KARACHI:
Every few days, employees managing the finances of Pakistan State Oil (PSO) meet in a secret huddle and there, they conspire — which bank should be last to get loan repayment? Who has the capacity to exert pressure on Islamabad? How about a threat to cut fuel supply to Pakistan International Airlines? Will this work for PSO to receive withheld funds?
For a company with sales revenue of Rs1.4 trillion, equivalent to 33% of the government’s budget outlay, PSO is a behemoth with an empty stomach. Responsible for 60% of country’s oil need, it often doesn’t have cash to pay off suppliers.
“We have already defaulted to a couple of suppliers and banks in the last few months. The fear of the worse keeps looming over us,” said a senior official.
“Often we have to use the tactic of holding payment to a foreign bank, which in turn compels the government to release funds. This is not good for our reputation but what else can we do?”
PSO’s receivables, mostly due from power producers, exceed Rs220 billion. Three governments have not been able to solve the problem, which arises from consumers not paying their power bills, exacerbated by electricity theft, excess use of furnace oil, subsidies and ends with a black hole in the national exchequer.
Amid all this, PSO has a lifeline in shape of a long-term supply contract with the Kuwait Petroleum Corporation (KPC), which sells diesel to Pakistan on very lucrative credit terms.
PSO buys around 2.5 million tons, or 70% of its diesel sales, from KPC. It doesn’t even use letter of credits for it. Under a long-term agreement, import payments are made 60 days after the shipments are booked.
“For the October-December 2014 quarter, they have even extended that duration to 90 days. So, basically, we get a loan of millions of dollars for two to three months,” he said.
Now the Ministry of Petroleum has asked PSO to limit imports from KPC between 2 million and 2.4 million tons. The move comes following protracted efforts of Byco, which has the largest refining capacity of 155,000 barrels per day in Pakistan.
Byco believes that local refineries should not be ignored. “What is the point in importing so much when local refineries have the capacity to meet the demand?” Byco Chairman Amir Abbassciy said in an interview last week.
The matter has further soured an already bitter relationship between the two. Byco supplies petroleum products on a credit of 21 days but PSO doesn’t want to meet this condition.
Bank guarantee or any other financial instrument in favour of Byco is also out of the question, considering PSO’s already leveraged position. Again there is an impasse.
A PSO spokesperson said that no formal agreement had been signed with Byco.
The location of the refinery in Hub is an issue too. Diesel produced by the refinery has to be transported 100 kilometres to Port Qasim from where it can be pumped to Punjab via a cross-country pipeline. In Karachi, dozens of tankers will crisscross rickety roads. It’s a logistical nightmare. And who will bear the cost?
To an outsider, every act of PSO appears shady. Everyday business decisions are taken with a tinge of conspiracy. But beneath few layers of whatever is mentioned in news and industry grapevine, there is basic human nature at work.
Years of out-of-turn promotions, FIA inquiries, interference of ministers and secretaries, suspensions and political pressures have made a certain cadre in PSO hardened. They have learnt to fight back outsiders who try to squeeze the company and its employees.
“We have nothing against any company including Byco. This is not about ego or anything. But Mr Abbassciy must realise that coming from the top is not how business is done. Byco has to deal with PSO. They should come and settle the matter once and for all,” said senior PSO official.
This relates to an arrangement Byco has planned for quite some time. If it could charter a tanker, which can transport diesel from refinery’s jetty in Hub to Port Qasim, the problem will be solved.
People in PSO want Byco to become a consistent long-term supplier who could become part of the marketing giant’s fuel supply schedule.
At the same time, the pressure, which the PSO executives work with, is all the more apparent in case of LNG. Government is using PSO to import up to 400 million cubic feet per day of gas.
That’s a proposition, which will bloat company’s debt by twice its current level. Many of the senior PSO officials have already raised their hands. No one wants to do anything with it.
Just like furnace oil, LNG will enter an energy infrastructure replete with leakages. Gas will go to same power plants, which are withholding payments to PSO because they don’t get their money from Water and Power Development Authority.
Industry people say that there is no denying the pressing need for LNG import. But even the PSO wizards can’t bear to imagine consequences of a default in this case. And they are running short on tricks.
Published in The Express Tribune, November 28th, 2014.
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COMMENTS (7)
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On the surface it appears that the fact the IPPs (Independent Power Producers) are not paying regularly and completely to the PSO as the real issue. The IPPs are unable to collect from WAPDA, which is unable to collect from DISCOs, who are unable to collect from the local consumer. So it is a zero-sum game and we are all -- as a nation -- are party to the crime in a long chain, as well suffer from it as well.
The energy theft is a big issue in Pakistan. Some of the commenters don't realize that issue of doing business with ByCo is one of lack of trust and integrity within the system.
Currently, the refined oil gets stolen by the tanker driver. If PSO takes delivery at PSO, they will only pay for the amount of oil actually delivered to PSO and ByCo would be ultimately responsible for the delivery, including the "mysterious" loss of entire shipments, which happens often. As this oil is frequently stolen and sold off-market to the unscrupulous IPP owners.
ByCo knows the game as well. Hence they want PSO to take delivery at the refinery. Hence the conflict. The ByCo owner is well connected and is using his influence to sway PSO in taking the delivery at ByCo -- end result: More loss to the exchequer. As Pakistani taxpayer -- who is already funding the theft of oil shipped from PSO -- will now be footing the bill for the theft of oil being shipped to PSO as well. PSO will get the double whammy.
We all want to end the corruption in Pakistan. But no one wants to look under the hood and get into the details, as anything more complicated than the story line of a Bollywood movie gets too much for this nation. Additionally, we are all Muslims; therefore, it is not an accident that theft and corruption is rife among us, as we all collude in one way or another to be part of the problem instead of being part of the solution.
There are simple solutions to the problem. The first would be to make the every financial transaction of all state-owned enterprise completely transparent and publicly accessible. The next step would be hold those accountable -- starting from the top. If the data is public, it would be difficult to survive the scrutiny.
Look at A. Khan & Asher Siddique, seems both are energy technical experts, knowing nothing but passing judgement on everything. Hope they will get job in BYCO now.
@A. Khan: What are you on about? If PSO is getting better terms from KPC then obviously it makes business sense to stick with that. Why should they switch to a local refinery for idealogical or political reasons? If anything this shows that PSO is still capable of making (some) decisions for commercial reasons and not because of political pressure.
Excellent article after the one done on Dewan brothers... Saad good luck getting any more comments from PSO officials.
in oder show good profit PSO is in the business of Furnace OIL. PSO is using all its resorces for the import of furnace oil beacuse they can accrue good margin in thier books of accounts depite knowing that the amount would not be recoverd on time. The other advantage they take on the receivable of IPP that they book interset on the recivable to improve their profitability depite knowing that even the rocovery of principle is doubtful. similary PSO is importing deisel more than the requirements to book inventory gains and to improve their profitability. Exchange loss over 30 days they pass on to the goverment. i am trying to estabilish that it is all gimicary of the PSO higher manggement to show higher profits and shift the blame to the Govermnet and on Inter circular debt. If PSO would stop supplies of Funrance oil to IPPs, reuce import of diesel and strat taking deisal from the local refineries, every thing would be resove automatically but the mangement would not be able to show good profits and contiue to be in the good books or get extension. Naturally in orde to protect the interest of some employees of PSO they are playing not only with the company but also with the economices of the country.
@Shuaib: What has Imran Khan got to do with this mess ? Is it your misunderstanding or are you just trolling or PTI baiting ?
I have to agree with Byco on this issue. Government all along has pushed for self reliance. Well now that you have a refinery, PSO being the import arm of the government does not want to buy from it but prefers to import refined petroleum products. Why ? Because the credit terms of 90 days are much easier than 21 days with bank guarantees to encash if payment is not made to Byco.
I am not related to Mr. Abbasi but he is running a business. KPC is state owned with very deep pockets and hence can extend the 90 day credit. The amounts being imported by Pakistan are a pittance to them, hence they give great credit terms.
Had PSO been a private company, it would have packed up long ago. All the shortfall is being borne not by the government as you state but by the tax payer, in terms of higher taxes. Also funds are being diverted from other critically needed projects like health and education. All because consumers do not pay their bills. The also don't understand how the economy in a country
The fact of matter is PSO isn't at fault our DISCOs are!! Why hasn't any head of a disco been fired or its managers? What country do we live in? Where illegal theft is xarried under tgeir nose and those responsible for stopping them do NOTHING for 6-8 years and STILL have their job?
Where is Imran Khan on this issue?? If he sincere he should call for their resignation.