PSO lays out complex plan to alleviate circular debt

Securitisation of OGDC dividends, swapping of petroleum levy for refinery receivables on the cards.

Zafar Bhutta March 04, 2012


It is an idea that could only come from the mind of an investment banker.

The government is currently considering a proposal that would seek to eliminate about Rs67 billion of the energy sector’s circular debt through a complex transaction that involves securitising the dividend stream of the state-owned Oil and Gas Development Company, and swapping the petroleum levy owed by the refineries with what the state-owned Pakistan State Oil owes them.

If that sounds enormously complicated, it is because it is. Sources told The Express Tribune that this proposal was put forth by PSO officials at a recent meeting held between the company and the petroleum ministry.

Securitisation is the process by which an entity issues debt by using its future cash flows as collateral. In this particular case, according to the proposal, OGDC would issue a bond that would offer the company’s future dividends as collateral. This part of the plan would raise about Rs50 billion, an amount similar to the $500 million (Rs45 billion) that the government was trying to raise through an international convertible bond offering for OGDC. The federal government owns about 85% of OGDC, which is the largest company in Pakistan by profits and market capitalisation.

A further Rs17 billion would be raised by with the government swapping the amount the refineries owe it in petroleum levies with the amount they are owed by the state-owned PSO.

“Under the securitisation plan, OGDC would have to announce a dividend plan, which would most likely be greeted positively by market investors,” said one official familiar with the matter, who declined to be identified. OGDC would then issue a bond that would then be used to pay off some of the circular debt.

“The petroleum ministry will now discuss the plan with the finance ministry to help bring it to fruition,” said one source, adding that circular debt has begun rising again despite the government arranging a Rs151 billion loan to swap the debt.

The “circular debt” problem stems from the government’s inability to pay the subsidies it promises the power sector. The power sector is also financially crippled by the fact that several thousand of its customers owe it about Rs300 billion in outstanding bills. About half that amount comes from provincial governments.

The power companies are then unable to pay the oil marketing company PSO for the furnace oil they use in generating electricity. PSO is then unable to pay the refineries for the fuel it buys from them, who in turn are unable to pay the oil exploration and development companies for the crude oil they buy. In addition, the refineries then cannot pay PSO for the crude oil they import.

And the problem keeps getting worse every month, with PSO receiving only about Rs20 billion from the power companies but supplying up to Rs40 billion in fuel to them. As of Friday afternoon, PSO’s receivables from its various clients stood at Rs161 billion. A whopping Rs72.4 billion of that is from the Hub Power Company alone, which supplies electricity primarily to the city of Karachi and the Hub Industrial Estate in Balochistan.

PSO itself owes about Rs155 billion to its suppliers, including about Rs80.5 billion to local refineries, with the rest being owed to international suppliers.

Published in The Express Tribune, March 5th, 2012.


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