On May 05, 2021, the Economic Coordination Committee (ECC) of the Cabinet approved payment of Rs89.86 billon as first installment of 40% to 35 IPPs (Under Power Policy 1994 and Prior to Power Policy 1994) out of total 47 IPPs as per an agreement reached with them.
Payment to the remaining 12 IPPs (under Power Policy 2002) was withheld owing to an investigation by National Accountability Bureau (NAB). This decision was subject to ratification by the Cabinet, which we understand approved the same yesterday (May 18, 2021).
AL Habib Capital Markets Market Lens of today evaluates this issue in detail.
Payment to IPPs: A quick recap
On May 05, 2021, the Economic Coordination Committee (ECC) of the Cabinet approved payment of Rs89.86 billon as first installment of
40% to 35 IPPs (Under Power Policy 1994 and Prior to Power Policy 1994) out of total 47 IPPs as per an agreement reached with them.
Payment to the remaining 12 IPPs (under Power Policy 2002) was withheld owing to an investigation by National Accountability Bureau (NAB). This decision was subject to ratification by the Cabinet, which we understand approved the same yesterday (May 18, 2021).
We understand payment to IPPs will be made as per receivables outstanding in November 2020 and in two installments as per the following formula:
First installment of 40%: 1/3rd cash, 1/3rd 5-Year Sukuk and 1/3rd 10-Year PIBs;
Second installment of remaining 60%: Due to be paid after 6 months from the date of First Installment in the ratio, 1/3rd cash,1/3rd 10-Year Sukuk and 1/3rd 10-Year PIBs;
Recall that in August 2020, the Government signed MoUs with various IPPs (except those falling under Power Policy 2015) in a bid to clear their partial outstanding receivables (Cumulative Amount: ~PKR450 billion) in exchange for reductions in future tariffs thus leading to a reduction in RoE of these power plants. These MoUs later translated into agreements with IPPs in February 2021!
We understand payment to IPPs will help improve their liquidity. Since this payment is a result of a ‘quid-pro-quo’ agreement, we foresee
higher one-time dividend from these IPPs — most of which have a net positive delta (receivables minus payables). The arrangement – involving a reduction in future tariffs of IPPs and consequently their RoE – is expected to lead to slower than anticipated build-up of energy sector circular debt. We expect relevant IPPs to resume dividend payouts in 4QFY21.
When will the first tranche be released?
We understand the first installment of 40% will be released as per the agreed formula by the end of May ’21 (end of next week);
Courtesy – AL Habib Capital Markets (Pvt) Ltd.