The size of circular debt has tremendously increased, by 90 percent, in the last two months, to Rs 190 billion in November 2008 from Rs 100 billion in September this year. "Though the oil price shock, seen last year, has come to an end, its repercussions are still being felt within the energy sector companies of Pakistan in the shape of a huge circular debt", analysts said.
This circular debt crisis has been generated mainly from Wapda, which is the largest generator (55 percent share) and supplier of electricity in the country, Farhan Mahmood, an analyst at JS Global Capital, said.
As per latest energy statistics, Wapda produces 40 percent of the electricity, using gas and furnace oil (FO) as fuel. Gas is mainly supplied by SSGC and SNGPL, whereas PSO and other oil marketing companies (OMCs) supply furnace oil to Wapda. Moreover, Wapda also purchases costly power from IPPs like Hubco, Kapco, etc.
Thus, owing to sharp increase in oil and gas prices in last one year with no major increase in electricity and gas tariffs, cash-starved Wapda did not clear dues of Rs 37 billion and Rs 35 billion to Hubco and Kapco, respectively, as per September company accounts, whereas Wapda's payables to PSO is estimated to around Rs 18-20 billion. However, due to lack of information, the payables by Wapda to SSGC and SNGPL could not be quantified. Thus, total payables by Wapda to these companies could be close to Rs 90-92 billion, he said.
Hubco (major oil purchaser from PSO) withheld its payment of Rs 26 billion to PSO as it is not getting cash from Wapda. This has resulted in PSO stop paying dues of Rs 40-45 billion to state-owned Parco (major oil product supplier to PSO). PSO also withheld payments to Pakistan Refinery (PRL) and National Refinery (NRL).
However, other than power sector dues, PSO also had PDC (Price Differential Claims) of Rs 19 billion as of September 2008 from MoF (Ministry of Finance) which further aggravated PSO's cash position.
The other chain of circular debt travels from Wapda through gas marketing to exploration companies. Wapda owes to Sui Southern Gas (SSGC) and Sui Northern Gas (SNGP). But, due to non-availability of data, receivables from Wapda could not be quantified. However, SSGC owed Rs 14.5 billion to Oil and Gas Development Company (OGDC) and Pakistan Petroleum (PPL), whereas SNGP owed Rs 11.7 billion, both of which supply gas to these marketing companies. Not only this, both the oil and gas exploration companies had receivables of Rs 21 billion from Attock Refinery (ARL), as of September 2008.
He said that it is evident that at least Rs 100 billion needs to be plugged in the power sector which would ease off the circular debt problem, probably mainly through raising electricity tariff, coupled with minimising transmission and distribution (T&D) losses. Otherwise, he said, local refinery production would further go down (during July-October refinery production down 2 percent), which meets 61 percent of the oil products demand of the country.
That could result in higher oil product imports in times when the country needs foreign exchange. Moreover, if this issue is not addressed cash pay-out ability of the government owned energy companies would also be affected that in turn could affect the fiscal deficit.
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