Energy sector inter-corporate debt crosses Rs184b

KARACHI - The inter-corporate debt of energy sector surpassed Rs184 billion during September 2009 amid issuance of Privately Placed Term Finance Certificates from the government and PEPCO respectively, and increased banks exposure towards financing circular debt of different entities.
However, the inter-circular debt of oil and power companies stood at Rs219 billion in FY09 as against of Rs184 billion during FY08.
Banks outstanding exposure on selected public and private companies touched Rs44 billion up to August this year.
The SBP data revealed that during FY09, though the government had removed the subsidy on oil prices, the stock of circular debt continued to grow as the year progressed. Indeed, the continued subsidies on energy and delays in settlement of electricity tariff claims from FATA caused liquidity shortages in a state owned power company, which in turn led to build up of large payables (both under fixed and variable tariff) to; (1) IPPs for the electricity purchased; and (2) fuel distribution companies for furnace oil and natural gas purchase. Resultantly, a chain of unpaid claims among different entities (such as IPPs, OMCs, public sector gas distribution companies and refineries) in the energy sector has grown in FY09.
The liquidity constraints in refineries and OMCs, resulted mainly from circular debt issue, did not allow them to import sufficient crude oil necessary to operate at their usual capacity. As a result, a number of refineries and power industries were forced to produce below capacity throughout the year.
The delays in the settlement of differential claims with government and the utilities forced some of the corporate to obtain short-term bridge finance from banks. Thus, demand for banks finance increased drastically during early months of FY09. This has not only caused immense pressures on banks liquidity but also increased banks exposures to these entities. As the magnitude of exposure got closed to incremental loans to these entities in H2-FY09 with banks were exhausted. Interestingly, although the advances to energy and petroleum sector have expanded robustly in FY09, this does not contribute significantly in the outstanding stock of non-performing loans (NPLs) in this sector.
The explanation is that the large entities involved in the circular debt have short-term running finance lines with banks which were either rolled over, or in some cases, settled by these entities. It may, however, be noted that a few small IPPs reported problems in servicing their banks obligation and even recorded NPLs in the recent months. This situation arose mainly due to discontinuation of fixed tariff payments by a state owned power company in previous years which had grown in sizeable amount in FY09.
Given the severity of circular debt issue and the government commitment under SBA programme to eliminate this problem, several measures have been taken in 2009.
For example, the government has agreed to a gradual reduction in energy-related subsidy.
Further government has issued privately placed TFCs (against government guarantee) twice in 2009, for a cumulative amount of Rs 175 billion. Specifically, PEPCO issued government backed PPTFCs worth Rs 80 billion at a rate of KIBOR plus 1.75 basis points in March 2009.
This issuance was meant to reduce significant part of banks claims on public and private sector enterprises and shift the same to government sector through a debt swap.
Consequently, reducing banks obligation on various entities and increasing their investments in PPTFCs.
Though the issuance of PPTFCs had no immediate cash impact on banks liquidity, it was observed that a few public sector enterprises had acquired more advances from banks to pay their due taxes as they got cushion for fresh borrowing.
Similarly, in September 2009 another PPTFCs of Rs 85 billion was issued by newly established power holding company against the guarantee of government at a price of KIBOR plus 200 basis points. In terms of cash impact, out of total issuance amount, Rs 40 billion is the cash injection and the remaining of Rs 44.9 billion is the settlement of banks existing exposure on various entities in the energy chain.
It is observed that few corporate paid their part of banks advances to avoid rising financial charges.
The maturity period of PPTFCs is five years (particularly the power sector) and a few public sector enterprises.
Moreover, anecdotal evidence suggests that few companies even stopped payments to their creditors as their advances limits with banks were exhausted. Interestingly, although the advances to energy and petroleum sector have expanded robustly in FY09, this does not contribute significantly in the outstanding stock of non-performing loans (NPLs) in this sector.
It is important to note that the circular debt problem during most of FY08 was mainly on account of oil price subsidies to domestic consumers. Subsidies relating to electricity tariffs were largely covered by the budgetary allocations.