ELECTRICITY & GAS CRISIS

PAVING THE WAY FOR DISTURBED LAW & ORDER

AMANULLAH BASHAR
Jan 05 - 18, 2009

A stable law and order situation is first priority of the present government as President and Prime Minister both have declared that economic revival and law & order are inter-related hence it is on top of the agenda to ensure a congenial and conducive environment in the country.

Contrary to this commitment, the authorities seem indifferent over the issue of endless power cuts and suspension of gas in Punjab and Northern areas forcing people to come on the streets to lodge their strong protest over what they call the failure of the utilities to cater to the power needs.

There is no doubt that the present government was inherited the chronic issue of electricity shortage yet the situation was not so harsh in the past than what it is today with the same resources. Actually, the issue of electricity and gas crisis is more related to mismanagement rather than shortage of the two. In fact indifferent attitude of the relevant authorities to address the financial issue of the inter-corporate circular debt which was left unattended added fuel to the fire. It is feared that if the issue of electricity and gas crisis as well as rationalization of tariffs was not resolved the economy is bound to receive undesirable shocks at the end of the current financial year by missing the several financial and economic targets.

Actually, the rising vicious circular debt, which has touched the level of Rs300 billion receivable and payable by various energy entities especially power producers, oil and gas suppliers as well as the five refineries, is stated to be the root cause of the worst ever power crisis.

Due to financial crisis one of the oil producers, according to energy circles, has stopped production on the grounds indicating the deteriorating energy situation which is required to be addressed as early as possible.

The Independent Power Producers (IPPs) are insulated from Pak rupee /USD parity as well as fuel costs which are reimbursed as per their power purchase agreements.

It may be recalled that the issue emerged in financial year 2008 at the time when government was providing subsidies on international oil prices hitting the peak levels.

According to industry sources, this debt as of Nov, 2008 has mounted over Rs300 billion compared to Rs150 billion in June, 2008. The circular debt debacle chiefly revolves around WAPDA, the largest electricity supplier and the only buyer of power generated by the IPPs under power purchase agreement.

Besides purchasing electricity from IPPs, WAPDA generates power from its own units from gas and furnace oil thus SSGC, SNGP, PSO and other OMCs are chief suppliers in the value chain. The steep international oil prices coupled with delays in subsidy receivables from the government affected the financial solvency of WAPDA to a great extent as a matter of fact WAPDA eventually became unable to pay to the IPPs, OMCs.

Coming specifically to IPPs, they themselves produce electricity mainly from oil and gas, hence they had to resort to short term financing to meet their working capital needs i.e. payables to their relative suppliers to an extent. Outstanding dues of IPPs owed to OMCs are still pending and leading towards the inability of OMCs to pay their obligations to the refineries.

In a nutshell, the situation has ultimately led to a domino effect as it aggravated the liquidity and solvency situation of the entire value chain. Under the IMF agreement, the government is required to eliminate inter-corporate debt by March, 2009. However keeping in view the gravity of the situation the dues required to be cleared at the earliest to save the economy as well as the people from power cuts and endless load shedding destroying the image of the civic life especially in the urban centers like Karachi, Lahore, Islamabad and Peshawar.

The government in a bid to off load the mounting subsidies has decided to raise power tariffs with a view to meet this mounting challenge. This would potentially help reduce the funds flow problems faced by WAPDA, thus resulting in increase in the "Free Cash Flows" and positive financial health for IPPs. However increase in power tariff is sure to add to the sufferings of the consumers already paying exorbitant and inflated bills of the utilities.

It is funny to see that despite daily power suspension for 12-16 hours the KESC surprisingly is sending inflated electricity bills to add to the agony of the consumers of average income group already over burdened under inflationary pressures and aggravating financial crisis. On one hand the consumers are fed up with hourly load shedding while on the other hand they are being charged inflated bills without passing on the benefits of 12-18 hour suspension of power supplies by the utilities. Justice demands protection of consumer rights by administrative or judicial remedies.

CNG

Meanwhile, the CNG Station Owners Association of Pakistan (CSOAP) has decided not to pass on 10 percent price increase to the CNG vehicle owners as they feel that the increase is unjustified in the face of steep decline of energy prices all over the world.

President CNG Stations Association of Pakistan (CSOAP) Malik Khuda Baksh has said that CSOAP members believed that it was unjustified to charge increased price at a time when the fuel prices have fallen substantially world over.

He said that 33% increase of gas prices in July 2008 by SSGC and SNGPL was fully absorbed by CNG station owners and dealers by reducing their profit margin. He said that CSOAP executive committee has discussed and observed that the CNG sector as a whole consumes less than 6% of total gas output of SSGC and SNGPL.

Khuda Baksh noted the recent increase of 10% of gas price will force CNG users to revert back to petrol which would be detrimental for CNG industry.

The investments of more than Rs. 60 billion of middle and lower middle class people who converted their vehicles to use cheap and environment friendly CNG would go waste if the government does not revert the recent increase of gas prices immediately. Members of executive committee of CSOAP urged the government to continue the CNG policy 1992 stating that any change in this policy would damage the CNG industry in Pakistan.

GAS

Effective Jan 1, 2009, consumer gas price has been raised in the range of 3-17% for different categories of consumers. It seems that the decision for increase in tariff has taken to pass-on the likely increase in the wellhead prices effective Jan 1, 2009 that will increase the cost of purchase of gas transmission companies.

It may be recalled that in July 2008, the government had increased the gas price by 31% for both domestic and consumer segments but the authorities ignored the fallout in the form of increasing inflation as gas price hike carries both direct and indirect implications for inflation due to increase in transportation cost. The recent hike will not have any significant impact on inflation directly. Nonetheless, the price hike also carries indirect impact on the other heads of CPI in the sense that this will result in higher production and transportation cost.

Gas distribution companies (SSGC & SNGPL) carry out their business under guaranteed return on their asset base. Hence, an increase in consumer gas price does not affect their profitability. In this regard, SNGPL is entitled to earn 17.5% operating profit on the average net fixed assets while the SSGC is allowed to get 17% return on its average net fixed assets. However, there will be a slightly positive impact in the form of improved cash flows for these two companies as this will reduce their working capital borrowing which will marginally lower their financial charges yet at the cost of smooth flow the economic cycle.

"DEVELOPING TOMORROW'S BUSINESS LEADERS"

CITI & INSTITUTE OF BUSINESS MANAGEMENT (IOBM)

PAGE REPORT

"Developing Tomorrow's Business Leaders" was the overriding theme behind the Citi Foundation sponsored seminar on 'Introduction to Risk Management' organized for students of finance & banking, in collaboration with The Institute of Business Management, Karachi, (IoBM).

Risk management has acquired particular significance in Finance & Banking both globally as well as in Pakistan. In line with its objective of developing the local sector through transfer of expertise, Citi arranged the 9 day seminar with a view to impart 'lessons learnt' from the events of the global financial crises. Sessions were based on real business cases and scenarios and the recent financial cycle formed a backdrop to all discussions.

Funded entirely through a Citi Foundation grant of US$ 25,000 the seminar took place during the academic winter break, the program was held at the Business Support Center, IoBM with 30 students from Karachi, Lahore, Sukkur, Quetta, Multan, Islamabad and Peshawer. Nominations were invited from business schools across the country to ensure participant diversity and maximum reach.

An excellent faculty comprising of existing and former Citi experts had been lined up for the program including President Royal Bank of Scotland Pakistan Shehzad Naqvi, President Tameer Microfinance Bank Nadeem Hussain, Political & Investment Advisor Yousuf Nazar, Country Officer & Managing Director Citi Tanzania Omar Hafeez, Consumer Bank Head NIB Naseer Hasan, and senior members of Citi Pakistan including MD & CCO Arif Usmani, Director & Corporate Bank Head Aziz Rahman, Consumer Bank Head Azim Alvi, Treasury Head Saquib Ayub, Head of Global Transaction Services Minaz Bhuiya, and F.I. Head Mona Naim Khan.

Executive Director IoBM Talib S. Karim said "We commend Citi for providing this opportunity to students from across the country and are appreciative of the speakers' contribution towards making this a meaningful and learning experience for them".

A Student of Multan said "this has been a tremendous learning experience. Each day we were asked to tackle a different case with some of the most renowned experts in the market... we're amazed at the high standards of instruction,"

Another participant from Quetta said "this is probably the first time universities from outside Karachi and Lahore have been invited to send their students to a forum of this caliber_ this has been an extremely active program, with lots of discussions and debates and I speak for all of us when I say that this has been a wonderful opportunity".

Speaking at the seminar MD & CCO for Citi Pakistan Arif Usmani said "This program on risk is in line with our agenda to upgrade skills and create awareness amongst the next generation of business leaders. Great care was taken to ensure the quality of instruction and each session was cased based and interactive. Due credit must be given to the exceptionally bright and well informed students who attended this program_ kudos to our universities".

Citi has had a presence in Pakistan for the past 47 years and has been actively involved in the development of the local financial services sector and has a demonstrated record of transferring its expertise via training programs on corporate governance, treasury and trade products, anti-money laundering and compliance amongst others. Citi has conducted a similar risk management program in 2006 and has recently concluded a 4-year US$200,000 research and learning initiative titled 'Foundations of Corporate Governance' with the Lahore University of Management Sciences.