CHRONIC INTER-CORPORATE DEBT
Oct 18 - 24, 2010
The inter-corporate debt has become a chronic problem for the state-run companies in Pakistan. While the people are forced to pay their electricity dues in time, the government and related departments are withholding payments. The inter-corporate circular debt has emerged out to be chronic issue as many state-run companies are in default on payment of huge electricity bills running into billions of rupees.
Pakistan State Oil (PSO), the largest oil marketing company of the country, has repeatedly been asking the Pakistan Electric Power Company (Pepco) and the†Pakistan International Airlines (PIA) to clear their dues, as the PSO' operations have adversely affected due to the financial crunch. Similarly, the Sui Southern Gas Company has been pressing Karachi Electric Supply Company (KESC) for the release of the billions stuck with the cash-strapped power supplier. The KESC owes Rs21 billion to the gas supplier.
Last month, the inter-corporate debt of Pepco exceeded Rs300 billion. It was due to non-payments by KESC and the Sindh government that Pepco has been unable to pay the bills of oil marketing companies, refineries and gas suppliers. Inter-corporate debt of Pepco recently ballooned to Rs300 billion and it was considering penalising the KESC, the biggest defaulter. This was in addition to the Rs301 billion that the government had parked in a holding company and was paying Rs40 billion annual interest on it. In practical terms, the cumulative debt had surged to Rs600 billion blocking the entire electricity generation and distribution system.
The inter-corporate debt particularly in the energy sector has been affecting on the liquidity health of fuel suppliers, power producers, and utilities. Some analysts however believe that it helped to strengthen income of PSO, the largest fuel supply company with the interest income to the tune of Rs10 billion from power generating companies besides inventory gains which are taken as a pleasant surprise for the largest fuel supply company in the country.
PSO outstanding interest income, according to one estimate, on overdue receivables was estimated at Rs10 billion while interest expense on overdue payable to one of the suppliers i.e. Pak Arab Refinery, a state-run entity, is Rs5 billion. In the last fiscal year 2009-10, the PSO received Rs5.7 billion as compared to Rs380 million in fiscal year 2009 in the form of interest income from IPPs while the company paid Rs7.6 billion interest cost on overdue payables.
Analysts link the power crisis to the circular debt arguing that both issues that cannot be resolved unless all the stakeholders, consumers, power generation and distribution companies and the government decide to adamantly resolve them in a comprehensive manner. The problem of inter-corporate circular debt has become chronic affecting the power generation capacity of the country. The liquidity constraints in refineries and OMCs, resulted mainly from circular debt issue, did not allow them to import sufficient crude oil necessary to operate at their usual capacity. As a result, a number of refineries and power industries were forced to produce below capacity throughout the year.
The inter-corporate debt of energy sector surpassed Rs184 billion during September 2009. The inter-circular debt of oil and power companies stood at Rs219 billion in the last fiscal year as against of Rs184 billion during FY08. Procrastination in the settlement of differences with government and the utilities forced some of the corporate to obtain short-term bridge finance from banks. Thus, demand for banks' finance increased drastically during early months of last fiscal year. This has caused immense pressures on banks' liquidity.
International finance institutions and lenders including international Monetary Fund (IMF), Asian development Bank (ADB) and the World Bank have asked the government to stop the piling up of debt. It is one of the major conditions of their loan programme, the country signed with World Bank or IMF. The government had committed with the IMF to provide a clear strategy for the settlement of the inter-corporate debt issue.
IMF has reportedly delayed the disbursement of $2.6 billion under the $11.3 billion standby arrangement (SBA) to Pakistan and imposed new conditionalities related to energy sector reforms. The international lender has asked the country to abolish Pakistan Electric Power Company (Pepco) and privatise two power distribution companies. The IMF meeting, which ended in the first week of September, demanded to put an end to power line losses by December and demanded to raise the power tariffs twice by June of the current fiscal year 2010-11(July-June).
The Fund also demanded to abolish Pepco and put an end to the discounted power supply to the employees of Wapda (water & power development authority) and other distribution companies. It was also demanded of Pakistan that two distribution companies should be privatised by the end of current fiscal year. After the required reforms, the remaining deficit in energy sector should be made up with twice-raised power tariffs.
The IMF executive board informed the Pakistani officials that it would not consider the country's request for more funds unless it made tangible progress on power sector reforms, gave more autonomy to central bank, and resolved the emergence of a fresh circular debt arising out of commodity operations.
The provinces and the Trading Corporation of Pakistan have contributed heavily to the creation of about Rs400 billion of circular debt in commodity operations, raising fears that this might lead to a crisis-like situation for banks because of flood-related defaults.
The government in May tried to reduce the circular debt of more than Rs150 billion by issuing Rs100 billion Sukuk bonds with a cut-off yield of almost 12.7 per cent as is on Pakistan Investment Bonds.
The cost of furnace oil for production of comparatively less costly electricity needs to be reduced. Outstanding bills of public sector companies should be deducted at source.
The government should make power sector self-reliant and self-sustaining. It should take steps to prevent power theft and reduce line losses. The government should take measures to revamp the system of collecting power bills within time from the consumers of all sorts.