KARACHI: China Power Hub Generation Company Ltd (CPHGC) served on Wednesday an “encashment notice” of $150 million on the bank that issued a standby letter of credit (SBLC) on behalf of the Hub Power Company Ltd (Hubco).

Hubco and China Power International Holdings Ltd are joint-venture partners in the 1,320-megawatt power plant based on imported coal.

Speaking to Dawn, Optimus Capital Management Ltd Chairman Asif Qureshi said the development shouldn’t be construed as a liquidity issue faced by CPHGC.

“The problem is that the SBLC was to mature today, and Hubco hadn’t renewed it. CPHGC called on the SBLC as it didn’t want to run out of options after Nov 23,” he said.

Decision may cause ‘increased financial cost’ to JV partner Hubco

SBLCs are a form of guarantee through which lenders ensure that equity partners cover any cost overruns or funding shortfalls that may occur before the project completion date. In the case of CPHGC, claimed one source privy to the company’s affairs, all conditions by the lenders had been fulfilled except one: the establishment of a revolving fund by the Central Power Purchasing Authority-Guarantee (CPPA-G) to help independent power producers overcome their liquidity shortfalls.

“The government has finally set up the revolving fund. As a matter of principle, therefore, the SBLC shouldn’t have been called,” the source said while requesting anonymity.

“Islamabad delayed the establishment of this fund for many years. With that in place now, all requirements of the lenders have been met. I think the finance ministry and CPEC managers should step up and play their part to resolve the issue,” he said.

According to a brief note issued by Topline Securities on Wednesday, the calling of the SBLC by CPHGC may result in an increased financial cost for Hubco. After all, SBLCs constitute a liability. The issuing bank must make immediate payment on behalf of its client as soon as the SBLC is called upon.

In a letter on Nov 18, the head of CPPA-G told the CEO of CPHGC that the Pakistan Energy Revolving Fund with a fiscal space of Rs50 billion was now operational and allowed withdrawals of Rs4bn per month against invoices starting from November.

In response, the CEO of CPHGC told the CPPA-G head on Nov 21 that the company had “communicated to the lenders” and was still waiting for their reply. Moreover, the CPHGC CEO requested the national power purchaser to inform the “Chinese government and the CPEC Joint Coordination Committee” about the revolving fund. “This would expedite the approval process from the Chinese government and the lenders side,” the letter said.

Meanwhile, the Prime Minister’s Office has called a meeting of all stakeholders to resolve the “issues of CPHGC” on Nov 24 (today) under the chairmanship of Mohammad Jehanzeb Khan, special assistant to the prime minister on government effectiveness.

The share price of Hubco dropped 3.63 per cent to Rs66.62 apiece on Wednesday.

Published in Dawn, November 24th, 2022