Destitute energy chain: PSO pleads for help again, Rs50 billion this time

For the umpteenth time, the country’s largest oil supplier asks the government to arrange for money to pay its bills.

ISLAMABAD/LAHORE:

It has become a depressingly familiar sight. Pakistan State Oil, the largest oil marketing company in the country, needs about Rs50 billion in financing over the coming month to avoid defaulting on the letters of credit it uses to pay for the country’s oil imports.

In a letter sent to the finance, petroleum and water and power ministries on September 9, PSO had asked the government to arrange for Rs50 billion after the state-owned company exhausted its credit lines with the commercial banks.

PSO currently has Rs155 billion in outstanding receivables from its power sector clients, who have been unable to pay the company because the government in turn has been unable to keep pace on the payments it owes the power companies for the electricity subsidies that Islamabad has a habit of promising.

Any normal company would simply stop doing business with any client that consistently failed to pay on time, no matter how big. However, PSO’s government shareholders continue to compel the company to keep supplying oil to the independent power producers, despite the fact that the IPPs are well beyond their credit limits.

PSO’s interest costs on the loans it must take in order to keep paying its suppliers (who are not nearly as generous in their credit terms) are reaching astronomical heights. The company’s current borrowing limit with the commercial banks is set at Rs60 billion, which was raised from Rs41 billion after PSO’s biggest clients consistently kept refusing to pay on time.

PSO’s financial woes, however, also have spill-over effects. This month, the company has been unable to pay the four refineries from which it buys fuel within Pakistan. The company prioritises its international payments above those for its local suppliers, fearing being locked out of the international market as a defaulter, which would make it very difficult to obtain letters of credit to finance its imports.

The power sector owes PSO about Rs131 billion, of which the Hub Power Company – one of the largest suppliers of electricity to Karachi – alone owes more than Rs67 billion.

“This month, the power sector only paid Rs8.5 billion for their fuel supplies,” said one PSO executive who wished to remain anonymous, adding that the company supplies about Rs32 billion worth of fuel to power companies every month.

The power sector, for its part, has been complaining that PSO’s reduced supplies has forced them to cut their generation, which in turn results in power outages that last several hours throughout the country, in many urban areas exceeding 12 hours a day.

The independent power producers are demanding that the Pakistan Electric Power Company (Pepco) – the company created by the government to manage the finances of the power sector – pay the more than Rs140 billion it owes the power sector so that they can then pay their fuel suppliers.

Pepco executives, for their part, complain that consumers – be they public or private organisations, individuals or industries – have a habit of not paying their power bills on time and very often not at all. The company claims it has about Rs300 billion in outstanding receivables from power consumers.

If this cycle sounds viciously circular, it is because it is. In common parlance, it has come to be known as “circular debt” and it starts with the government’s unsustainable promise to provide electricity to consumers at below production costs, and the incompetence of the state-owned power companies at collecting bills from their customers.

Sounds depressing? It should. It has executives in the power sector screaming bloody murder every week. And it is why the lights keep going out for several hours a day every day.

Published in The Express Tribune, September 27^th, 2011.