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FM AMEMBASSY ISLAMABAD
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RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 03 ISLAMABAD 002140 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN ECON EAID ENRG PK
SUBJECT: PM AND FINANCE MINISTER ON PAKISTAN'S TROUBLED 
ENERGY SECTOR 
 
REF: ISLAMABAD 1983 
 
¶1.  (SBU) Summary:  In meetings with Prime Minister Gilani 
and Finance Minister Tarin, NSC Senior Director for 
International Economics David Lipton said Pakistan needed to 
take a number of steps in the coming months to put its energy 
sector on firmer footing:  resolve the remaining $3.7 billion 
"circular" overhang of energy sector inter-corporate and bank 
debt; ensure that energy tariff's are adjusted to cover 
energy generation and distribution costs, as agreed to with 
the ADB and World Bank and blessed by the IMF; and create an 
energy sector task force to prioritize and implement 
short-term projects to limit blackouts and unscheduled load 
shedding through improved generation and distribution.  Tarin 
said the circular debt would be resolved by August 31, 
through the placement of $2.6 billion of old debt into a 
holding company and a $1.1 billion capital injection for 
current arrears.  Gilani said the GOP would stick to its 
commitment to raise tariff rates and said a ministerial-level 
task force was meeting daily to address the energy sector. 
Gilani welcomed the proposed October 21-22 strategic energy 
dialogue. 
 
¶2.  (SBU) Lipton warned Gilani and Tarin that banks, 
overloaded with GOP and energy sector debt, planned to cut 
credit lines to the power sector, squeezing power producers' 
ability to secure fuel stocks and perform essential 
maintenance  and repair.  Tarin said he would work with State 
Bank of Pakistan (SBP) Governor Raza to persuade banks to 
keep credit lines open.  Lipton noted that public opinion 
could turn against tariff increases because of the GOP's 
approval of 14 expensive rental power projects, some of which 
may questionable merits.  Tarin agreed with Lipton,s 
suggestion that independent auditors should review the rental 
power agreements to dispel public criticism.  End Summary. 
 
Resolving Pakistan's Circular Debt 
---------------------------------- 
 
¶3.  (SBU) In an August 28 meeting, Tarin said that $2.6 
billion of energy sector circular debt had been placed in the 
Government Power Holding Company, a newly-created GOP debt 
holding company.  As further detailed reftel, circular debt 
is inter-corporate and bank debt that accrued from 
non-payment between various energy companies as a result of 
insufficient tariff collection and non-payment of government 
subsidies.  Tarin hoped to repackage the holding company debt 
as bonds for sale to domestic and overseas markets.  (Note: 
Currently, there is no secondary bond market in Pakistan, 
though the State Bank of Pakistan(SBP) and Karachi Stock 
Exchange (KSE) are working to develop one.  End note).  Tarin 
said the GOP injected an additional $850 million in the 
sector on August 28 to erase more recent arrears and planned 
to inject another $240 million on August 31.  The injections 
were financed through five-year term finance certificates 
(TFCs) with a sovereign guarantee placed in domestic banks. 
(Note:  The Asian Development Bank (ADB), which closely 
follows the circular debt issue, could not confirm these 
figures.  Post will report on the amount of arrears actually 
removed from the sector septel). 
 
¶4.  (SBU) Lipton reported that a number of banks, overloaded 
with government and energy sector debt, planned to cut lines 
of credit to the power sector, further squeezing power 
producers' ability to secure fuel stocks and finance 
necessary repairs and maintenance.  He asked that the 
Ministry of Finance and SBP work with the banks to keep 
credit flowing so that power producers had the financial 
wherewithal to bring additional power on the grid before the 
October 1 tariff increase.  Tarin said that power producers 
would not need large credit lines, as the financial injection 
would erase their arrears, but agreed to ensure the banks 
extended appropriate credit lines to the sector. 
 
 
ISLAMABAD 00002140  002 OF 003 
 
 
Tariff Increases 
---------------- 
 
¶5.  (SBU) In an August 28 meeting, Prime Minister Gilani 
reiterated his long-standing assertion that the political 
opposition and the public would accept tariff increases if 
they saw new power coming on the grid.  (Note:  The GOP 
agreed to a World Bank/ADB plan to raise tariffs 6 percent on 
October 1, 12 percent on January 1, 2010, and 6 percent on 
April 1, 2010.  End Note).  Gilani said his government was 
put in the unenviable position of correcting energy policy 
mistakes of previous administrations.  Minister of Water and 
Power Raja Ashraf added that the GOP had tried to push 
through a 17.5 percent tariff increase in June but reversed 
itself in response to public outcry.  Gilani said, however, 
that a consensus had been built on energy and that opposition 
PML-N leader Nawaz Sharif supported his policies.  He said 
additional generation would be on the grid by December, 
reducing blackouts and public opposition to the tariff hikes. 
 
Rental Power Projects 
--------------------- 
 
¶6.  (SBU) Tarin said he had opposed the August 24 GOP 
decision to approve 14 rental power projects with a total 
installed capacity of 2250 MW.  (Note:  Rental power was 
conceived as a stop gap measure to increase power generation. 
 Rental power producers (RPPs) agreed to quickly install 
refurbished equipment to deliver power for three to five 
years.  Though the official cost per kw/h for RPP power is 
only 1-2 cents higher than that of long-term independent 
power producers (IPPs), the structure of the RPP contracts 
pushes the actual kw/h costs higher.  There have been 
accusations of corruption in the awarding of RPP contracts. 
End note.)  Lipton said that public opinion could turn 
against tariff increases if RPP contracts were not perceived 
as transparent and fair.  Tarin said he acquiesced to the 14 
rental projects only after Gilani promised him that the GOP 
would raise tariffs as scheduled and allow a third-party 
auditor to review the RPP agreements.  (Note:  The ADB 
confirmed that the Ministry of Finance requested it arrange 
the audits.  The ADB has yet to decide whether to do the 
audit itself or contract with an outside firm.  End note.) 
Tarin also said he would not direct banks to finance the 
RPPs, noting loans should be based on each project's 
financial merits. 
 
Energy Sector Planning 
---------------------- 
 
¶7.  (SBU) Lipton urged Gilani to put a working-level energy 
task force in place that could prioritize and implement 
short-term repair and maintenance projects to improve 
existing power generation and distribution.  Gilani said he 
had already instituted a daily ministerial-level task force. 
Minister for Water and Power Ashraf added that the GOP had a 
short-term and medium-term energy plan.  (Note:  None of our 
other energy interlocutors had heard of such a plan.  End 
note.)  Tarin said a working-level task force that reported 
to a ministerial committee biweekly would be an effective 
means to improve the sector's performance.  Gilani welcomed a 
U.S.-Pakistan strategic energy dialogue on October 21-22. 
 
¶8.  (SBU) Comment: The clearing of the circular debt is an 
important first step in getting Pakistan's energy sector on 
firm footing, opening the financial space for short and 
long-term investments in generation and distribution.  Much 
now depends on the GOP's commitment to raise tariffs, as well 
as paying out necessary subsidies to the energy sector until 
the payment gap is closed.  Adherence to the October 1 tariff 
increase would signal to the banking community that the GOP 
is serious about energy sector financial reform and could 
help loosen up credit lines.  However, continued load 
shedding and rising public suspicions about rental power 
 
ISLAMABAD 00002140  003 OF 003 
 
 
could well combine and derail tariff reform.  End Comment. 
 
¶9.  (U) This cable was cleared by NSC Senior Director for 
International Economics David Lipton. 
PATTERSON