The writer is a graduate student at the University of Notre Dame in the United States
If Pakistan State Oil (PSO) were a privately-owned firm, the populist commentators who pass for journalists in Pakistan would be foaming at the mouth calling for its break-up by now. The state-owned company controls close to 65 per cent of the Pakistani oil market, making it close to a monopoly. True, it is a heavily regulated monopoly, but if the petrol crisis has taught us anything, it is that PSO is too large to continue functioning as a single entity. The dominance of this one company of the entire country’s energy chain is simply too big a risk to the economy. It is time to break up the company.
PSO is by far the largest company in Pakistan in terms of revenue. In fiscal 2014, its revenues were nearly Rs1.2 trillion, making it more than three times as big as the next largest company, Pak-Arab Refining Company (PARCO). How did our energy sector come to be dominated by one company? The answer, as always, lies in history.
PSO is yet another monstrosity created out of that national calamity known as Zulfikar Ali Bhutto’s nationalisation drive. It was cobbled together in 1974 by the government through a series of forced mergers and acquired its current form and name in 1976.
In February 2000, the legendary Shaukat Raza Mirza — the man who led the management buyout of Engro in 1991 — was appointed CEO and turned around the company to becoming one of the few government-owned institutions that could compete with the private sector for some of the nation’s best talent. (Mirza, one of the most talented business leaders in Pakistani history, was murdered for being Shia in July 2001.)
PSO has two main lines of business: its retail business, and the wholesale business. The retail business is the one most Pakistanis are familiar with: PSO supplies 3,689 franchisees who own PSO-branded petrol pumps with a variety of fuels used by ordinary commuters, including petrol and diesel.
The company does not break out its revenues by business segment, but the retail segment is by far the largest source of income for PSO. With over 60 per cent market share, the company is a dominant player in the retail fuel sector and a critical component of the energy sector, though its dominance is being challenged by newer, faster-growing rivals.
The wholesale business is just as important a piece of the energy puzzle, though one that most people are not familiar with. In this line of business, PSO supplies fuel to larger customers, including the military and large companies, but mostly the power sector.
About the only thing the two businesses have in common is that they both involve selling oil. The customer profile, the fuel mix, and the business model are all completely different. The retail business is a cash-based business. PSO receives instant payment for the fuel it sells to your local petrol pump. No money, no sale. Fairly straight-forward business with relatively little financial risk.
Meanwhile, the wholesale business has massive amounts of financial risk, not least because many of its customers are reliant on the government for payment and often refuse to pay until the government pays them. It is this wholesale business that is involved in the ‘circular debt’ that you have been hearing so much about and the reason why PSO is unable to get banks to lend it money to import more oil.
There are, of course, many, many reasons why the petrol crisis happened, and many ways the government can and should try to fix the problem. But since it is becoming increasingly clear that it is in no mood to do so, the least it can do is try to isolate the problem.
If PSO’s retail business were spun off into a separate company, it would have a completely separate financial profile and far better borrowing abilities. It would always be able to import oil for petrol stations because it would always be cash rich.
Meanwhile, the wholesale business can continue to limp along until the government finally musters up the courage to come up with a real energy policy. Wholesale PSO would likely be a financial basket case, but at least it would limit the damage to the power sector and not spread it to petrol pumps across the country.
Published in The Express Tribune, January 23rd, 2015.
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COMMENTS (8)
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I think separating out the liquidity problems of the wholesale business caused by accumulated receivables/circular debt, as presented by the author, to protect retail customers makes a lot of sense. The motorbike owner shouldn't have to wait in huge lines or spend valuable time looking for fuel because WAPDA, railways, PIA, etc, need massive structural reforms, can't pay their dues, and have brought PSO to its knees. This could be an important lesson to come out of this crisis. Of course mismanagement and corruption should be eradicated in each business line, but I haven't read anything in the comments that directly challenges this logic.
What you will do if one of your child is spoiled (a) try to fix the issue (b) get him/her out of home. Similiar is case here, by seperating businesses will not solve the problem, the root cause is theft of electricity all others are just symptoms and will be taken care of.
Instead of breaking up PSO........why not deregulate oil imports, so that market forces determine this sectors health. The government must facilitate business and NOT be in the business of running businesses.
Assuming that the broad frame work of business structure ascribed to PSO are correct, the author's suggestion of separating credit side of the business and the cash side of business is a logical, scientific business acumen to prevent the cash flow crunch. After all that is what every business man does, and refusal of LoC by banks to off set the cash flow is one of the reasons for the present crisis.
However, the cash side of the business in politics is translated as Votes, and every politician in the world will promise to reduce the fuel cost to get elected. Otherwise, the opposition who lost the election will protest until the fuel price is reduced and the ruling party will dip into the other accounts revivable to pay for the subsidized fuel cost.. In a growing economy with large GDP, it is tenable. Otherwise, it leads to circular debt and cessation of letter of credit, which spirals out of proportion as it happened here.
In today's oil market, the separation of credit and cash business is a good timing, since the cash price will be equal or lower than the promised subsidized fuel price and voters won't care.
Credit business is a government promise and it will work itself out as deficit financing like in other countries.
Increasing the competition with multiple private sector players in cash side of the business wil keep the fuel price stable, cheap, and in tune with the market, provided government won't interfere with price fixing or tax.
What is the lesson: PAK security is easily vulnerable. If a supply chain logistics is disrupted for 20 days,(delayed clearance, maritime disruption, cash flow delay, Distribution disruption, refinery shut down etc.,) PAK will come to a grinding halt. PAK internal resources alone are not enough.
Relax, no outside force will disrupt PAK fuel supply.
"If Pakistan State Oil (PSO) were a privately-owned firm, the populist commentators who pass for journalists in Pakistan would be foaming at the mouth calling for its break-up by now."
In the debate over privatisation I have only read fairly balanced pieces from its critics. It's those cheering on privatisation, foremost amongst whose ranks you have planted yourself, who are 'foaming at the mouth'.
The writer says that controlling close to 65 percent of the Pakistan oil market, state-owned PSO is too big and unwieldy. As such, he recommends its break-up in two institutions, handling retail (cash) and wholesale (credit) oil business respectively. This is the wholesale business which creates problems because of delayed or non-payment of dues for oil supplies on credit, resulting in liquidity problems for PSO which lacks resources to pay for oil imports. Unfortunately, the adverse consequences of shortage of petrol thus caused also have to be faced by retail petrol buyers who pay for petrol on delivery and bear no responsibility for the liquidity problems of PSO. According to the writer, separation of retail petrol business will insulate and protect cash buyers from liquidity problems of PSO which are not of their making. Also, handling of smaller units will be relatively easier.
Elsewhere he stated that in 2000, the talented Shaukat Raza Mirza turned around PSO but unfortunately, he was murdered. And that shows the problem is clearly of mismanagement and not of huge size of PSO. As such, the problem can only be solved by addressing the basic cause, which is mismanagement, and not by taking the measures that do not treat the disease. Knowing the capacity of PML-N government for greed, corruption, nepotism and mismanagement, it won't be long before the favourites placed in important positions mess up the retail petrol sector as well.
And what would he suggest then? Further splitting of the retail petrol sector on provincial lines so that no province suffers for mismanagement by others?
I know in an adverse situation, the logical approach is to salvage what you can and then to sort out the rest. But this is feasible only when there is a capacity, and more than that, a desire to improve things. However, where a confused situation is a basic requirement of the rulers in order to facilitate their corruption, such an approach may not bear fruit. And splitting PSO into two may call for controlling and paying a much larger crowd of regime's favourites, thus making the situation worse than before, apart from increasing costs astronomically.
I read somewhere that people put in their best performance when they are slightly apprehensive of what the future holds for them. However, when those in important positions enjoy perfect security of employment, come what may, like we saw in the recent petrol crisis, real improvement becomes impossible, or nearly so.
Karachi
Just because there is a crisis doesn't mean that ET allow any hare brained idea on its pages. Please spare your readers. Thank you.
Sounds fair. But both companies should be government owned. We cant privatize PSO because of national security and monopoly issues.