ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet on Friday approved delinking past payables and receivables of K-Electric (KE) to be settled through arbitration and its additional future power supplies from national grid under fresh payment mechanism.

The meeting presided over by Finance Minister Shaukat Tarin also approved a Rs60 billion worth of refinancing facility and credit guarantee for small and medium enterprises (SME) and cleared about Rs19.43bn worth of 11 supplementary grants.

Informed sources told Dawn that two sides had reached an agreement over the appointment of former chief justice of Pakistan Tassaduq Hussain Jilani as arbitrator on settlement of claims of the government entities and KE against each other without the binding and straight jacket terms of reference (TOR) of ‘equity and fairness’.

These sources said KE had been insisting to include ‘equity and fairness’ in the TOR of the arbitration on the advice of a lawyer who is now a treasury Senator. However, the power division and finance division had been opposed to such a compulsion given the fact that the principle of ‘equity and fairness’ was already covered in the arbitration act.

The finance and power divisions had been advised that the term ‘equity and fairness’ in the TOR had different connotation and offered an escape from bilateral commercial contracts between the public sector entities and the KE and thus an additional Rs175bn or so liability to the public sector.

The overall sense of the ECC meeting participants was that such a pre-condition for arbitration had to be rejected at the outset and the sole arbitrator – a former chief justice – must have complete freedom to give an award on the basis of the country’s laws and contracts.

For the future, the government has made a commitment to also sign a separate agreement for payment of market-based mark-up on delayed subsidy payments by the ministry of finance. The KE would provide standby letters of credit (SBLC) backed by an escrow account to ensure that the Central Power Purchase Agency gets automatic payments for the monthly bills on account of power supply to the KE.

It was agreed that liquidity would remain the key challenge for the SBLC or the subsidy payment and hence a solution was required or the KE would have to borrow from banks. The KE also wanted a government guarantee for timely payments of subsidies. At current rates, the monthly power bill payable by the KE is estimated at about Rs13bn compared to about Rs8-9bn monthly tariff differential subsidy. Further meetings would be required to work on an agreement.

The government agreed to have a fresh power purchase agreement (PPA) to provide about 2,050MW electricity to Karachi from the national grid.

An official statement said the ECC was given a presentation on grant of National Security Certificate to the KE and outstanding payables and recoverable issues of the company. The federal ministers for planning and energy updated the ECC about the principles agreed between the government and the KE to resolve most of their long-standing issues regarding additional supply and payment procedures during the last meeting.

The ECC directed the authorities concerned to expedite the signing of new PPA for smooth payment mechanism and uninterrupted power supply to Karachi and approved “settlement of issues out of past transactions through arbitration”.

The energy minister informed the committee that new PPA would be signed with the KE soon.

The ECC also approved a three-year Rs60bn worth of refinancing scheme for SMEs under refinance and credit guarantee scheme for collateral-free lending. The scheme involves risk sharing subsidy from the government.

The finance minister told the ECC that there were about 5.2 million economic establishments in Pakistan out of which the largest proportion was of SMEs and the sector contributed 40 per cent to GDP and 25pc to exports.

However, according to the minister, access to finance, amongst other limitations, continues to remain a challenge for SMEs in achieving their potential.

This is in part due to higher loan losses, larger intermediation costs, lack of appropriate lending technology for retail lending, acute information asymmetry, collateral deficiency and SMEs’ desire to operate in the informal sector. The banks, therefore, are reluctant to lend to SMEs.

The scheme envisages partnering with selected banks to enable them to offer collateral-free financing to SMEs. Under the scheme, the State Bank of Pakistan will provide refinancing of around Rs60bn in three years at one per cent mark-up which will be used by the partner banks for extending financing to SMEs at 9pc mark-up, thereby providing a spread of 8pc mark-up to the banks. This will encourage banks to justify their initial investment in systems and personnel.

Maximum loan size under the scheme will be of Rs10 million. The scheme has a provision of up to 60pc risk coverage by the government to banks on their financing to SMEs. The total financial impact of the proposed risk sharing facility to the government has been worked out at about Rs26bn to be provided to the SBP for onward payments to banks over four years -- Rs1.19bn in FY2021-22, Rs6.24bn in FY2022-23, Rs11bn in FY2023-24 and Rs7.4bn in FY2024-25.

The ECC also approved a summary presented by the Ministry of Commerce about condonation of delay of late shipment of vehicles imported by overseas Pakistanis subject to compliance with all other conditions of import.

The meeting took up allocation of funds for launching the second phase of Ehsaas Emergency Cash programme and recommended that the programme be evaluated whether the new National Socio-Economic Registry (NESR) survey targeted those sectors which had been adversely affected due to smart and micro lockdowns during Covid-19 pandemic and then an updated proposal be presented before the committee.

The underlying rationale is to provide targeted subsidies to support the most vulnerable segments of the society during the third wave of the pandemic.

It was proposed that number of regular Ehsaas Kafalat beneficiaries would be increased and additional beneficiaries would be added (after identification through ongoing NSER) to mitigate economic hardships amid Covid-19 pandemic during the second phase.

The ECC approved allocation of 3mmfcd gas from well NF Hor-1 (RE) to M/S PPL, for two years, for sale to any third party selected through a competitive bidding process at a mutually agreed and negotiated price.

The meeting also evaluated a summary by the Board of Investment (BOI) regarding exemption from minimum Turnover Tax under Special Economic Zones Act 2012 to facilitate both SEZ developers and its enterprises. After discussion, the committee directed the Law Division, the Federal Board of Revenue and BOI to firm up proposals through mutual consultation regarding implementation of the exemption from minimum Turnover Tax and present the proposals in the next meeting of the ECC for approval.

Published in Dawn, May 22nd, 2021