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Troubled times

By Haris Zamir

The country’s oil and gas sector has been caught in a debt spiral since mid-2008, with state-held utilities defaulting on payments to oil marketing companies. The energy crisis has gripped the country for almost a decade. In fact, it has now become a harsh reality of life. According to various sources, frequent power outages have impeded economic growth that led to the 3.7 percent GDP growth figure in FY12. If energy crisis was not at its peak, the economic growth would have increased to almost five to six percent in FY12 as compared to the dismal 3.7 percent. During the tenure of the Pakistan People’s Party, several protests were held against the ongoing power crisis in different parts of the country. The government also announced different dates to put an end to the crisis, but it failed to fulfill its commitments. Half-hearted planning is not the answer to the energy crisis, rather concrete steps are required to resolve the issue on war footing. Keeping in view the amount of subsidies paid by the government in the last five years, the lion’s share went to the power sector, which had a huge impact on the economy. Based on conservative estimates, if only half the power sector subsidies are spent on economic development, it would not only help increase revenue collection, but also generate employment, lower non-performing loans, and give a boost to production. The amount of subsidies paid to the power sector stood at Rs408 billion in FY08, Rs252 billion in FY09, Rs229 billion in FY10, Rs396 billion in FY11, while in the preceding fiscal year it touched the record high of Rs512 billion. For FY13, it has been projected at Rs209 billion. Since the last five years, nothing substantial has happened to deal with the critical issue of energy crisis, which has not only lowered the industrial sector’s output but has also compelled the people to come out on streets and protest against the deepening crisis. The economy, during troubled times, has the capacity to grow by at least five percent per annum. However, it remained between 1.7 to 3.7 percent, causing an erosion of 3.3 to 1.3 percent. Assuming that one percent is equivalent to two billion dollars, this means that the country has suffered a loss of almost $12 billion to $14 billion from FY08 to FY12. A commonly used phrase known as ‘circular debt’ remains hanging over everyone’s heads – from economic managers to policymakers, chief executives of state-run energy companies, major industry stakeholders and consumers. In such hard times, Punjab is bearing the brunt of the energy crisis as power cuts last for 10 to 14 hours. In Karachi, however, the Karachi Electric Supply Company (KESC) has dealt effectively with the crisis. Despite some areas experiencing increased power cuts, the issue has been resolved speedily. Outages are mainly driven by transmission and distribution (T&D) losses and theft, and decline in gas supply from the Sui Southern Gas Company (SSCG) to the KESC. The decrease in supplies is also due to circular debt, because both the corporates have been making claims on each other. The electricity producer has to receive around Rs18 billion from the Karachi Water and Sewerage Board, while the SSCG claims that the KESC owes Rs36 billion. KESC wants a steady supply of around 400 mmcfd of gas to curb outages in the metropolis. Simply put, the country’s oil and gas sector has been caught in a spiral of circular debt since mid-2008, with state-held utilities defaulting on payments to oil marketing companies. Subsequently, this makes them unable to pay refiners their dues and then they have trouble financing crude oil purchases and running plants. The total value of current outstanding dues amount to Rs425 billion, which has also affected the liquidity of local exploration and production companies by restricting drilling activity. “Circular debt, also known as inter-corporate debt, is a by-product of three major factors, including tariff subsidy on electricity, delays in payment of subsidy amount to the Water and Power Development Authority of Pakistan (Wapda) and its resulting impact on power and fuel suppliers and inefficiency in the energy chain,” said Mohammad Fawad Khan, research analyst at KASB Securities. “Given the quantum of debt and number of companies involved, there appears to be no quick solution. However, the issuance of Rs84 billion TFC, which is believed to be non-cash transaction along with actual fund injection, may reduce the overdue amount on energy companies’ balance sheet by a large amount.” He further added that the government still needs to take more comprehensive measures in the long and medium term to resolve the crisis. These measures include: increasing electricity tariff (the government is paying an estimated Rs2.7/kwh subsidy on each unit of electricity, resulting in over Rs20 billion/month subsidy burden to the national exchequer), changing the energy mix to a less expensive option of coal/hydro and removing inefficiencies in the system (T&D losses, privatisation of Wapda, etc.). “While tariff increase may be criticised, the government could provide targeted subsidy to life-line consumers instead of the current system of blanket subsidy to every consumer,” observed Fawad. Many believe that the amount of circular debt is exaggerated as the stakeholders have failed to reach a consensus. Nevertheless, there’s no denying the outstanding amount of the energy sector is a major hurdle in the smooth operation of many industries. The textile sector is one such industry, as it claims to have faced a closure of more than 175 days on some occasions, due to gas shortage. If it received steady gas supply in the preceding fiscal year, textile exports would have easily crossed $14 billion, but unfortunately, exports dipped by 10.4 percent to nearly $12.38 billion. The ongoing energy crisis has not spared a single sector, with fertiliser receiving gas that could be used for less than 60 days only from Jan till Aug. This has led to debt accumulation by companies. “Restricted gas supply has caused decline in fertiliser production, forcing the government to import urea to fulfill the farmers’ needs,” said an industry representative. Therefore, billions of rupees were spent on subsidies, as the price of imported urea was more costly than domestic output. Fertiliser manufacturers have provided Rs504 billion benefits to farmers in the last five years. This benefit is because locally produced urea is almost half the price of imported urea since the last five years and the industry passes this saving onto the farmers. As of May, imported urea was available for Rs2,851 (May 21, 2012 TCP tender price) and currently, locally produced urea is for Rs1,483 per bag (ex-GST). The current urea demand is between 5.5 million to six million tonnes, whereas the installed production capacity is seven million tonnes. However, due to gas curtailment, the production has tapered to 4.3 million tonnes, thereby resulting in urea import to meet demand. As a result, the government has so far wasted over $600 million in terms of foreign exchange, whereas approximately Rs40 billion has been used to subsidise the costly urea imports. Sadly, the story does not end here. The oil giant, Pakistan State Oil, has also suffered on account of circular debt. According to latest figures, the state-run entity is to receive around Rs272 billion from power companies, including Hub Power, Kot Addu Power and Wapda. It has to pay almost Rs225 billion to its creditors, Rs96 billion to international suppliers and Kuwait Petroleum, while the rest of the amount will go to refiners. The writer is the head of the business desk at GEO TV.

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