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HUBCO: Suffering for no good reason

HUBCO: Profit skyrockets 50% in 9MFY23
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November 29, 2022 (MLN): Hub Power Company Limited (HUBCO), the first and largest Independent Power Producer (IPP) in Pakistan with a combined installed power generation capacity of 3,250 MW is witnessing a messy round on behalf of the government to fulfill its commitment with all China Pakistan Economic Corridor (CPEC) power producers while creating a special fund to clear future invoices of China Power Hub Generation Company Limited (CPHGC) on time.

The fiasco was all started right after an encashment notice worth $150 million served by CPHGC under the Standby Letter of Credit (SBLC), on the issuing bank provided by HUBCO. In response, HUBCO initiated legal proceedings against the encashment notice to safeguard the interests of its shareholders.

After carrying out a detailed analysis of the situation, it can be said that HUBCO is suffering for no good reason as the fulfillment of the government’s commitment is out of its forte.

HUBC as a joint venture partner and Pakistani sponsor of CPHGC had issued security in the form of an SBLC of $150mn in favor of CPHGC which expired on 23rd Nov’22.

What is that guarantee?

This guarantee was to assure that the power plants would be established as per agreed terms and conditions and if there are any cost issues that surfaced, the guarantee could be enough to address them through encashment.

It is pertinent to mention that the aforesaid project has already been completed in 2019 and operational since then. However, under the Completion Guarantee Agreement which was signed in October 2017, HUBC also agreed to fulfillment of the government’s commitment to all power producers under CPEC and the creation of a special fund that would ensure clearing all payments on time.

And this is why the aforesaid project is technically not completed and at the same time government’s commitment is out of the company’s hands.

Earlier, the government had approved the opening of an Assignment Account titled “Pakistan Energy Revolving Fund” which will be operated by CPPA to address the shortfall in tile liquidity issues.

Pursuant to this decision MoF, MoE and CPPA have created the Pakistan Energy Revolving Fund having a fiscal space of Rs50 billion, with the State Bank of Pakistan, from its own sources, thereby allowing withdrawal of Rs4bn per month against invoices starting from the month of November 2022. This fund has been adequately funded by the Ministry of Finance and the same is operational.

In essence, the requirement of a Revolving Account which is meant to deal with the 22% shortfall is being taken care of by the government through special payments and this Pakistan Energy Revolving Fund.

In response to the above-stated development, CPHGC in its letter dated November 21, 2022, said that the company had communicated the said development pertaining to Energy Revolving Fund to the lenders and waiting for their responses.

In the same letter, the company also requested CPPA to communicate this information about the establishment of the Pakistan Revolving Account Fund to the Chinese Government and CPEC Joint Coordination Committee (JCC) because the Revolving Account Agreement is under the CPEC framework which is a government-to-government agreement.

This would expedite the approval process from the Chinese Government and the Lenders’ side as it is very important for us to ensure that the establishment of the Pakistan Energy Revolving Fund by the CPPAG/GOP fulfills the Revolving Account Agreement requirement.

If things were that smooth then why did Chinese partners call for encashment?

Since the guarantee was to be expired on November 23, 2022, HUBCO was supposed to issue a new guarantee within ten days. However, the company was given a clear indication that its Chinese partner, China Power International, that it would not call on the guarantee, “not even if the Chinese lenders asked for it”.

Hubco was taken aback by the decision of its Chinese partner to go back on their word and actually call the guarantee. The source claimed that the representative of the Chinese partner of CPHGC did not even call a board meeting to discuss this, insinuating mala fide intentions on part of the Chinese, as reported by Profit.

At the same time, CPHGC had communicated in their response to CPPA-G that till they get a go-ahead from the Chinese government, and in turn, their lenders, the issue does not stand resolved. CPHGC called on the standby letter of credit as it didn’t want to run out of options after Nov 23. The reason for calling on the guarantee is not because CPHGC was facing serious cash flow issues or had gotten greedy, but just that they wanted to be on the safe side, it added.

There were reports that HUBCO would issue a new guarantee speaking to Mettis Global, an Analyst of Arif Habib Limited said, “HUBC will issue a new SBLC to CPHGC within ten days. In case of non-issuance of new SBLC, banks will disburse $150mn to CPHGC.

“In this case, a liability of the same amount will be booked on the books of HUBC against a receivable from CPHGC. CPHGC will repay the SBLC amount to HUBC after the Project Completion Date (PCD)”, he added.

But after knowing CPHGC’s intentions, HUBCO went immediately to the court to settle the matters.

CPHGC is a joint venture company formed by two sponsors, China-based company China Power International Holding Ltd (CPIH) and Pakistan-based company HUBCO setup as the project company for the development, construction, and operation of 2×660 MW Coal-fired Power Plant in Hub, Balochistan, near the existing HUBCO’s RFO power plant.

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Posted on: 2022-11-29T11:42:07+05:00