Absence of fiscal incentives leave energy, oil and gas sectors worse off

Gov't commits to resolving circular debt, however, industry still remains confused about the measures.

KARACHI:

Let it be clear that the government did not offer any fiscal incentive to the oil and gas sector in the budget. Even the months-old demand of petroleum companies to do away with turnover tax on their revenues was ignored.

The only good news for firms like the Oil and Gas Development Company (OGDC), Pakistan State Oil (PSO) and Sui Southern Gas Company (SSGC) is the commitment shown to resolve crippling inter-industry circular debt.



Even there, a divide has emerged between power producers and the companies which supply fuel to run power plants. So much is being said about the debt, which stands close to Rs503 billion that officials also seemed to have forgotten to fix causes that led to the current state of affairs.

“Just settling circular debt won’t solve the problem,” said a senior executive of Pakistan Petroleum Limited (PPL). “The way it is being resolved, the problem will resurface in few months.”

Despite the high-level meetings and subsequent press briefings, industry people do not seem to know exactly how the government intends to solve the circular debt, which basically entails from one company owning money to another in the energy supply chain.

The proposals to raise the cash including the issuance of bonds through OGDC and PPL, and adjusting the books of power companies are not new.

“Previous government tried to do the same thing but nothing came out of it,” said the PPL official. “What we need is liquidity. There has to be a big cash injection for all the companies.”

The real beneficiary of the proposed measure would be privately-held independent power producers (IPPs), which are owned by well-connected businessmen. “They get payments directly from the budget and we are being made to issue bonds, which will basically choke our own liquidity,” said the PPL official.



Government particularly views OGDCL and PPL as cash cows with revenues running into hundreds of billions of rupees. That is one reason it wants to use their balance sheets to raise around Rs126 billion.

“But bonds come at a cost for PPL and OGDCL. We would have to securitize them against our liquid reserves. Then, we will be borrowing from the banks to fund our own exploration programmes,” said the official.

PPL alone is working on 49 hydrocarbon blocks. The company would need massive cash to fund development of fields as more discoveries come online in coming months. Solving the crisis requires much more than that.

Analyst at JS Research Atif Zafar concurs. “We are still waiting for the government to explain the mechanism it plans to use. Then the real task is not just clearing the backlog of debt. There is issue of electricity theft and government departments not paying power bills.”

However, PSO CEO Naeem Yahya Mir said he sees no immediate problem for OGDC and PPL from issuance of bonds. “Government has a majority stake in these organisations. It can forgo its dividends for the time being. There won’t be any pressure of companies’ finances.”

Moving swiftly on the circular debt issue is important, he said. “Industry is at a critical stage. We are struggling to run day-to-day operations. Immediate fiscal space will help us work on a lot of stalled projects.”

Industry people believe the measures being pursued by the Pakistan Muslim League-Nawaz (PML-N) government focus on adding more power to the national grid in a matter of weeks. While the public will appreciate relief from recurring power cuts, some hard decisions have to be taken.

Circular debt surfaced as power plants started using expensive furnace oil in the face of gas shortages. Previous governments remained reluctant to raise the power tariff and power producers started to delay payments to fuel suppliers.

Massive power theft and technical losses due to rickety transmission and distribution system added to the losses. “All of this needs investment and planning. It will take years before we are out this mess. We just hope the government won’t stop at some cosmetic moves,” a senior official at an oil firm said.

But who is going to make sure that defaulters start paying bills? Won’t the federal government need help of provincial governments of Sindh and Khyber-Pakhtunkhwa which are controlled by opposition parties? What incentives would it offer to encourage conversion of power plants from expensive furnace oil to cheaper alternates? All of these still remain unanswered!

Published in The Express Tribune, June 17^th, 2013.

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