Question

Government of Pakistan is planning to build a Bhasha dam which will enhance the hydroelectric production capacity to 4500 MW. The 6.4 million acre feet (MAF) water storage capacity of the dam will reduce the current water shortage in the country of 12 MAF to 6.1 MAF. It will add 35 years to the life of Tarbela dam by reducing sedimentation. An area of 1.23 million acres of land will be brought under agriculture use due to this dam. The ministry of Water & power wants to make it independent company which will act as autonomous project with its own profit & loss. This will increase transparency and reduce direct interference of Government Machinery and inturn reduce the agency cost. In this regard, the ministry has taken an independent advisory and consultancy company for overlooking the projects. The ECC committee approved a capital structure of 75:25 I.e. 75% debt and 25% equity. The company initial equity was PKR 100 Billion with an expected return of 10%. The Asian Development Bank (ADB) is will provide a debt of PKR 150 Billion with a condition to increase the whole debt by issuance of Bonds at the coupon rate of 5%. In order to issue bond, the ministry of Finance engaged PWC and Deloitte Pakistan as consultant and AKD Securities as Investment advisor. The company management opt for best effort basis rather underwriting as they have already received a commitment of PKR 150 Billion from ADB. Further, AKD securities will not change anything on ADB commitment otherwise PKR 20 per bond. The PWC & Deloitte shall charge a fix fee of PKR 250M and shall certify and audit the process. KPMG was engaged to develop the projected financial statements and cash flow statements for which they quoted a fixed fee of 75M. The information memorandum was developed by AKD securities which included the KPMG projections which was subsequently audited by PWC and Deloitte. The Bonds were rated by Moody’s which came as AA+ which brings more confidence to international investors. However, Moody’s charged PKR 160M equivalent to USD. Since the bonds will be SLR eligible and shall be allowed to be traded at PSX therefore, AKD proceeded for registration at PSX which costed about PKR 50M including SECP registration charges. The bond was issued at PKR 1000 i.e. at PAR. The Equity shares were also issued to Govt. of Pakistan against PKR 100Bn at a rate of PKR 100 per share. The Portland investment company (TPIC) was engaged for the Initial Public offering. The TPIC offered best effort basis for the process as this is going to be wholly owned subsidiary of Govt. of Pakistan therefore their process requires no credit ratings as well no book building process. Hence, PKIC only required to carry out basis documentation and registration of PSX as special case. Therefore, they quoted only PKR 5 per share for their efforts. Govt. is planning to sell 5% shares after the project completion. You are required to calculate Weighted Average cost of Capital along with the relevant floating cost.

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