ARTICLE (July 14 2009): The Budget Speech 2009-10 has devoted
considerable space to bring improvement in the energy sector.
Salient energy-related points are: (1) Prime Minster's
Economic Advisory Council has developed an integrated energy
plan to cater short, medium and long-term energy needs of the
country; (2) Government has taken a number of measures to
improve energy scenario of the country which will also going to
give impetus to agriculture and industrial sectors; (3) PSDP
allocations for the power sector increased by 100 %, from Rs
11.4 billion in FY 2008/09 to Rs 22.8 billion in FY 2009/10; (4)
to the end of a stable and reliable supply to consumers and to
minimise power losses and outages, projects have been undertaken
for enforcing the transmission and distribution systems; and (5)
To resolve the issue of circular debt and to improve the
liquidity position of the power sector, the Government /
specially created holding company will be taking a number of
measures.
Thus, it seems that our leaders and planners have recognised the
need for an energy DFI (Development Finance Institution). Budget
Speech 2009-10 (paragraph-40), while discussing financial
measures, mentions the creation of a new DFI but it is for the
industrial financing.
There is nothing in it for revival of an existing DFI or
establishment of a new DFI for the financing and risk mitigating
of capital intensive power generation or other energy
infrastructure projects in the private sector. In the absence of
such a DFI, it takes much longer for the sponsors to achieve the
financial close for power generation or other important
infrastructure projects.
However, the State Bank's (SBP's) Development Finance Quarterly
Review (December 2008), mentions the setting up of a new DFI for
infrastructure finance with the following words: "An SBP Task
Force on Infrastructure Finance was established and delegated
with a mandate to identify institutional bottlenecks and
recommend an institutional mechanism for risk management of
project financing.
A set of recommendations aimed at enhancing flow of credit to
project financing have been made by the Task Force. These
recommendations primarily focus on development of long-term
funding mechanism through establishment of dedicated
Infrastructure Lending Organisation, which is under
consideration".
In 1988 the Government had set up Private Sector Energy
Development Fund (PSEDF), a sort of a specialised Energy DFI,
with support and funding by the World Bank, the US AID and some
other foreign donors. The Government and the donors had selected
the National Development Finance Corporation (NDFC) to
administer PSEDF through its specially created Private Energy
Division (PED).
For power generation or energy related infrastructure projects
appraised and scrutinised by PED. NDFC's Board of Directors was
authorised to release finances out of PSEDF resources. The World
Bank, the USAID and a number of other donors had provided over
$500 million by way of loans and grants for the PSEDF.
Motivating terms of PSEDF loans were specially designed to
facilitate raising part of the cost of capital
intensive-projects through loans from commercial banks, with
maximum 10 years maturity. According to the agreed financial
package, PSEDF could finance up to 30% of the capital cost of a
new power generation plant in the private sector.
PSEDF loans carried fixed rate of interest (then) at 14% with a
maturity period of up to 23 years - including a grace period of
up to 8 years. PSEDF loans in repayment were junior to the loans
from commercial banks. Competence-wise the officers and staff in
PED / NDFC handling PESDF related functions were stated to have
attained international level.
This was made possible through intensive on the job as well
training otherwise by support, in Pakistan and abroad,
especially from the Government, NDFC, the World Bank and the
USAID over a number of years. PED had the services of short-term
and long-term advisors.
With professional advisory services of NDFC and active support
from the Government and all the donors, PSEDF in early and
mid-90s financed a number of private sector new power generation
projects including Hubco. These are now monitored by LTCF (the
successor to the PSEDF). PSEDF also financed the pipeline for
carrying furnace oil from Port Qasim to Hubco power plant at
Lasbella, Balochistan.
However, after the utilisation of the funds initially provided,
new funding for LTCF by the Government was not made. In the
absence of financing required for new power generation or energy
related infrastructure projects, LTCF activities have been
restricted to project monitoring and performing other functions
- in compliance with agreed arrangements amongst stakeholders
including the Government.
The country has been facing shortages of power with huge losses
to the economy coupled with inconvenience to all the electricity
consumers. The importance of the relevance of not having an
active energy DFI and its loan facilities is partly evident from
the fact that in the last few years a few private sector power
generation plants have been added to the system.
This loss, at least a substantial part of it, could have been
avoided if a revised incentive framework for the private sector
investors was designed and allowed LTCF to continue funding,
establishment of new power generation projects. One is compelled
to say that the huge inflow of foreign exchange into the
country, another source after 9/11, was wasted on non-essential
imports. With better foresight, these funds could have been
utilised for financing new power generation capacity and for
removing bottlenecks in the national power system.
One should keep in mind that since the moth-balling of LTCF
financing only a small number of new thermal, hydel or
coal-based projects had completed financing package or achieved
financial close. In addition the people have been made to pay
rather higher tariff in the case of fast track rental power
projects, relied upon to meet the power shortages in the short
run.
High electricity tariff will not let our industry become
internationally competitive. Moreover, despite claims from
certain quarters for ending load-shedding in the country, the
demand-supply gap of electricity on the ground appears to be
widening. So is the case with the intensity and duration of
load-shedding.
An unkind recent reminder to the real situation in the power
sector is that due to a massive electricity breakdown, life in
Karachi - the City of Lights - came under serious stress on the
evening of 17th June 2009. Until the afternoon of 18th June,
2009, electricity could not be restored in many areas of
Karachi. Apart from windstorm that hit the transmission lines,
the scale and duration of breakdown had link to the poor
maintenance of our grid and transmission networks.
The proposition, as to whether a new DFI be established or an
existing structure presently under-utilised be made fully
operational, needs to be pondered seriously. The former option
ie establishing a new DFI would require completion of a large
number of formalities and taking a number of enabling measures.
SOME OF THESE ARE: The Charter/Articles of agreement of
every DFI are drafted keeping in view the results envisaged to
be achieved through its financing and advisory services. The
draft charter is normally discussed thoroughly with all
stakeholders including major shareholders and the prospective
financiers. Many changes are made at different negotiation
meetings.
The completion of this process takes quite sometime. Top
executives some members of senior management also take part in
these meetings. The selection and engagement of such personnel
also takes time and effort. Filing of necessary documents and
payment of applicable fees establish corporate existence of the
DFI.
Human capital is the real capital of a DFI. Recruitment of
necessary qualified and experienced professionals with
commitment to economic development of the country is not very
convenient, particularly for a country like ours. Training of
professionals in different aspects of DFI work demands planning,
cost and effort, selection of long term / short term advisors
and consultants is also not easy. Large financial resources need
to be raised or arranged for smooth process.
Capability of DFI personnel for expert handling of activities
such as: appraisal of power / infrastructure projects
including the set of inter-locked agreements known as Security
Package is essential for financing on limited recourse basis;
procurement of plant and equipment in line with the procedures
prescribed by the international financiers, the disbursement of
funds and finally monitoring the projects to the end of loan
recovery.
Money makes the mare go. Energy DFIs need large equity and loan
funds. For mega projects financing, funds have to be lined up
from various sources - in currencies and maturities needed. The
lenders may not allow use of their money till they are satisfied
with DFI's organisation structure, staffing as well as the set
of applicable policies and guidelines.
Preparation of documents such as the application form, brochure
for assisting the investors, policy guidelines and operational
manuals of the DFI, particularly the appraisal of power
generation projects and other infrastructure projects on
non-recourse basis and the drafting of appropriate credit
agreements with the project sponsors is of critical importance.
Often, the services of experts are required to work closely with
the senior management of the DFI.
In view of the emergent electricity situation in the country at
present and the time consuming and difficult pre-requisite
paraphernalia to establish a new DFI, preferable would be to
revive an existing structure instead of establishing a new
Energy DFI. Making LTCF fully functional can save most of these
efforts and requirements. After all, PSEDF / LTCF have already
achieved the above landmarks successfully.
They were able to handle and finance 1292 MW Hubco power plant
as well as other power projects through PSEDF funds. All these
projects are now operational. There could be so many options to
the end of revival of LTCF. The preferred option could be that
the country makes LTCF a joint-venture independent DFI
specialising in the financing of energy and energy related
infrastructure projects.
As in the past, the World Bank and the USAID can possibly play a
big role. National Bank of Pakistan (NBP) which had assets
amounting to almost Rs 40 billion as on December 31, 2008 and
which is now administering LTCF on behalf of the government, may
spear head the revival and restructuring of LTCF. The World
Bank, USAID and other stakeholders could replenish the foreign
currency funds for financing by, credit lines and equity support
to the government for the purpose of LTCF.
Thus, the country should be able to revive LTCF as a strong and
well-capitalised energy DFI, LTCF could also be mobilising local
savings and using these resources to fund part of the local
currency cost of new power projects. (The writer is
President/CEO of First Credit and Investment Bank Limited (FCIB).
The views expressed in this article are of the author and do not
represent those of the Bank)