SITUATION CALLS FOR IMMEDIATE CORRECTIVE STEPS
Oct 18 - 24, 2010
Pakistan has enormous means and resources to adequately meet the national energy needs, but the misuse of policies and mismanagement consequently has entangled the energy sector into a vicious cycle of circular debt which is alarmingly impairing the economic potentials.
Today, Pakistan has to heavily rely on imported fuel to cater to the energy needs of the country, which is on one hand damaging the financial health of the country while on other adding to the cost of power generation, which has made the energy precious commodity for masses.
The most crucial issue the energy sector confronted with is the inter-corporate debt or circular debt whatever you may call it. However, the non-payment of dues to the fuel suppliers and to the power producers in the private sector has turned the power generation a difficult task to carry on, which is ultimately affecting the socioeconomic development in effect.
The issue has taken a height to such an extent that the international donors including IMF, the World Bank and the Asian Development Banks have started pressing the government to settle the issue as early as possible to avoid further decline in the estimated growth rate of two per cent at the end of the current financial year.
It will not be out of place to mention that the issue of non-payment of dues or circular debt between Sui Southern Gas Company (SSGC) and Karachi Electric Supply Company (KESC) took a bad turn last week when the industrial, commercial and domestic consumers had to experience agony of unannounced load shedding extended to many hours in 24 hours primarily due to drastic cut in gas supplies to KESC.
It may be noted that KESC runs its power generating machines mostly on natural gas instead of using costly fuel oil to avoid cost escalation. It seems that in case of reduced supply of gas, KESC prefers to stop generators rather than running them on fuel, hence the consumers have to suffer enhanced duration of load shedding.
SOURING SSGC-KESC RELATIONSHIPS ON OUTSTANDING PAYMENTS
According to SSGC, KESC is the only nationally significant company in the private sector, which is supplied with gas without any gas supply agreement (GSA) with SSGC, an integral requirement for a bulk customer.
In fact, KESC has created a general impression that it wants to sign a GSA to ensure a defined quota of gas supply. The fact is that KESC is willing to sign this GSA on its own terms rather than agreeing to a standard mutually negotiated agreement with SSGC. In fact, as per OGRA requirements, the end customer of gas must provide bank guarantee, or cash equivalent amount of three months gas billing on an average. KESC has also not provided any security to SSGC - a requirement fixed by OGRA ñ to provide bank guarantee, cash, or any other instrument to secure the gas utility in case of default.
KESC's failure to sign on the GSA has further worsened the receivables position, with the electric company reluctant to settle its dues worth over Rs21 billion with SSGC. This amount is unsecured in the absence of any GSA. SSGC, on the other hand, in its negotiations with KESC has made all out efforts to finalise a GSA, as per standard terms and conditions, yet not much headway has been made, primarily due to KESC's unwillingness to agree to standard industry terms.
KESC has stated in its 2010 Annual Report that it has withheld payment of monthly installment effective May 2010 on the principle that the payment was agreed based on the allocated gas supply of 276 mmcfd.
In the 'Head of Terms' (HOT) Agreement signed between the two companies in July 2009, it was clearly mentioned that while KESC will purchase 236 mmcfd of gas from SSGC to meet its power generation requirements, the latter will supply an additional 40 mmcfd gas during the 2-month validity period of HOT.
KESC, therefore, is not entitled to injection of 276 mmcfd gas from SSGC for an indefinite period of time, since the commitment to supply additional 40 mmcfd was time-bound for two months and expired on September 30, 2009. Even the HOT's main agreement of injecting 236 mmcfd into KESC's system was valid for 60 days and is no longer operative.
Prior to this HOT agreement, in an accord signed on June 30, 2009 by the then managing directors of the two companies, KESC acknowledged that the outstanding amount for bills up to 31 May 2009 was Rs12.23 billion and agreed to pay Rs1.4 billion on July 2, 2009 and remaining outstanding amount of Rs10.83 billion in 18 monthly installments.
As per accord, KESC further agreed to pay each month's bill within due date i.e. 15 days from the date of issuance of the bill. In the case of non-payment of current bill on due date, KESC agreed to pay interest at the rate of 3-month KIBOR + 2.5 per cent for delays from the due date to the month end date.
Since July 2009, KESC has repeatedly failed to honour its commitment with the result that the outstanding amount has swelled to over Rs21 billion. On the basis of the June 30 agreement, KESC's ability to settle the outstanding balance should have improved. In fact, it has further deteriorated.
On the other hand, SSGC has continued to provide gas on regular and consistent basis to KESC, albeit slightly less than the so-called allocated gas supply of 276 mmcfd. However, in September 2009, SSGC injected an average of 280 mmcfd gas to KESC which was more than the 'allocated quota'. All along SSGC has been driven by one motive ñ to continue supplying gas to KESC so that the city of Karachi does not plunge further into darkness.
KESC's failure to settle its dues with SSGC means that the gas utility today is faced with severe liquidity constraints that may lead to default on payments to the local and multinational exploration and production (E&P) companies from whom SSGC purchases gas. These purchases are governed through gas sales and purchase agreements (GSPAs).
On the other hand, the Government of Pakistan (GoP) guarantees full performance of SSGC's payment obligation in all GSPAs with multinational E&P companies, which is around Rs7 billion per month.
Continuing circular debt issue is leading to major payment default by KESC, Wapda, SNGPL and blocked sales tax refund. This, in turn, has put SSGC in severe liquidity crisis and, as a result, SSGC has been defaulting in making timely payments to the public sector E&P companies (OGDCL, PPL, Orient Petroleum, SNGPL, OMV Pak Exploration, Eni Pakistan Ltd, British Petroleum, and Government Public Holding Limited).
SSGC's receivables have now reached staggering levels at Rs21.6. Along with the fact that SSGC is severely restrained by its capital expenditure, the burgeoning receivables' position has threatened the gas utility's very survival unless KESC starts paying up its dues on a regular and consistent basis.
FALLOUTS ON EXPORT ORIENTED INDUSTRIES
Unpredictable power supplies are pushing the export oriented industries in an uncertain position regarding volume of export this year.
Besides other industries the leather industry which is the third largest export earning sector currently is finding itself in a vulnerable situation to deliver the exports orders besides incurring financial losses on account of power outages.
In fact disrupted power supply situation in Karachi last week was due to drastic cut in gas supplies to the KESC. The gas supplies were reduced due to what it was called technical problem from gas field into SSGC system.
Though the gas supply to KESC was improved to 180 mmcfd last week and may further improve with the improved supplies from gas producing fields of Bhit and Kadanwari yet the KESC continues to resort to day-night load shedding intermittently.
The industrial consumers have also expressed concern over what they called the 4-hours load shedding in industrial areas last week without prior intimation, denial to assurances that industry would be exempted from load-shedding so that its production is not affected.
In the wake of fast approaching Eidul Azha when hides and skin of the sacrificial animals are pooled in the leather industry there is a risk that if the power situation is not improved the industry might be unable to avail the seasonal advantage of leather and leather product exports this year. The leather industry has demanded of the government to ensure an uninterrupted power supply to the industries to avoid losses.
According to representatives of SITE industries, the power outage occurred due to non supply of gas by SSGC to KESC. Further inquiries revealed that SSGC had disconnected its supply because KESC was not making payments to SSGC and billion of rupees had accumulated in arrears leading to this drastic step.
It is interesting to note that electricity consumers in general and industrial consumers in particular, have been making regular payments of energy bills to KESC. Then why huge arrears were allowed to pile up against KESC. The KESC hierarchy is morally bound to explain why the consumers should suffer on this account.
It is learnt that the government is actively considering resolving the chronic issue of inter-corporate debt so that the energy sector could move on a well-defined route, however it is yet to be seen what steps are being taken to settle the dues which are running in billions of rupees. It may be mentioned that PSO's outstanding dues are over Rs150 billion. The total held up receivables of the oil refineries was estimated over Rs120 billion.
While commenting on the circular debt situation, senior oil marketing sources sounded a note of warning that the situation created by the stuck up payments calls for immediate corrective measures to avoid a total chaos that are in the offing and may prove a disaster for the energy sector.