There has been a gigantic rise in the demand for energy (electricity) in correlation with the global population growth and development of industries. Power sector reforms at the private and government levels have been a key challenge for major countries. ASIM HAMEED discusses a Shariah compliant solution for the power sector for generating funds within the ambit of Islamic law.
At different forums power generation and distribution companies have been working on a pragmatic approach to introduce various forms of the energy. In addition to that, state-of-the-art technologies are also being used to create new techniques to control power wastages and to provide hassle-free services to consumers such as smart prepayment electricity meters, etc. Fueling the capital expenditure (CAPEX) and revenue expenditure (REVEX) needs with a timely availability of funds is an imperative factor and a key concern of the power sector to meet stakeholders’ expectations.
A unique structuring can be done in countries where consumers of prepaid electricity smart meters are relatively reasonable. Normally, the structures for CAPEX needs are common but the following structure is particularly proposed for fulfilling REVEX with multiple flexibilities:
a) Investors will appoint an investment agent who will act on behalf of the investors in a transaction execution. Both the investors and investment agent will sign the investment agency agreement.
b) An investment agent (purchaser) on behalf of the investors will purchase prepaid electricity units from a domestic electricity distribution company (seller) e.g. Pak-electricity (PAK-e). The total facility amount will be spread over the facility period hence PAK-e will make an offer to sell at regular intervals e.g. quarterly tranches. At this time a sale will be executed therefore, a separate sale deed will be signed for each purchase in reference with the master sale and purchase agreement between the investment agent and PAK-e.
b.1. The purchase consideration for purchasing prepaid electricity units will be paid upfront by the investment agent, from the funds of investors, to PAK-e who will use it to fulfill its REVEX need.
b.2. The investment agent will purchase prepaid electricity units at a discounted rate (from the face value of electricity units e.g. at 90 cents if the cost of one unit is 100 cents).c) An independent agency agreement will be signed between the investment agent and PAK-e wherein the investment agent will appoint PAK-e as its agent to sell the prepaid electricity units during each sales period for an amount not less than the face value of the units. PAK-e will also agree, in the same agreement, to sell prepaid electricity units at a price not less than the face value.
d) The investment agent (as principal) will advise PAK-e (an agent) the minimum selling amount (MSA) to be required to be generated from the sale of the prepaid electricity units. The MSA will be the aggregate of the principal amount and profit to be generated for that sales period.
e) If actual sales are in excess of the MSA in a sales period, this excess amount will be parked in a separate reserve which PAK-e, on behalf of the investors, will maintain with proper records. The reserve will be accounted as PAK-e’s short-term liability. The reserve will be utilized to settle profit distribution to the investors when actual sales are less than the MSA. Otherwise, this reserve will be dissolved at maturity for the investors. If the reserve is not sufficient to fulfill the shortfall, PAK-e may provide at ‘its sole discretion’ the shortfall amount from its own resources to sufficiently pay the MSA.
f) In the event of default under the sale and purchase agreement, if PAK-e is unable to provide the services, ie it is unable to sell the prepaid electricity units, all unsold electricity units will be provided back to the investment agent and PAK-e will return the equivalent purchase price at the actual price.
Extract of the term sheet:
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Principal repayment: Six months after each drawdown provided the targeted prepaid electricity units are sold by PAK-e within the sale period.
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Profit benchmark: Will be linked with the interbank offer rate of the country.
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Profit payment: Quarterly in arrears calculated from the date of the first drawdown. Profit to be paid provided the targeted prepaid electricity units are sold by PAK-e.
It is to be noted that the above proposed structure is a concept transaction; it can be modified to consider the general requirements of the originator (a company in need of funds). Furthermore, a call/put option can also be attached for flexibility in investments. Moreover, the same structure can be used for mobile telecommunications companies on prepaid cards/vouchers instead of prepaid electricity units. Nonetheless, this structure is not suggested as a tradable instrument as there will be a very short time period for permissible trading i.e. the sale period for electricity units to be sold by PAK-e. At that moment, it will become Bai Dayn and hence cannot be traded, for example at a higher price than the face value, consequently creating a Riba.
Asim Hameed is a manager at Islamic Financial Services Group – IFSG, Ernst & Young Ford Rhodes Sidat Hyder, Pakistan. The views in this article are his own. He can be contacted at [email protected] .