Circular debt settlement plan

The circular debt settlement plan of Rs1,268 billion developed by the Ministry of Energy (MoE) is making rounds in the energy-related circles once again claiming the scheme to be unique, holistic, and synergistic, unlike the previous settlement schemes. The latest is that the Finance Ministry has issued mixed opinions over the matter with some objections on the pretext of the IMF.

The overall energy sector circular debt is reported at Rs5,725 billion (Power Rs2,703 bn including Rs310 bn on account of Late payment surcharges- LPS, and Petroleum Rs3,022 bn including Rs857 bn on account of LPS). One of the unique selling propositions of the scheme lies in the fact that for the first time, circular debt is being dealt with on an end-to-end basis at the sector’s level instead of Power or Petroleum separately. It is worth noting that around Rs300 billion of circular debt balances have the payable end lying in the power sector while the receivable end is in the Petroleum sector. However, the balances reported from both divisions previously included this amount which was actually an overlap.

The panacea of the scheme lies in the seriatim execution in a preset sequence, i.e. to start by paying central power purchaser (CPPA) enabling them to settle with power generators (Gencos, GPPs), who will then settle with gas distribution companies (SUIs) that will eventually settle state-owned E&P companies (OGDCL, GHPL, PPL). The scheme promises to be budget-neutral, which implies that the IMF will agree with the plan. It also aims at magnifying the settlement amount by utilizing the technical supplementary grants in an end-to-end manner.

Circular debt is the Federal Government’s (GoP) liability, which has snowballed over the last 4 years at a CAGR of 22 percent, expected to double by 5 years. The numbers are too big and cannot be burdened on the fiscal deficit or consumers’ pockets. Had GoP paid this liability eventually owed to E&P companies, the said companies would have been cash-abundant and paid GoP hefty dividends. It is pertinent to note that the past settlement in 2013 included the issuance of Rs82 billion TFCs to OGDCL as part of the total settlement of Rs450 billion. But the dilemma is that the TFCs have not performed so much so that the principal, interest thereon, and the LPS cumulatively stand at Rs264 billion, as of now.

The solution needs to be immediate and sizable to avoid compounding especially when CAGR is too high. The scheme takes care that all settlements are cash-based while the remaining are in compliance with applicable laws, which is another point of satisfaction for the IMF, unlike previous schemes.

The math is simple; the government has to provide Rs745 billion cash injections and get back Rs748 billion to have no increase in the fiscal deficit while the technical supplementary grant (TSG) of Rs157 billion is already budgeted. There might be some procedural ambiguity in the process of defining and recognizing the said injections in GoP books of accounts, but that may not obliterate the larger objective of the scheme.

The TSG is Rs157 billion – within it, Rs82 billion will be provided to OGDCL through PHPL, Rs29 billion to PSO through SNGPL, Rs30 billion to GPPs, and Rs16 billion to Gencos through CPPA. Then Rs46 billion (Rs30 bn and Rs16 bn) will end up in GHPL through SNGPL eventually.

Then the cash injections are Rs745 billion where Rs645 billion is to be provided to Sui companies and Rs100 billion to government-owned plants coming through NPPMCL. And both TSG and cash injection land in different companies. Out of Sui companies’ Rs645 billion, ODGC is to get Rs397 billion, PPL is to get Rs126 billion, and GHPL is to have Rs122 billion. It must be noted that Sui companies to date claim of tariff differential of natural gas has touched Rs900 billion.

The overall amount OGDC is to get is Rs397 billion (out of cash injections), Rs82 billion (from TSG), and Rs77 billion (out of Rs3.23 per unit being charged to power consumers as FC charges). OGDC issues dividends so that the GoP share equals the injection, and the rest of TSG is more than enough to cover the dividend to be doled out to non-controlling interest (NCI) shareholders, with ODGC still having surplus cash in it. This will not only settle circular debt on the balance sheet but also right-size the equity, which has swelled otherwise.

Then PSO is to get Rs29 billion, which is to clear the previous CD stock balance of RLNG. PPL and GHPL will issue dividends of the full amounts injected into them. In this way, the government will get back (Rs748 bn) more than the initial injection of Rs745 billion. Further, Rs 25 bn will be added to FBR tax revenues on the dividends that will be paid to NCI.

The solution also aims at settling LPS through negotiations, which the E&P companies do not record but rather disclose only to avoid tax implications. There may be some procedural ambiguities that the Ministry of Energy and Ministry of Finance can settle and take the IMF on board in the larger interest of the economy.