In what appears to be a major breakthrough, the government plans on issuing up to Rs300 billion worth of bonds in order to clear up the existing inter-corporate circular debt that has financially crippled the energy sector, even as it contemplates reforms to ensure that the problem never arises again.
Sources told The Express Tribune that the plan would be announced on Tuesday (tomorrow) after the special cabinet committee on the energy crisis holds a meeting with Prime Minister Yousaf Raza Gilani.
Under the plan, the government would create a company – a special purpose vehicle – that would absorb all the debts that have arisen in the energy sector as a result of the government’s inability to pay its promised subsidies on time. The SPV would then in turn issue bonds in order to finance those debts, which the government of Pakistan would then pay off over time.
Petroleum Minister Asim Hussain confirmed the details of the plan. “Funds will be generated through bonds to end the circular debt,” he said.
The use of long term bonds by the government is designed to ensure the payments remain minimal in what could be a Rs300 billion addition to the national debt. The use of the SPV appears to be an attempt by the government to make the transaction an “off-balance sheet” one, which would avoid showing a sudden jump in government liabilities.
In the meantime, the government appears to be moving towards energy sector reforms to ensure that the financial crisis does not happen again. The circular debt crisis had caused a dramatic reduction in production at power companies and refineries.
The government will seek to overcome the problem in the future by requiring oil marketing companies to buy petroleum from refineries using letters of credit, effectively providing a bank guarantee on all outstanding receivables and limiting them to the duration it takes to deliver the product. The same rule would apply to power companies paying oil marketing companies.
This measure has been a longstanding demand of Pakistan State Oil, the largest oil marketing company in the country and one of the biggest victims of the circular debt crisis. According to the latest available figures, PSO has outstanding receivables of Rs155 billion.
Hussain confirmed these details and added that refineries that, after these reforms take hold, produce below peak capacity would be subject to a fine. Currently, refineries claim that the lack of payments by oil marketing companies results in them not being able to pay their international suppliers of crude oil and hence reduce their production capacity down to between 60% and 70%.
Yet while all of these measures would address the mechanics of how the circular debt crisis affected the energy sector, they do not address the source: unaffordable government subsidies on power. For that, the government has decided in principle to bring down its allocation of power sector subsidies to zero for the fiscal year ending June 30, 2013.
In the past four years, the government has spent over Rs1,000 billion on power sector subsidies, including Rs295 billion in fiscal 2011 alone.
Yet another problem has been the differential between the power tariffs that the National Electric Power Regulatory Authority has calculated and the ones the government actually allows power companies to charge. That difference is currently around 20%, which sources said, the government aims to close by the end of the year.
In the meantime, the government is expected to lose close to Rs337 billion in forgone revenues due to the inefficiency of the state-owned power generation companies as well as subsidies to the power sector.
Published in The Express Tribune, October 31st, 2011.
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