The government has decided to approach the Competition Commission of Pakistan (CCP) with a request to examine the possible formation of a cartel of commercial banks for offering loans to public sector entities at high costs.
The decision was taken as commercial banks provided financing at higher rates for laying a gas pipeline by public utilities for transmission of imported liquefied natural gas (LNG) from south to north of the country.
LNG imports began in the backdrop of an agreement between the previous government of Pakistan Muslim League-Nawaz (PML-N) and Qatar for gas supplies. For handling imports, the government awarded an LNG terminal contract to Engro.
However, the country required a gas pipeline from Karachi to Lahore to pump the imported gas into the network of Sui Northern Gas Pipelines Limited (SNGPL) to meet consumption needs of the gas-starved province of Punjab.
SNGPL secured Rs54 billion in loans from commercial banks at high rates for the pipeline project. Now, the company has made a debt swap arrangement with banks and has sought bids for new loans. However, it needs a letter of comfort to secure the fresh loans.
The government decided to approach the CCP while considering the request for issuance of a sovereign guarantee and letter of comfort in favour of the lending banks for a new financing agreement concerning the LNG-II pipeline infrastructure development project.
The Economic Coordination Committee (ECC), in a meeting held last week, directed the Finance Division and the Securities and Exchange Commission of Pakistan (SECP) to jointly develop a framework/ strategy for reducing the cost of borrowing from commercial banks by the public sector companies.
In this regard, it said, the CCP may be consulted for taking appropriate measures to avert the possibility of cartel formation by commercial banks while offering loans to the public sector companies.
It was proposed that the ECC may consider approval of a sovereign guarantee amounting to Rs24,188 million in favour of banks for the remaining tenor of the loan, ie four and a half years.
The ECC considered and approved a summary submitted by the Petroleum Division titled “Issuance of Sovereign Guarantee and Letter of Guarantee and Letter of Comfort in Favour of Lender Bank for New Financing Agreement Concerning Pipeline Infrastructure Development Project LNG-II”.
The Petroleum Division recalled that the ECC had approved bank borrowing of Rs101 billion by SNGPL and Sui Southern Gas Company (SSGC) for executing the second phase of a pipeline project.
The Finance Division was advised to provide government guarantee for the required financing of Rs101 billion.
The Finance Division had issued a guarantee in 2016 in favour of SNGPL to arrange financing of Rs54 billion from a syndicate of commercial banks. The guarantee is valid till 2026.
SNGPL secured the loan at six-month Karachi Inter-bank Offered Rate (Kibor) plus 1.1 percent. At present, the outstanding loan amount is Rs24.1 billion.
Keeping in view the high cost, SNGPL decided to swap the loan with borrowing at a lower mark-up while prepayment penalty of all banks was waived. Bids were called for fresh loans.
The Finance Division has approved new term loans according to which a letter of comfort is required for Rs24.18 billion to disburse the funds.