Rising circular debt: Petroleum sector to collapse if urgent measures not taken: official

ISLAMABAD: Secretary Petroleum Asad Haya-ud-Din has cautioned the federal government that petroleum sector will collapse if urgent measures are not taken to resolve its circular debt, well-informed sources told Business Recorder. He conveyed his concerns at a recent meeting of Economic Coordination Committee (ECC) of the Cabinet, which has given the assignment to SAPM on Power, Tabish Gauhar to find out sustainable solution to this issue.

The sources said, the Petroleum Division noted that the circular debt in the power sector emerged mainly in 2008 due to the shortfall in the cash flow of Discos which adversely affected their ability to pay the power generation companies (Gencos, Hubco, WPPO, ICAPCO etc) for supply of electricity. Consequently, these companies could not make full payments to PSO, OGDCL, PPL and PPL for supply of fuel, gas and LNG.

Despite the delayed payment from the power and gas sectors, PSO has been protecting local refineries since long by making timely payments due to which PSO had to resort to massive bank borrowing to avoid international defaults and consequential disruption in the supply chain of petroleum products.

Similarly OGDCL and PPL have continued to provide gas to intermediate entities (SSGCL, SNGPL) and power plants (Uch, Guddu) without receiving payment. PSO, OGDCL, PPL and PLL were the entities that primarily financed the circular debt of around Rs 1.601 trillion of the country which includes 1.081 trillion of principal and Rs 520 billion of markup.

This principal amount as well as mark-up/LDs have been increasing with the passage of time due to continuous supply of fuel/LNG/gas to the power, gas and refinery sectors. In this regard, various government audit teams had highlighted that the increase in the financial cost arising from delayed recovery from the power sector was adversely affecting the PSEs' profitability with the risk of bad debts resulting in possible bankruptcy.

PSO had also stated that Gencos III spent PSO's funds (Rs 80 billion) on the Nandipur Power Plant and covering other losses in fuel rather than paying PSO. This has further increased PSO's receivables. The Exploration & Production (E&P) Companies, ie, OGDCL, PPL & GHPL (being the last entities in the chain of circular debt for receiving their outstanding dues from power, refineries and gas sectors) were negatively impacted and were now at the stage that they might be compelled to cease supply of crude oil, RFO, LNG and gas in the foreseeable future.

Resultantly, massive shortages of oil and gas could be created across the country and the entire petroleum sector would face collapse, if the settlement of circular debt was not accorded the top most priority.

The Petroleum Division further noted that in order to resolve the circular debt issue and improve national energy and economic security the following possible options may be adopted for clearing the debt after exclusion of markup if permissible under relevant law/rules: (i) adjustment by earmarking a portion of Petroleum Levy (Rs 3-5/litre for PSO; (ii) In case of OGDCL, PPL & GHPL, the royalty/sales tax obligation will be discharged on collect and pay model for providing temporary relief to the companies through (a) adjustment by adding a fixed rate in gas price of SNGPL/SSGCL for realizing their receivables' from government and other sectors and ensuring clearance of their payables (b) settlement of GDS payable by PPL on gas sales to Genco, against the amount receivable by PPL from SNGPL while allowing SNGPL to set-off its receivable from GoP on account of GDS against the amount payable by SNGPL to PPL;(iii) by issuing Sukuk bonds against the entire circular debt; and (iv) adjustment of debt with equity in profitable public sector entities/ Power projects/companies in the energy chain. The Petroleum Division proposed that in order to find a sustainable solution to the circular debt issue, a Committee may be formed to be led by Finance Division, comprising of Power and Petroleum Divisions and the Securities & Exchange Commission of Pakistan. The Committee would develop modalities for clearing the debt through adjustment as per the proposed options.

The Committee would submit its final recommendations for the settlement of circular debt to ECC of the Cabinet for approval within (30) days. The Petroleum Division maintains that inaction can lead to collapse of some of its otherwise profitable entities causing major disruption in supply chain. During ensuing discussion Tabish Gauhar, SAPM on Power opined that the matter of circular debt on petroleum side may not be dealt with in isolation rather recommendation be made in conjunction with power sector owing to their interconnectedness. Dr.

Waqar Masood, SAPM on Revenue also supported a comprehensive solution for resolving the circular debt as a whole and not in piecemeal. The sources maintained that after having heard the participants with similar views the Finance Advisor invited comments of Secretary, Petroleum Division thereon.

The Secretary, Petroleum Division apprised the Committee that the issue of circular debt in petroleum sector has attained urgency and if not dealt with on immediate basis the sector may collapse.

Finance Secretary supported the stance of Secretary, Petroleum Division and recommended that since Tabish Gauhar, SAPM on Power chaired the Committee for resolution of circular debt on energy, and circular debt on petroleum was a subset of the bigger problem, Tabish Gauhar should chair this committee also. However Omar Ayub, Minister for Energy suggested that since all matters are ultimately of financial nature therefore, Finance Secretary should chair the committee.

After detailed discussion, it was decided that Tabish Gauhar, SAPM on Power, who heads the Committee constituted to formulate recommendations for settlement of circular debt relating to energy, constitutes a Sub-Committee which may examine the petroleum circular debt and make recommendations to ECC. Constitution of the Committee will be decided by Tabish Gauhar, SAPM on Power.

Copyright Business Recorder, 2020