ISLAMABAD, Nov 22: The federal government has expressed its displeasure over the prepayment of $350 million foreign debt by Pak-Arab Refinery Company (Parco) at expensive rates and without prior approvals.
Finance ministry sources told Dawn on Monday that an ex-post facto approval to the prepayment deal had been accorded by the government because the prepayment had already been made to the disadvantage of national exchequer.
The sources said not only the due diligence was not carried out before striking the deal in haste and in the heat of debt pre-payment slogans, but the advisory fee and mark-up agreed to with a consortium of local and foreign banks was quite higher.
The Economic Coordination Committee (ECC) of the cabinet, which met in the first week of this month and was presided over by Prime Minister Shaukat Aziz, placed on record that "it was a classic case in which terms and conditions had been settled without obtaining appropriate approvals."
The ECC also approved issuance of the GoP guarantee in favour of syndicate of banks providing loan facility to Parco for the prepayment of loan to Japan Bank for International Cooperation (JBIC) but also recorded its observation in its decision "that greater due diligence should have been exercised in the matter to get financing at more favourable and competitive terms."
The ECC said: "Advisory fee and mark-up agreed with the consortium of banks was on the high side. Advisory fee should have been 0.2 per cent of the loan facility and mark-up should have been Kibor plus 5 per cent".
The Rs19 billion domestic loan that replaced the $350 million foreign debt carries an advisory fee of one per cent of the amount and mark-up rate of six months Kibor plus 25 basis points apart from advisory fee of one per cent and structuring fee of 0.1 per cent.
Parco had availed a $500 million export credit facility from JBIC in 1998 under guarantees of the government of Pakistan. An amount of $150 million had already been repaid as per schedule till June 2004.
Keeping in view the prevailing low interest rates, Parco decided to swap this foreign loan with domestic loans, making early repayment of balance of foreign debt of $350m. The prepayment carried a penalty of $25 million.
A syndicate of banks comprising National Bank of Pakistan, Habib Bank Limited, United Bank Limited, Muslim Commercial Bank Limited and Standard Chartered Bank provided Rs19 billion local financing, which has been termed as the largest long-term syndicated financing in the history of Pakistan.
The swap of foreign debt with the domestic loan at the terms asked by the banks has resulted in the saving of Rs290 million in the first six months. If the rupee depreciation against dollar is projected at four per cent per annum, gross savings due to this swap is envisaged at Rs1.7 billion.
Parco sources said the ministry of finance and the State Bank should be blamed for the higher rates and less savings because Parco was not allowed to undertake the prepayment as originally planned.
In May, the finance ministry had announced that this loan was carrying an interest rate of 7.3 per cent while the local financing facility would charge 2.4 per cent mark-up rate and make a significant saving on account of interest rate, currency fluctuation risk, subsidies and increase profit.
The exercise to repay the $355 million loan was undertaken when Parco chief Shahid Hak floated this idea to the banking community. The refinancing offer was open to both local and foreign banks.
However, as the initial local currency option provided by the consortium headed by Pakistani banks was working out more expensive than the existing loan, given the large pre-payment penalty, Parco also sought proposals for a foreign currency solution. The idea was that even after payment of all the relevant penalties, such a loan would work out to be cheaper in Pakistan's interests.
Based on the proposals received, the Parco management decided not to proceed with the re-financing. However, the loan proposal was sent to the finance ministry which suggested that the same could be done by a consortium headed by Pakistani banks.
While the banks agreed to finance the deal, the proposal was to lend in rupees against which then dollars would be bought and remitted. The State Bank refused to allow outright dollar buying to repay the loans on the grounds that it had not been consulted and that such a payment would affect the dollar exchange rate adversely.
After this, Parco was forced to enter into a rupee-dollar swap with a consortium of five banks to repay the foreign loan ahead of schedule. The SBP permitted Parco to enter into the swap deal with the banks, adding that the permission was necessary as the corporate sector and banks cannot enter into a rupee-dollar swap for a financial transaction.