Banks reluctant to lend to Pakistan power projects

• 13 years ago (2011-06-10)
• David Flin

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Officials in Pakistan’s Private Power Infrastructure Board has said that investment in electricity generation has been stifled by banks’ reluctance to provide finance because of the persistent circular debt. It claimed that in over three years, the Asian Development Bank had approved many rental power projects with a total capacity of 1500 MW, but that only 150 MW is being produced.

Mohammad Ashraf, former Senior Vice President of Allied Bank of Pakistan, said that the reluctance of banks is understandable. He said banks are worried about the repayment of loans that they have already sanctioned to IPPs. “There seemed to be no chance at that time that the IPPs could lose money. But non-payment of their dues by state-owned power purchasers has damaged even the most feasible projects.”

Mohsin Syed, a power sector consultant, said WAPDA delays electricity payments to IPPs for multiple reasons, including lower-than-cost tariffs, power theft, inefficiency, and poor recoveries. In turn, he said, IPPs delay payment to oil marketing companies and resort to bank borrowings to manage their working capital. In turn, oil marketing companies delay payments to refineries. “We can see that the whole country’s energy sector is afflicted by the same core issue.”

Ashraf said that banks have become nervous due to the “government’s inability to address this issue.” Previously, the government restructured circular debt to longer terms by issuing term finance certificates. However, he said, banks have felt let down by this practice, as their 12-month lending was converted to much longer terms at lower rates, while the key problems of the energy chain remain unaddressed. He added that most banks in Pakistan have already exceeded their limits for exposure to the power sector, and cannot afford to lend further without increasing the risks for their depositors and shareholders.