SETTLEMENT OF CIRCULAR DEBT IN THE OFFING

INTERVIEW: KALIM SIDDIQI OUTGOING CHIEF PSO

AMANULLAH BASHAR
Mar 02 - 08, 2009

Kalim A. Siddiqui, outgoing Managing Director of Pakistan State Oil (PSO), has said that the circular debt issue resulting in liquidity crisis not only for PSO but also for various private sector organizations involved in power generation, is on its way to an amicable solution.

Since 2001, Kalim has been working with PSO as Executive Director Marketing and Supply Chain in PSO. He played a key role in transformation of the company on most modern lines elevating professional capacity for responding the fast track changing business environment through marketing strategies that led to enhanced productivity as well as earnings of the company.

Responding to a question regarding much talked about circular debt, Siddiqi said that the government has taken effective measures to resolve this issue. From January the government has a plan to keep all oil supplies update in terms of payment to avoid further accumulation of debt while the entire debt accumulated to the tune of Rs67 billion only against power till December 2008 will have to be cleared by June this year.

In order to resolve the issue, the government is preparing a fund raising of Rs75 billion TFCs for PEPCO through financial institutions. Kalim was confident that these fund raising efforts would prove fruitful and because of that, at least half of the total amount would be retired while the remaining debt would also be paid before June this year. If this plan is executed successfully the issue of circular debt will be resolved, he hoped.

As far as PSO is concerned an amount of Rs80 billion is receivable. Out of that Rs7 billion is outstanding under the head of price differential claim (PDC) while the government has to pay yet another Rs18 billion to rest of the industry under this head. Another amount of Rs3.4 billion is owed by PIA. In fact, it is not the part of the circular debt but stuck-up, as PIA was unable to pay due to financial crunch the airline was facing for quite sometimes.

The IPPs have a valid reason that since PEPCO does not pay them they are unable to clear dues. The outstanding bill primarily has to be paid off by the PEPCO. When asked about the stuck-up amount against KESC, he said in fact nothing was outstanding against KESC. However, fuel consumption by KESC for power generation is quite nominal as the utility primarily is running on gas-fired system, hence there is nothing pending between PSO and KESC.

When asked about the trend of fuel consumption in the economy especially in the face of economic recession and financial meltdown, PSO chief was quite comfortable and said there was a slight decline in consumption of oil. On the other side, the consumption of black oil was increased resulting in offsetting the impact. However, overall decline in consumption of POL products is estimated around 4 percent as compared to consumption of last year.

However, the profit margins have come down mainly because of inventory losses and unpredictable decline in prices while the consumers of black oil were also not paying bills on time, which was also affecting profitability. Regarding inventory losses, he said since PSO enjoys over 74 percent of the market share it has to be responsible to cater to the market requirement. Hence, we have to carry a good amount of inventory that has proved costly because of drastic cut in international prices.

When asked his elaboration of unpredictable decline of oil prices, he recalled when oil prices were soaring, analysts and gurus had a consensual assessment that the oil might touch the level $200 a barrel. When prices had touched the mark of $140 per barrel, analysts and oil sector gurus could not foresee coming events despite financial meltdown started in the United States. Based on that assumption, oil marketing companies kept on carrying inventories, which consequently proved costly in the shape of heavy losses.

When asked about outlook of oil prices, he said it is very difficult to predict even at this time because the dust of the ongoing financial crisis in the United States and other European countries has yet to settle down. You cannot say in advance that what turn it is going to take because the worst is still in the store and that worst is not confined to US or the Western countries but it for the entire world because the developed economies have their direct impact on the developing countries.

In order to substantiate his version, he cited the example of TOYOTA of Japan, which for the first time after 1950 suffered losses mainly because of the global crisis.

In fact, these happenings are unpredictable. You see the litany of layoffs, suspension of production and shutter down of the major companies having a working background of 100 years or more. People are also expressing concerns that if the current recession prolongs the world might move from recession to depression. When asked what the impact on PSO was and was there any layoffs in PSO, he said with a broad grin on his face that so far we have not laid off a single employee and hopefully cope with the situation amicably.

In fact, we are relatively safe as compared to other countries because Pakistan has a nominal dependency or affiliation with world economies. On the other hand, we are an agriculture-based economy and nature is kind enough to have bestowed people of this country with rich lands and plenty of water. In fact, if things were managed professionally and dedicatedly we would have been in a position to turn the economic threats into an opportunity, he observed in a firm tone.

FINANCIAL PERFORMANCE

PSO has paid out Rs5/share cash dividend despite heavy losses in second quarter of financial 2009 sending a strong signal on management comfort on future cash flows.

Under an agreement with the IMF, the government has agreed to pay down power subsidy related debt by June 09 in two installments. The government plans to pay the first installment of PRs75-98billion to the energy sector. A large part of this amount would eventually flow down to PSO-sole supplier of power fuel-and improve PSO's cash flow position.