Resolving matters related to SSGC and SNGPL

How the under-estimation of UFG is costing the economy dearly.

DUBAI: Capital markets are a necessity for a vibrant corporate sector. While the global financial crisis of 2008 led a lot of blame being heaped on capital markets for the meltdown, the recovery seen in almost all sectors of the global economy can be attributed to the strong performance of capital markets. Abundant and low cost funding available to corporate entities and governments aided in the recovery.

In Pakistan, we saw a similar situation where a recessionary environment was induced first due to the global crisis, and then compounded by local problems. Political uncertainty and terrorism have deeper impacts than decisions taken by the International Monetary Fund (IMF) about reforms in the Pakistani economy or American aid. While external decisions are not in our control, our failure to acknowledge our internal problems, let alone solving them, remains our biggest failures.



Pakistan has a vibrant corporate sector and an even more vibrant capital market, both of which have tremendous potential for growth. If one looks at lowest levels of global capital markets around the 2009 levels and compare the same 4 years later, it gives a participant like me immense satisfaction that Pakistani markets have not just recovered lost grounds but also galloped ahead.

We being a nation of non believers fail to acknowledge these potentials and begin questioning recovery.  One can write a series of articles about how our non belief has given us a bad name, however, I would like to focus my attention to the matter of Oil and Gas Regulatory Authority (OGRA) “scam” and its impact on two state owned enterprises: Sui Southern (SSGC) and Sui Northern Gas Pipeline Limited (SNGPL); something that the capital markets have been keeping a keen eye on.

SSGC and SNGPL are duopolys conducting business in the natural gas transmission and distribution sectors. In essence, whenever we make our favorite dishes, fuel our vehicles with cheap CNG or produce captive power, it is most likely that either of SSGC or SNGPL is serving us.



While loot and plunder by politicians and bureaucrats is time and again proudly highlighted by our media and the gullible public, no one dares highlight ground level theft of natural gas by the general public, CNG station owners and industrialaists.

Nonpayment of bills is another theft that we all love doing. When gas pressure is insufficient, the media loves showing long queues of vehicles outside CNG stations and housewives complaining that their children and husband will remain hungry, but not a single program is done to cover the run of the mill cases of theft by general public.

OGRA was formed in 2002 with the intention of regulating the natural gas sector to provide a level playing field for investors and consumers. Attracting investment by formulating policies, ensuring constitutional guarantees and abiding by the agreements that governs the business of SSGC and SNGPL was the main role to be played by the regulator.

While we love crying foul about the problems of the common man, what about the loss to these companies and people who have invested in them based on their potential but lost out because of inaction by a largely bureaucratic regulator? Will there be accountability of those people who have caused loss to these companies and its shareholders?

Both SSGC and SNGPL are assured a 17% rate of return on the average net operating assets, and at the same time are allowed to demand for an Unaccounted for Gas (UFG) allowance for theft, leakages, errors etc. It is important to understand that calculating average net operating assets and the UFG determine the revenue requirements of the two companies and the price to be charged from consumers, leading to an impact on the performance and health of these two companies.

The process for tariff revision involves petitioning by both the companies in which case they present their revenue requirements and the case for UFG allowance. The petition is a public hearing in which anyone can participate and present for and against the tariff revisions. The regulator, being a bureaucracy run institution, never accepts the UFG allowance in full and the UFG allowed is lower than what the companies demand.

Being listed companies, the disclosure requirements are stringent for both SSGC and SNGPL and whatever material information like treatment of UFG, petitions, changes in board members or even major shareholders, is made public through the stock exchange.

Both companies are also covered extensively scrutinised by major brokerage houses. Pick up any report on SSGC and SNGPL, a mention of the UFG and revenue requirements is a must feature point.

A key beating point in the OGRA scam has been the targeting of certain stock brokers who are supposed to have benefited in “billions” from prior knowledge of actions of OGRA.

While an SECP report has cleared some of apprehensions about price manipulation in these two companies prices, that report contends that the major brokerage firms, who may have opposing views about each other, all highlighted the impact of UFG decision by OGRA on the financial performance of SSGC and SNGPL.

In essence, public information and research reports clearly indicate what is expected to happen with the results of these companies. While this broker bashing continues, the biggest losers remain the shareholders of the companies and the state of Pakistan, which incidentally is also the largest shareholder and collects taxes and various duties from gas consumers.

With a new government in place that has a better perception amongst the business community and our media, it is imperative that the issues related to the tariff being set up by OGRA and National Electric Power Regulatory Authority (NEPRA) be resolved to make them more market oriented and timely rather than long drawn and based on political sensitivities.

The current government is known for pursuing a fast track agenda for privatisation and formulating policies. It is high time OGRA and NEPRA linked businesses be prioritised allowing for timely settlement of tariff related matters. Delays by these bureaucratic organisations lead to losses for companies and eventually lead to problems like circular debt and excessive subsidies by the state.

The writer is a UAE-based investment banker who can be contacted at [e-mail]

Published in The Express Tribune, August 26^th 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.