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GOING IN CIRCLES

Much of Pakistan’s energy related issues are being attributed to power sector’s circular debt. Power sector circular debt is a real challenge facing our economy and apparently most of the efforts to resolve it have met with failure.
There are at least a dozen entities involved in circular debt. There are Oil and Gas Development Corporation (OGDC) and Pakistan Petroleum (PPL) that provide crude oil to refineries. There are five refineries, i.e., Pak Arab Refinery (PARCO), Pakistan Refinery (PRL), National Refinery (NRL), Attock Refinery (ARL), and BYCO who sell oil to Pakistan State Oil (PSO).
There is government of Pakistan that has to receive petroleum levy (PL) and crude discount (CD) from the refineries. Pakistan State Oil buys from refineries and supplies to power generation companies (GENCOs). There are power distribution companies that buy from GENCO and distribute to power consumers.
There are certain misconceptions about the circular debt. First, contrary to various official claims, circular debt in power sector cannot be resolved on a permanent basis unless we take some radical measures such as change our energy mix to reduce dependency on oil-based electricity, and take stern measures to stop electricity theft.
Pakistan’s energy mix of electricity is highly skewed and dependent on thermal generation (oil and gas). Thirty six percent of our electricity is produced from oil, another 36pc from hydel, around 25pc from gas and 3pc from nuclear. This reflects that the cost of electricity would increase with increase in global oil prices.
The average crude prices (OPEC basket) remained $112 per barrel during the last nine months. High prices of crude oil have increased per unit cost of electricity. Power generation companies are unable to recover their cost of production (partly due to power theft and partly due to high prices of oil), they are not in a position to pay to PSO, PSO cannot pay to refineries, which cannot pay to OGDC, PPL, and GoP and this cycle continues. Thus, it is important to take some radical measures if we want to permanently get rid of circular debt issue in the medium to long term.
Second, unlike the common perception all the above-mentioned entities involved in circular debt chain are not negatively affected by circular debt. Quite a few of them are actually making profits from the circular debt. In my opinion, PARCO is the only loser among refineries. It has to receive 29.10 billion from PSO and pay 19.25 billion to GoP, OGDC, and PPL. All other refineries have to pay much higher than their receivables. BYCO, for example, has to receive Rs2.65 billion from PSO and pay Rs12.13 billion. Similarly, ARL has to receive 29.03 billion from PSO and pay 37.10 billion.
Third, contrary to the belief that GoP would not be able to retire the existing circular debt due to lack of fiscal cushion, GOP can clean up the balance sheet of 10 major organisations in the liquid energy supply chain by approximately Rs700 billion without any monetary loss.
One can start from Pakistan State Oil which has to receive Rs200 billion from power sector. As it has cash flow problems so it cannot make payments to refineries in time. With the limited oil stocks it cannot sell (on deferred payment) to PEPCO, HUBCO and KAPCO, which would not be able to generate electricity, thus resulting in load shedding.
Against the current receivables of Rs200 billion from power sector, PSO has to pay Rs85 billions to refineries. The shortfall in PSO (mainly to retire letters of credit) is financed by bank borrowing. PSO pays around 10 million rupees per month as cost of borrowing.
The refineries, which have to receive Rs85 billion from PSO in turn, need to pay 101 billion rupees to GoP, OGDC, and PPL. The refineries are not paying their dues using the plea that they have a cash flow problem due to non-payment from PSO.
Direct GoP receivable (petroleum levy and crude discount) from refineries (BYCO, PARCO and PRL) as on 23rd April 2012 was Rs18.3 billion. The idea is that GoP should pay the amount equivalent to PL and crude discount (Rs18.3 billion) to PEPCO through National Bank of Pakistan as mediator. PEPCO would pay to HUBCO and KAPCO and the three would pay to PSO. The PSO in turn clears all outstanding of BYCO, and make partial payments to PARCO and PRL. The refineries would clear up GoP. The GoP would get its Rs18.3 billion back in less than an hour.
In the second step, GoP shall arrange a loan from banks (or through term finance certificates) equivalent to the amount that PSO owes to refineries and those that refineries owe to OGDC, total of whichever is lower. This loan (Rs59.65 billion as per the working on 23rd April 2012) would be paid to PEPCO. PEPCO would pay to HUBCO, KAPCO, and PSO. HUBCO and KAPCO would also pay to PSO. PSO in turn would pay to the five refineries. Refineries would make the payment to OGDC.
GoP has 74.97pc of share holding in OGDC. Unappropriated profits of OGDC is Rs179 billion. It has a dividend paying capacity of 42 per share. OGDC would use the amount received from refineries to pay dividend of up to Rs18.5 per share. The shareholding of GoP in OGDC will result in GOP receiving dividend of Rs59.65 billion. This dividend may be used to pay back the loan amount that GoP initially mobilized to pay to PEPCO.
These two steps would help PSO to recover around Rs77.95 billion from the power sector. It would reduce PSO’s payable to refineries to Rs7 billions. It would also clear refineries’ payable to GoP (PL, and crude discount). OGDC’s receivable would come down from Rs75.78 billion to Rs16.13 billion.
The balance sheet of 10 organisations in the liquid energy supply chain will be cleaned up by approximately Rs700 billion. Settlement of refineries’ receivable balances will result in increased business with PSO. Clean up balance sheets will help increase in stock price of all listed entities currently affected by circular debt. This would help in presenting a positive picture to international lenders on power sector circular debt situation with no extra burden on GoP’s financial kitty.
This formula does not address Rs6.05 billion that the refineries have to pay to PPL. However, ARL (that has to pay Rs4.6 billion to PPL) and PPL can sort it out using ministry of petroleum and natural resources as third party mediator.
The details of above-mentioned formula prepared by PSO finance department and approved by PSO Board of Management have been shared with high-ups by Minister of Petroleum (I believe that a presentation was made to President of Pakistan on this issue). I hope that our economic team would analyse its pros and cons to reduce the burden of circular debt. Having said it, we should remember that there is no permanent solution of circular debt until we bring radical reforms in the power sector, including a change in our energy mix.
The writer is Executive Director of Sustainable Development Policy Institute and a member of PSO Board of Management. He can be reached at suleri@sdpi.org

This article was originally published at: The News

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.