount (both principal and interest) would be guaranteed by the government.

However, to provide standalone exposure to Wapda in the international capital market, the Interest During Construction (IDC) of one year (third year) would be exclusively on Wapda’s balance sheet with no government/World Bank guarantee. The remaining foreign commercial component of about $500m would be raised either through a loan/bond in early 2018 by using remaining PCG of $250m ($460m minus $210m), which is equivalent to four times of the surrendered IDA credit of $62.5m.

The foreign currency commercial borrowing in this phased manner would mitigate the negative impact of IDC on the project. Credit Suisse Bank through competitive bidding was quoted the lowest all-in cost at an internal rate of return (IRR) of 5.736pc for $350m loan of the 10-year tenor with an interest rate of Libor plus 3pc, US swap rate of 2.4pc, arrangement fee of 1.5pc of the loan amount, commitment fee of 40pc of the spread and capped transaction cost of $250,000.

Additionally, Wapda will also be required to pay a guarantee fee at the rate of 0.75pc per year on the IDA guarantee of $210m provided for $350m loan amount. Wapda as the borrower of $350m is responsible for repaying this loan from hydel power sale income.

The ECC decided to provide government guarantee for the repayment of the loan amount $140m ie 40pc of the loan amount of $350m, whereas the World Bank will provide guarantee for the remaining $210m ie 60pc of $350m loan amount. The guarantee will also cover markup payments for the entire loan amount of $350m, except for the third year of loan on which no guarantee from any agency is required.

The ECC also approved the exemption to Japan International Cooperation Agency (Jica) from all levies and taxes for the loan extended by the government of Japan on concessionary terms, amounting to 2.665bn yens ($26m), for the Islamabad-Burhan Transmission Line Reinforcement Project.

Published in Dawn, April 29th, 2017