Gas distribution companies are at the verge of bankruptcy as the unaccounted for gas (UFG) losses are getting out of bound. Ironically, this is adding on to the list of white elephants in public sector companies at a time when government is eyeing privatizing the loss making companies. Both SSGC and SNGPL are listed on the stock exchange but have not released their financial accounts for last 30 months which is a violation of SECPs rules - last quarterly accounts were published in March 2013. There is something terribly wrong somewhere. Earlier this week, the managing directors of both companies presented bleak financial position of the gas distribution companies to the Senate Public Accounts Committee. The numbers are mind blowing and have created a new form of dangerous gas circular debt at a time when oil prices are falling down to lower oil related circular debt. The issue is that permissible UFG losses at 4.5 percent for these companies are much less than the actual position on the ground. But that does not mean that higher losses should be allowed to make these companies profitable. Internationally UFG losses are allowed at 1-2 percent and in Pakistan for longest time the losses were hovering around 5-7 percent. But in the last few years, the losses really skyrocketed and according to company sources they are around 12-15 percent. Especially, in case of SSGC, the situation is worse. The company is finding it hard to recover from parts of Sindh and Baluchistan - as in latter case the UFG losses are as high as 51 percent. The poor recovery from K-Electric and Pakistan Steel Mills are adding salt to the injuries. The UFG losses of SSGC are around 15 percent or Rs30 billion. In case of SNGPL the losses are around Rs23 billion or 11.5 percent.Two third of SSGC and half of SNGPL losses are due to theft while rest are due to poor condition of gas pipelines. Even taking theft part out of the equation, erosion of gas pipelines alone does not meet the permissible 4.5 percent UFG allowed by OGRA. Who is to blame for the mess? Why the companies directors and executives were sleeping? How these companies in such disarray can manage large influx of LNG coming into the system through them? These are the thorny questions speaking for poor governance and exhibiting management failure in public sector companies in the energy chain. Some blame OGRA for not revising UFG limits for these companies but why should the losses be institutionalized?Why can the losses be curbed? Some argue for upward revision in gas prices to lower the losses. But why should the honest consumers pay for theft or these companies negligence for not upgrading gas infrastructure? These issues are of criminal negligence. Why the managing directors and board of these companies remained silent for such a long time? Why the independent directors are not blowing whistles? The problems have compounded and are adversely affecting the cash flows of companies in exploration and production businesses. The receivables of OGDC and PPL are mostly from gas distribution companies, and the number has escalated in the last two years. Both SSGC and SNGP outstanding payables to two E&P companies stood at Rs132 billion (71% of total) in September 15 and that number is consistently increasing as the toll was Rs106 billion (68% of total) in June 14 and it was as low as Rs53 billion in June 10. How can the government attract new companies in exploration business when the distribution companies are unable to pay?The revenues of gas distribution companies comprises of three components - 17-17.5 percent return on operating assets plus UFG allowance (4.5%) plus other income (primarily late payment surcharges). Since the UFG allowance is too less than the actual numbers, the companies are at the verge of bankruptcy. Now these companies are fighting for increasing the UFG allowance and are trying to take other income out of the operating revenue to make their bottom lines green. These are all semantic as accounting treatment can remove blood stain from these companies account; but cannot wash away the losses the public at large is bearing. The issue is how much gas the country is selling and what portion of it is being recovering. The base tariff which is charged to consumers is going to gas marketing companies and in turn to the E&P companies, and generating gas development surcharge which goes to the divisible pool. Since the gas marketing companies are recovering less, their profits are eroding and their payables to E&Ps are mounting and GDS is low as well. An easy and inappropriate way to reduce losses is to increase the base tariff which is advocated by IMF as well. This would imply that honest bill payers will bear the burden on thieves. And this may not work as increasing tariff will incentivize more theft in the absence of enforcement. The government was holding back the decision of base tariff increment since Jan 2013 and finally it increased base tariff for domestic consumers by 10 percent in Oct 15. The government is cleverly charging non-domestic consumers by imposing GIDC which directly goes to federal government. There is no benefit to gas distribution companies from this but the industrial and commercial consumers pay more. How long the inefficiencies and lack of enforcement would go? The gas demand shortfall is planned to be filled by imported LNG which will be supplied through SNGP and SSGC; and since the price of imported gas is double the domestic gas, the losses will double as well. The circular debt created by these companies will also impact the running of new RLNG based power plants. Its time for government to mend it before it gets incurable. Otherwise in 2018, the country will have RLNG based power plants of higher efficiencies but will not have adequate gas supply to produce electricity.
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