ECC forms panel to settle debt

Committee formed in wake of warning of disruption to power, gas supply

ISLAMABAD:

The federal government on Wednesday formed yet another committee to settle Rs1.6 trillion circular debt after the Petroleum Division warned that power and gas supplies across the country may be disrupted due to near bankruptcy situation of companies.

The Economic Coordination Committee (ECC) of the cabinet, which decided to constitute the committee, also allowed the reduction of Rs1.5 billion subsidy budget and diversion of the amount to clear liabilities of the Ministry of Religious Affairs and National Accountability Bureau (NAB).

Under the chairmanship of Finance Adviser Dr Abdul Hafeez Shaikh, the ECC approved the import of another 320,000 tons of wheat at a price of $286.2 per ton. It was $6 cheaper as compared to the previous deal of 320,000 tons agreed with Russia under a government-to-government contract.

The ECC formed a committee with all the relevant stakeholders for proposing modalities for clearing the circular debt of the Petroleum Division, according to a statement of the finance ministry.

The committee would prepare a well-rounded proposal in a month and submit to the ECC, it added.

The ECC decided that the issue of circular debt may be considered holistically and a solution may be worked out to resolve the matter, according to the ministry.

The committee will comprise officials of the Finance Division, Power and Petroleum Divisions, Planning Division, Securities and Exchange Commission of Pakistan (SECP), Oil and Gas Regulatory Authority (Ogra) and five gas sector companies.

The Pakistan Tehreek-e-Insaf (PTI) government is in its third year of power and yet it has not been able to finalise a "well-rounded solution". The circular debt that stood at Rs1.13 trillion at the end of the previous PML-N government has now more than doubled to Rs2.6 trillion.

As against earlier estimates of Rs1.1 trillion circular debt flows, the Petroleum Division summary suggests that the amount was Rs1.6 trillion after adding Rs520 billion in interest cost.

Some of the solutions being discussed would punish consumers for governance failure of the government. The proposals include levying a surcharge on gas consumers to pay off the debt of Sui Northern Gas Pipelines Limited (SNGPL) and Sui Sothern Gas Company (SSGC).

"Oil and Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL) and Government Holdings Private Limited (GHPL) are negatively impacted and are now at the stage that they might resort to ceasing supply of crude oil, RFO, LNG and gas in the foreseeable future, resultantly, massive shortages of oil and gas could be created across the country and the entire petroleum sector would collapse," warned the Petroleum Division.

Companies on verge of collapse

Pakistan State Oil (PSO) has been protecting domestic refineries since long by making timely payments due to which PSO has to resort to massive bank borrowing to avoid international defaults and consequential disruption in the supply chain of petroleum products, the Petroleum Division informed the ECC.

Similarly, OGDC and PPL have continued to provide gas to utility companies and power plants without getting payments, it added.

"PSO, OGDC, PPL and Pakistan LNG Limited (PLL) are the entities that primarily financed the circular debt of around Rs1.6 trillion of the entire country, which includes Rs1.081 trillion in principal and Rs520 billion in markup," said the Petroleum Division.

PSO's receivables have increased to Rs323 billion, including Rs198.3 billion in principal amount. SNGPL owed Rs97 billion to PSO, Hub Power Company (Hubco) plant Rs50.6 billion, Kot Addu Power Company (Kapco) Rs15.4 billion, Gencos Rs141 billion and Pakistan International Airlines (PIA) Rs19.8 billion, according to the Petroleum Division.

OGDC's receivables have touched Rs401 billion, including Rs284 billion in principal amount. SNGPL owed Rs192.5 billion to OGDC, SSGC Rs133.5 billion and the power sector Rs39 billion.

Similarly, GHPL's receivables have increased to Rs113 billion. These included Rs31.6 billion from SNGPL and Rs78 billion from SSGC.

PPL's receivables have touched Rs379 billion, with SNGPL being the main defaulter with Rs173.4 billion, SSGC Rs122 billion, refineries Rs13.3 billion, Gencos Rs70 billion.

SNGPL's receivables have increased to Rs54 billion, owed by the power sector. SSGC's receivables have surged to Rs293 billion. SNGPL owed Rs105 billion to SSGC and K-Electric owed Rs113 billion, according to the Petroleum Division.

Various government audit teams have highlighted that the increase in the financial cost arising from delayed recovery from the power sector is adversely affecting public sector enterprises' (PSEs) profitability with the risk of bad debts resulting in possible bankruptcy, stated the Petroleum Division.

The Petroleum Division proposed that Rs3 to Rs5 per litre in petroleum levy be earmarked for clearing Rs323 billion worth of circular debt of PSO.

To provide temporary relief to OGDC, GHPL and PPL, royalty and sales tax obligation should be discharged based on the collect-and-pay model, according to the Petroleum Division. Total receivables of these three companies are around Rs892 billion.

It proposed that a fixed-rate surcharge should be slapped in gas bills to pay off circular debt of Rs347 billion of SNGPL and SSGC. According to a major proposal, the debt of profitable public sector companies should be adjusted against their equity.

The committee would develop modalities for clearing the debt through adjustment as per the options given by the Petroleum Division.

"Inaction can lead to the collapse of some of the otherwise profitable entities, causing major disruption in the supply chain," cautioned the Petroleum Division.

Other decisions

The ECC approved the diversion of over Rs1 billion from this year's subsidy budget to settling Hajj-related liabilities of the Ministry of Religious Affairs.

In 2017, the federal government had capped Hajj expenditures at Rs280,000 and decided to pick the additional cost of Rs4.5 billion. The Ministry of Finance has already paid Rs3.5 billion and Rs1.1 billion is outstanding.

Similarly, the ECC allowed the payment of Rs433 million from the subsidy budget to Broadsheet LLC that won an arbitration case against NAB.

Broadsheet LLC pursued the case of arbitration against Pakistan in the Chartered Institute of Arbitration, London. The arbitrator issued $2.3 million or Rs433 million award against Pakistan, including the fee that Pakistan government owed to the lawyers engaged to fight the case.

The ECC approved the sixth wheat import tender of 320,000 tons at a price of $286.2 per ton. The government is in the process of importing 1.8 million tons of wheat, including 800,000 tons from Russia under a government-to-government deal.

The food ministry informed the ECC that there would be sufficient availability of wheat in the country by January 2021 and with the increase in supply, prices would go down eventually, said the finance ministry.

Published in The Express Tribune, November 5^th, 2020.

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