ISLAMABAD, Nov 11: With low recoveries and high system losses leading to intractable circular debt problems, the government is facing serious difficulties in arranging fresh funds from domestic and international lenders for the troubled power sector.

“The challenge is compounded by resistance from boards of directors of some of the better managed distribution companies to allow their assets to be pledged against fresh loans to other companies for loss reduction and system maintenance,” an official told Dawn.

This was despite the assurances that fresh loans would be backed up by the government’s sovereign guarantees even if power sector assets were pledged for collateral purposes, he said.

The official alleged that boards of some of the companies were treating them as stand-alone entities and had taken the position that their assets could no longer be pledged against loans for loss-making distribution companies because this would limit their own capacity to contract commercial loans that they might require as independent entities.

He said the domestic and international lenders were insisting that power sector assets be pledged as collateral to provide the funding and at the same time demanding that proceeds against such assets in the shape of revenues and recoveries be put in escrow accounts that could flow directly to the lender. If the revenue flows remained lower than the amount required to meet the repayment schedule, the power companies should have revolving letters of credit that could be utilised by the banks for direct payments instead of waiting for the companies to make payments.

Sources said the managing director of the Private Power and Infrastructure Board, N.A. Zuberi, had reported to the government that on top of challenges in the way of completing some crucial hydroelectric projects was “hesitation from investors and lenders towards Pakistan’s power sector due to the existing circular debt issue”.

According to Mr Zuberi, the local banks could not extend more loans because they had reached their exposure limits imposed by the State Bank despite the government’s decision to take over the power sector’s Rs400 billion loans as sovereign debt last year, while “foreign lenders were jittery because of the circular debt”.

The government has been informed that in view of the slow processing of tariff proposals submitted by the independent hydel projects there is an urgent need to announce an upfront tariff for such schemes to attract investors without going through tariff negotiations, public hearings and approval process.

The provincial governments do not have roadmaps for the development and implementation of private projects and they lack expertise and institutional capacity required to process new IPPs, although constitution amendments over recent years have empowered them to launch power projects.

Land acquisition difficulties, inter-provincial boundary disputes related to the projects and their benefits and the law and order situation are also leading to slow progress.

“The power sector is facing serious financing and investment challenges due to the huge circular debt and poor security situation mostly in the northern parts of the country,” the PPIB is reported to have informed the Ministry of Water and Power.

An official said the situation was so serious that Power Secretary Nargis Sethi had asked key players to focus on reducing loadshedding, improving recoveries and managing the existing facilities in the short term and letting the next government deal with the long-term problems.

The PPIB, said the sources, was pursuing five hydroelectric projects of about 2,270 megawatts capacity that could be completed by 2018 and which were in advance stages of contract negotiation or implementation.

Among them, the 84MW New Bong project in AJK is expected to begin production in May next year at a level tariff of about 8.544 cents per unit. The 147MW Patrind project in AJK is expected to achieve financial close soon and most of its contracts have been signed by K Water, Daewoo and Sambu of Korea. It is expected to produce electricity at about 7.1 cents per unit.

The 100MW Gulpur project having an estimated generation cost of 5.4 cents per unit is likely to be completed in June 2017. The $2.5 billion Kohala project in AJK, having a capacity of 1,100MW and to be built by CWE-Three Gorges Corporation of China, is likely to be completed by December 2018 at 50-year average tariff of 8.2 cents per unit.

The 840MW Sukki Kinari project in Khyber Pakhtunkhwa is also expected to be completed by December 2018 at a tariff of 6.33 cents. The process for contract signing with a subsidiary of Al Jomaih Group of Saudi Arabia, Eden Inc of Malaysia and Dongfang Corporation of China is in the final stage.